7 Point Guide To Buying A Term Insurance Plan
- 1️⃣ Buy term insurance as soon as you have financial dependents
- 2️⃣ Calculate an appropriate cover amount to fit your family’s needs
- 3️⃣ Choose an increasing cover option for an inflation-proof cover amount
- 4️⃣ Plan to end your plan as soon as you become financially free
- 5️⃣ Hand-pick the riders that are right for you
- 6️⃣ Opt for the Married Women’s Property (MWP) Act
- 7️⃣ Choose the right claim payout option
- In conclusion
Being one of the main earning members of your family, the thought of protecting your family and providing them a comfortable lifestyle is always going to be a top priority in your life. But, what happens if you die? Who will protect your family and help them financially? How will your children or spouse achieve their dreams and goals?
While such questions are likely to come across your mind, the answer is quite simple- Term Insurance.
Term Insurance is one of the most affordable and efficient types of life insurance policy. The main idea behind buying a term insurance plan is to secure your family and their future needs - should your death happen before you build enough wealth. Your family or nominee receives a sum of money in case you pass away during the term of your policy. This money can help them meet their financial needs and continue living a comfortable life without having to make any kind of compromises.
If you have been thinking about buying a term insurance plan, but are not quite sure on how to go about it, here’s a quick guide to buying term insurance that can help you.
Anyone who has the responsibility of financial dependents must consider buying a term insurance policy.
The financial dependents are the family members who rely on your income for their short-term and long-term expenses. It could either be your parents- who have retired from their jobs, your spouse- who has decided to put a hold on her career and focus on looking after the household, or your children- who are very young and have a long way to become financially independent.
However, if you have just started earning and both your parents are still working, then we recommend you skip buying a term insurance plan for now and can again re-consider buying it after a couple of years.
In addition to this, you should also consider term insurance if you’re taking a big loan like a business or a home loan - that will burden your family should your death happen.
While buying term insurance, you must choose an adequate cover amount that meets your family’s short-term and long-term expenses without them having to make any compromises.
You might have often heard about using the thumb rule of 20X/ 15X your annual income to find an appropriate term cover. But, this is just a thumb rule - and not an accurate calculation personalised to your family’s needs. By using the thumb rule of 20 X your annual income, there is a probability that your family can end up with very little money, which will put them into debt. And you obviously don’t want that!
Then, how do you go about it?
To calculate the right term insurance amount, you need to take into consideration your family’s specific expenses, long-term goals, plans as well as your current savings and investments. To make this easy, we have built a term insurance calculator with - Beshak TruMatch - that will give you the exact amount of term insurance your family needs - not more, not less.
Most term insurance plans are offering you multiple benefits and customizations. The increasing cover is one such customization, where your cover automatically increases until a certain maximum amount is reached. With the increasing cover option, you will not have to constantly worry about upgrading your policy, additional documentation or medical tests, and neither will you have to fear about the upgrade getting rejected. Your cover will grow with time, and be enough to meet any new responsibilities you pick along the way, as well as beat inflation.
If you have achieved financial freedom before your policy term ends, then you can simply stop paying your premiums and close the term insurance plan.
For example - you purchase a term plan at the age of 30 years as at that time you didn’t have enough wealth and wanted to secure your family’s future financial needs. Now, by the age of 50 years, you have flourished in your business and have made enough wealth for your family and the coming generations to provide them with a comfortable life. You can simply end your cover early and save any additional premiums you might otherwise pay.
Today, most term insurance plans offer you the option of choosing additional benefits called Riders. Before you opt for any of these additional benefits, you need to check out each of them carefully, and see if you really need it or not. Make sure you don’t buy Riders by default - as not all of them might be helpful for you.
You might not need a particular rider at all - or might have better options that serve the same purpose.
For example - instead of buying an accidental disability rider, you can look into buying a separate accidental disability cover that comes with more benefits and advantages. Similarly - you could also buy a standalone critical illness insurance plan, instead of a Rider for the same - in case you’d like a comprehensive cover for the occurrence of a serious disease.
There’s one rider though that we always recommend everyone buys - the low cost rider called Waiver of Premium Rider, then we will recommend you to not give it a second thought and just purchase the rider and enjoy the multiple benefits.
According to the law, your term insurance is part of your estate and the cover amount is first payable to your creditors - people or entities that have given you loans - in case of outstanding dues even before it reaches your family. This can be very inconvenient - but there’s a way out if you’re male and married - and want your term insurance money to reach your wife come what may.
You can purchase your term insurance plan under the Married Women’s Property Act. With this simple addendum that you can add at the time of buying the policy - you can insulate the claim amount from loans and liabilities - so your wife receives the amount first. She can then take a call as to how she wants to pay off the creditors, while having enough money for her immediate needs and expenses.
Just remember -
- You can only opt for the MWP addition at the time of buying the policy, and never later. (So, think twice before passing it off)
- No one (including yourself or even your wife) can change the MWP inclusion to the policy once it is added. This holds, even in the case of a divorce.
While we have learned about the importance of choosing an appropriate term cover, it is also important for you to learn about choosing the right claim payout option.
This means you have to choose how your family receives the claim settlement amount. The claim payout options you’ll find are -
👉 Lump-Sum Payout Option
In this option, your family or nominee will receive the entire Sum Assured in a single payout. If you have any existing loans to be paid off, then choosing this option will be a good idea. But, overall this is a risky option, especially if your family does not have prior knowledge and experience of managing a large sum of money together.
👉 Monthly Income Payout Option
This option is a replacement for your monthly income. The monthly income payout option will pay the money to your family every month in the form of instalments for a long time. Choosing this could be a good option if your family does not have prior experience in managing a large amount of money together.
👉 Lump-Sum with Monthly Income Payout Option
This is a combination of the above two options. Here, the claim amount is divided into two halves. The first half of the money is given in a single payout, which can be beneficial for your family in case of any existing loans. Whereas, the second half of the claim amount is provided to them on a monthly income basis to help them meet their basic monthly expenses.
Before you choose any of these options make sure you keep your family’s financial understanding in mind as you wouldn’t be around to help them manage the claim amount when the time comes.
A term insurance is a simple enough product - but comes with several customisation options that you’ll need to pick from - based on your family’s needs, goals and preferences. Also, given the fact that this is a long-term investment - that you can’t really drastically change - it is important that you make the right decisions at the time of purchase.
The points above can help you personalise your policy perfectly when you buy term insurance plan online, so you can remain worry-free always.
You could also use Beshak TruMatch - answer a few simple questions and get a personalised report taking all the above points into account, and some more. It takes less than five minutes and is your sure-shot way to getting the perfect term plan for your family.
Got any questions related to how to buy term insurance?
Post them on the Beshak Insurance Forum and get answers from isnurance experts, for free!
- Purchase a term insurance policy only if you have or are planning to have financial dependents.
- Do not depend on thumb rules while calculating the term insurance cover amount.
- Opt for the increasing cover feature where your term insurance cover will get upgraded at specific intervals automatically.
- If you’re free from all your financial responsibilities, stop your term cover before the policy terms ends.
- Buy riders only if you need them. Go through all the terms and conditions of the riders before opting for them.
- Take your policy under the Married Women’s Property Act if you’re married and male. It will ensure the term insurance claim is paid to your wife before any of your creditors.
- Based on your nominees’ financial aptitude, you can configure how they receive the term insurance claim.
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