8 Mistakes to avoid while purchasing a term insurance policy
An ounce of prevention is worth a pound of cure. Basically, it means that it’s better that we make additional efforts before making any decision - and it’ll go a long way reducing our pains in the long run. This is true in almost every aspect of our lives - especially so when it comes to buying term insurance.
And given, it is the single-most important decision you’ll make for your family’s financial security - it is crucial that you take some extra effort to ensure no mistakes creep into your purchase journey.
We’re here to help! :)
In this article, let’s quickly go through the most common mistakes people make while buying term insurance - and help you avoid them.
1️⃣ Buying a policy when you have no dependents
A financial dependent is anyone who depends on your earnings for their lifestyle - both in the short term and long term. The main reason for purchasing term insurance is to provide financial security to your financial dependents. So, it would be meaningless to buy a plan if you don’t have or plan to have dependents anytime soon. Read more here: https://www.beshak.org/insurance/term-life-insurance/articles/could-term-insurance-be-wrong-for-you
2️⃣ Not stopping the cover after you become financially free
You only need a term insurance policy until you become financially free. Once you have created enough wealth to sustain your family, and are done with all your monetary responsibilities - you can stop your term insurance cover.
Note: The only exception would be if you’re planning to take term insurance as a way to leave a financial legacy for your family, and buy a super-long-term policy until 85 or even 99 years of age.
3️⃣ Not calculating the right cover amount for your family's future
You’ll often hear thumb-rules for the cover amount needed as - 20X / 15X your annual income. However, like all thumb-rules, this too has its flaws. It is very important that you calculate the right cover amount that fits your family’s needs, and you can check out our detailed calculator here.
During your life, your income, expenses, and liabilities are likely to increase as you grow older and take up more financial responsibilities. Thus, you’ll often have to keep upgrading your cover - which will involve new documentation, medical tests etc. Plus, there’s the risk of the upgrade getting rejected due to any new illnesses. Instead of this, you could simply opt for an automatic increasing cover, where your cover amount will keep growing automatically, without you having to intervene every time.
5️⃣ Purchasing riders, just because they're easy short-cuts
Riders are short-cuts designed for those who want to make instant decisions and get additional coverage beyond the base cover. One advantage of riders is that you can buy them without the hassle of additional documentation, medical tests etc. Having said that - you should know that Riders often come with limitations and exceptions. Be sure to always weigh the pros and cons of riders versus separate covers - before deciding which one is right for you and your family.
6️⃣ Not choosing the right Claim Payout Option
Ever heard the story of the lottery winner who went on a bad-investment spree, only to lose it all? Well - this happens (more often than you think), with families receiving a lump sum through term insurance too. If you think your family might not be able to manage a huge amount of money effectively - you should consider a monthly income type payout - so they get just the right amount, every month. You could also do a combination of a lump sum payout + monthly income, in case you want some part of your claim to go towards paying off large liabilities in the short-term.
7️⃣ Not filling the proposal form to the best of your knowledge
The proposal form is the very basis of your policy contract. The insurer issues the policy based on the details provided by you in the proposal form. So, you must fill it yourself, and not depend on anyone else - not a close family member, not your agent/ financial advisor - for this. Make sure you disclose all the required information accurately and completely - to the ‘best of your knowledge’ or else, your family might be declined the claim - and you won’t even be around to offer an explanation.
8️⃣ Not buying under MWP to your policy, if you are making your wife the nominee.
During claim settlement, all your loans and liabilities will first be paid off, even before the claim amount reaches your nominee’s account. A term insurance policy taken under the MWP Act ensures that your claim amount directly reaches your wife, despite any loans that you have taken out. So, if you're married and male, taking the term policy under the MWP Act can be crucial.
Note: The MWP addendum can only be added at the time of taking the policy. It cannot be changed or removed by anyone (including yourself) once it is added. It stands valid even in the case of a divorce.
So, that’s the list of things you should keep in mind while buying a term insurance policy. Remember, a little extra effort and proper research will go a long way in ensuring that your family will have a hassle-free claim settlement, and financial future. And, it’s the best thing you can do for them!
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Further, if you have a question, you can post a query on our forum, and get answers from insurance experts in 6-8 hours.
- Buy term insurance only if you have financial dependents.
- Stop the policy, once you become financially free.
- Fill the proposal form yourself, and provide accurate and complete information.
- Calculate the correct cover amount your family needs.
- Choose the increasing cover option if you want your cover to get upgraded, automatically.
- Choose a monthly income type payout, if your family is not financially well-versed.
- Do not purchase riders just because they are easy to pick.
- If you’re married and male, ensure you sign the MWP addendum.
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