Term insurance Simplified
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In this article I have penned my learnings from what I have read about term insurances in books and articles on internet. I am not a financial advisor, just a average person curious about personal finance (every should know basics). In case you feel there is something incorrect or can be improved, feel free to send suggestions on twitter or via mail.
I hope this helps you in making better financial decisions. Let’s start!
What is term insurance?
- This is the purest and simplest form of life insurance.
- You pay a premium to cover your life risk for a specified period of time (called the term).
- If you survive the term, the policy matures and you are not paid anything.
- If you die in between the term, your family gets the sum assured.
- Best for consumers, worst for life insurance companies.
- Term insurance works for individual and do take this especially if you are primary source of income for your family.
- Avoid other types of life insurance plans which offer returns
- Go for Mutual Fund, Public Provident Fund (PPF) and other investment options for returns.
Insurance is for covering risks and not as a tool to generate returns.
Who needs Term insurance?
- If you are sole earning member and lot of financial dependency lies on you. Imagine how your family would do if you were not there with them today or in next 5 years. Will they be in a good state financially to live their life ahead in peace.
- You have enough assets for family and they won’t be affected much financially if you are not present anymore. In this case, you don’t really need a life insurance.
“Risk hai to Ishq hai” . Ok fine but better safe than sorry when it’s about life and family.
How much?
- “10-15 times your annual income” - you’ve probably heard this.
- But, there are some points to consider when calculating this -
- Do you have any debt? If yes - add that
- Medical emergency? Its good if you have health insurance, but if not then add extra ~10-20 lac for this. Being prepared is always good.
- Child education or important goal like house, etc? - add that to cover as well.
- You do the math for yourself now :)
Till what age?
- Simple answer - until you expect yourself to reach financial stability.
- Generally term plan till age of 60-70 yrs is good.
- Don’t opt for those ~100 yrs plans. I wish you live that long but it’s quite unlikely based on stats! Also, you already are financial inpendence by ~70 years.
- Don’t start term insurance at 20 too! You probably are not the main source of income by then. There are exceptions here though. Usually 25-35 is when people start term insurance.
Documents Required
This might vary from company to company but here are the common one’s which are required.
- Age proof
- Identity proof
- Address proof
- Photo
- Income proof
- Medicals
Good options
There are a lot of other good options as well. I personally liked these based on my requirements and analysis. Do your research before choosing one :)
- HDFC Standard Life Click 2 Protect Term Insurance Plan
- ICICI Prudential iProtect Smart Term Insurance Plan
Riders to Buy
A rider is a basically an addon that increase or amends your coverage in certain cases. There are a lot of riders available. Here I mention three. You can check others and add them if you find them useful.
Accidental Death
If one dies due to some accident, extra sum is paid due to rider being present. If natural death, then no extra sum.
Accidental Disability
If you get some disability, insurer will pay you a sum for next 5-10 years. This might get tricky if insurance company treats your disability not under their policy. Just read out their policy around this.
Critical illness
In this rider you get part of coverage in case you get diagnosed with certain set of critical illness. This helps you cover bills for such illness while you are alive. This is useful since you might not be able to continue your work and financials might be hit hard in those times. Note: This rider is also available in health insurances, compare both and choose accordingly.
Personally, I’ll go for Accidental and critical illness riders. In case you have this in your health insurance, you can skip these here.
General Advice
- Buy insurance online. Avoid these brokers and middle-men. Why pay extra brokerage (these brokerage can be as high as 40% in first year - that’s why these brokers are after you to take insurance from them)
- Don’t forget to buy life insurance under the Married Women’s Property Act 1874 (MWP Act). This ensures money goes to your wife and kids.
- Double check beneficiary and nominee details !!
- Go for medical tests before buying. Never skip this. Be clear about diseases you had in past. These insurance companies might deny your claim if they find even slightest of issues.
- Don’t hide anything from insurance companies like smoking, drinking alcohol, etc. There is a high chance they’ll decline the claim later.
- You smoke rarely. Still specify clearly about this. Even if you have quit smoking now, mention clearly in policy how much time you smoked and you’ll not smoke ahead and other things. Else, mention you smoke and pay a relatively higher premium. Just be truthful. Insurance companies are in this business for years - you cannot fool them!
- The most popular line ever - “Read the policy documents carefully.” Well it’s important even if it takes 2-3 days. Just sit and read it out. Your future depends on this :)
Things to consider when choosing term plan
- Claim Settlement Ratio (CSR) > 95% (Higher the better - check avg over years not just over 1-2 year period). This ratio gives a percentage of claims the insurer has paid out during a financial year. Here is IRDAI annual report for reference.
- Solvency ratio > 1.5 (Higher the better chances company has to pay your claims). This ratio helps identify whether the company has enough buffer to settle all claims in extreme situations.
- Compare premium amount - you don’t want to pay extra bucks for same services.
- Go for companies who have been in market for > 10 years.
You can read about other ratios in detail in this economic times article.
There are lot of tools to compare policies online. Google is your friend here. Policybazaar is a nice place to start :)
Also, don’t worry about questions like “What if this company shuts down?”. The new company who buys will pay for insurances. Regulatory bodies are there in place to handle these situations.
Resources
I hope you learned something new. Feel free to suggest improvements ✔️
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