The amount of life insurance cover you go for is a very important decision you will make. Inadequate life insurance defeats the purpose of going for it. When you are calculating your insurance needs keep in mind the liabilities you have. Ideally it should be enough to payout all your loans and payable still keeping enough for your family to maintain themselves without compromising on the standard of living.
People buy term loans with an objective of generating a reliable asset that would help fulfill their pending responsibilities if they die untimely. Generally, if a sole bread winner of a family dies the surviving family gets into a deep financial trouble. The situation is worse if the person dies with pending loans. Your term policy should be strong enough to leave enough money with your dependents to survive after paying your loans. Also, one should take account of inflation when deciding the sum assured. An insurance cover of INR 60 lacs would be the same value of INR 30 lacs of today 10 years down, considering the modest level of inflation.
For example: Mr. Mahatre a chartered accountant in his early 30s died of a stroke and was backed up by a term plan of mere Rs.15 lacs out of which Rs.6 lacs went to pay for his car loan. With the remaining Rs. 9 lacs how long his family is expected to survive? It is a typical case of under insurance.
When comparing term insurance policies one must consider the following three criterion.
• Sum Assured: The maximum sum assured or amount payable in case of death of a policyholder during the tenure of the policy is generally 20 times of the annual income of the policyholder at the time of taking the policy. With age the eligibility shrinks to 15%, 10%, 7% etc. Ideally one should go for the maximum sum assured as per one’s eligibility. The sum assured chosen once cannot be increased later on. Generally people go for a second term plan if and when their annual income increases to enjoy a greater cover for family.
• Age Cover: Different insurance companies have different maximum coverage periods. Some cover for 30 years with a maximum coverage till 65 years of age others provide coverage of as long as 50 years and cover till the age of 85 years. It is always in the favor of the policyholder to go for maximum coverage as chances of mortality increase multi fold in the advanced age. As per study people dying in the age bracket of 70-75 years is 2.5 times more than the people dying in the age of 65-70 years. It is always better to be covered for a longer period.
• Claim Settlement Ratio: When comparing plans of different companies one must favor a company having a better track record of settling claims. Your years of paying premium would be futile if your claim is not sanctioned to your nominee when the need arises. So, always go for a company that fare better when it’s the question of settling claims. A claim settlement of closer to 100% is always a go to choice. You wouldn’t want your heirs to struggle at the time of claims.
Term plans also come with certain additional benefits called riders. These riders add to the premium payable. Some of the popular ones are.
• Accidental Rider: This rider is applicable only in case of death due to an accident. The insurance company pays the nominee the amount up to twice of the sum assured if the policyholder dies because of some accident. “Accidents” run the gamut from abrasions to catastrophes but normally do not include deaths caused due to non-accident-related health problems or suicide.
• Critical Illness Rider: Under this rider the insurance company pays a lump-sum amount if in case the policyholder contracts a lethal disease like cancer, stroke, heart attack etc. Critical illness riders may also provide a feature of waiver off premium as it is understood that a person suffering from a critical disease might be compromised to work and it would be hard for him to pay premiums.
Apart from these some companies come up with features like monthly income plans which pay a monthly income for a specified period apart from paying the lump-sum sum assured. With the market getting more competitive there is always a space for innovation with the features that the companies are bringing in. Thus, it is very important to compare and study plans of various companies to get the most desirable plan at the cheapest rates. Compare wisely for a smart purchase. A term plan is generally a long commitment and therefore it needs a good amount of homework to choose a worthy plan.