While we cannot predict the future, what we can do is stay prepared irrespective of what lies ahead. The very first step towards is to have a term life insurance policy that protects your family and provides them with financial security in your absence. Yet, only three in 10 urban Indians buy term insurance plans and even those who do, often make mistakes, which could cause hardship to their family despite all their good intentions. Therefore, here are some common mistakes one should avoid while choosing a term insurance plan:
Insufficient Sum Assured
The idea behind a term insurance plan is that if something happens to the policyholder, his/her family can continue leading a comfortable life without worry about the finances. However, if the sum assured is not carefully evaluated based on the future needs of the family, the insurance proceeds may not last long. This is a mistake that is quite common and data shows that an average Indian policyholder’s life insurance coverage would meet only 8 per cent of expenses of the family following the death of the earning member.
Ideally, the sum assured should be at least 10-15 times the policyholder’s annual income. For a 34-year old individual with a family of 4 — including self, wife and two children — earning ₹8 lakh to ₹10 lakh per annum, a sum assured worth ₹1 crore or more seems sufficient to take care of all major expenses, including child’s education, marriage, daily expenses and retirement of spouse in case of sudden demise of the policyholder.
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Limited tenure
The financial benefit of the term plan is applicable only if the death of the policyholder occurs during the policy term. If the policyholder survives that term, there is usually no maturity benefit until you are buying a term plan with return of premiums. Policyholders often choose, to save on premium cost, to go for shorter tenure/coverage duration. This could be a major mistake as, at the end of the policy term, the coverage expires. To continue the benefit, you may have to buy a new policy at a much higher premium.
One must take coverage for the maximum term available. Since a higher term period would cover you till a longer age, this would also increase the chances of the plan benefits being paid. Ideally, one must opt for a term plan with coverage up to the retirement age that, in most cases, is 60-62 years. Until the retirement age, all the major expenses of a family would have been taken care of and one hardly needs term cover post that age, as dependents such as children would have grown up by then.
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Delay in buying term plan
When you buy a term plan, you are buying coverage against the risk of death. Therefore, it is obvious that higher the risk, more will be the premium you pay to cover that risk. For example, a term cover of ₹50 lakh is available for as low as ₹5,000 per annum if you buy it at 25 years of age. However, if you buy the same policy when you are 35 years old, it would cost you close to ₹9,000 per annum. So, delaying the purchase would directly affect you in terms of how much money you pay for it. Moreover, since you have to pay the premium every year during the policy term, not locking it in at an affordable price could be a costly mistake. It is suggested to buy a term plan as soon as you have financial dependents.
Giving out incorrect information
While it is true that pre-existing conditions, and lifestyle habits like smoking and drinking, may negatively affect your term insurance premium, an even bigger mistake is not to disclose them while buying a policy.
If the policyholder’s death is found to be associated to a health condition that existed when the policy was bought, and was not declared, it could lead to outright rejection of the claim. So think of the bigger picture and keep your family’s best interests in mind while purchasing the term plan. Always disclose pre-existing conditions, if any.
Insurance for saving tax
It is true that life insurance policies come with substantial tax benefits under Section 80C of the Income Tax Act. However, saving tax should not be your main purpose to buy a term insurance policy. Yet, it is a common practice to buy insurance as a last-minute bid to save on income tax. This is a big mistake because when the goal is tax saving, all calculations tend to focus on premium in order to optimise tax outgo whereas you should focus instead on the sum assured in order to meet your family’s financial needs. In addition, when one buys insurance for tax purposes, one tends to make other mistakes as well, like buying a policy with lesser term or a lower sum assured.
The writer is Chief Business Officer, Life Insurance Policybazaar.com
