Things to Look for While Buying a Term Life Insurance Policy

Term Insurance Plans were introduced with a very basic structure — the plan will offer a sum assured on the death of the policyholder, provide coverage up to the age of 65, and the premium can only be paid on an annual basis. However, it became more complicated when more and more insurers started offering online life insurance plans.

Meaning of a Term Life Insurance

Term life Insurance, also known as pure life insurance, is a type of death benefit that pays the policyholder’s heirs for a set period of time. Once the term expires, the policyholder can either, extend it for another term, convert the policy to permanent coverage, or let the term life policy expire.

Term life insurance guarantees the payment of a specified death benefit to the insured’s beneficiaries if the insured dies within a specified period. These policies have no value other than a guaranteed death benefit and have no savings component like a whole life insurance product.

Lifetime premiums are based on a person’s age, health and life expectancy. Depending on the insurance company, it may be possible to change the period of life to whole life insurance. You can buy whole life policies for 10, 15 or 20 years.

Benefits of Term Life Insurance

The following are the benefits of Term Life Insurance:

• Term life insurance is attractive to young people with children. Parents can get substantial coverage at a low cost. If a pay check is needed, the family can count on it to replace lost income.
• These policies are also suitable for people with growing families. They may anticipate that coverage will be needed, say, until their children reach adulthood and are self-sufficient.
• Of course, the term lifetime benefit can be just as useful for an older surviving spouse. However, due to higher premium costs for older policyholders, other surviving spouse coverage options may be more appropriate.
• Insurance companies set a maximum age for their term life insurance coverage. This ranges from 80 to 90 years.

Working of Term Life Insurance

A medical examination may be required in some cases. The insurance company may also ask about your driving record, current medications, smoking, occupation, hobbies, and family history.

If you die during the term of the policy, the insurer will pay the face value of the policy to your beneficiaries. This cash benefit – which is tax-free in most cases – can be used by recipients to pay their medical and funeral costs, consumer debt or mortgage debt, among other things. If the policy expires before you die, there is no pay-out. You may be able to renew after the policy expires, but the premium will be recalculated based on your age at the time of renewal.

Example of Term Life Insurance

Thirty-year-old George wants to protect his family in the unlikely event of his early death. He purchases a 10-year, $500,000 term life insurance policy with a premium of $50 per month.

If George dies during the 10-year period, the policy will pay $500,000 to George’s beneficiary. If he dies after reaching the age of 40 when the policy has expired, his beneficiary will not get any benefit. If he renews the policy, the premium will be higher than his original policy because it will be based on his current age of 40 years, not 30 years. 
If George is diagnosed with a terminal illness during the first policy period, he will probably not be eligible to renew the policy when it expires. Some policies offer guaranteed reinsurance (without proof of insurability), but such features, when available, come at a higher cost.

Points to check while you buy a Term Life Insurance

The following are the important points that should be kept in mind while looking for a Term Life Insurance:

Number 1: Calculate how much insurance coverage you need:

Your insurance policy should generally assess how much money your family would need should you meet with an untimely death. The best way to do this is to take a piece of paper and start counting the following:

• First, estimate the monthly expenses of your dependent family and multiply it by 150. A multiple of 150 factors in future inflation.
• Second, add your home loan account liabilities, personal loans, credit card bills.
• Third, deduct all the liquid assets you already have in the form of FDs, shares or mutual funds.
• Fourth, add your planned spending on important life goals that are likely to happen in the next 15 years. Like your children’s higher education or their marriage.
• For five, add the retirement corpus you’d like to leave to your spouse at retirement.

Number 2: Determine the duration of your plan:

• Once you know how much coverage you need, it’s important to know until what age you would need it. The duration should not be too short as the policy could expire before your financial obligations are completed. At the same time, the tenure should not be too long, because the premium charged would be too high to account for the higher tenure.
• The correct way to estimate the duration of your life insurance plan is to determine by which year your liquid net worth i.e. the total investment you have in mutual funds, pension fund, shares etc. after deducting your liabilities will be more than your cover term life insurance, which we calculated in the previous section.
• The age at which these two numbers match should be the age you need coverage until. Make it public, your assets will be enough to take care of your family in your absence.

Number 3: Aim for the highest level of peace of mind for a rupee premium:

• We use the term peace of mind here rather than coverage per rupee of premium because consumers often value some key intangibles when making decisions.
• For choosing a term plan, these factors can be the stability of the insurance provider or its reputation in the eyes of the policyholder. Term life insurance is a long-term contract, often for 30 to 50 years. Therefore, it is important that you are happy with your decision on the insurance plan you have chosen, which would be a combination of the premium you pay and your perception of the insurance provider.

Number 5: In general, look at the claims settlement ratio:

• The complaint ratio usually attracts a lot of attention from consumers. It indicates the efficiency with which policies are settled by the insurance company. So when you see 95 percent in the claim settlement ratio column, it means that 95 out of 100 claims reported to the insurance company have been settled.
• However, there is one caveat here. The ratio of claims settlement is indicative only. If the insurance ratio of the company is higher than 95 percent, then the company has been very efficient in liquidating insurance claims. You really don’t have to go much deeper to see who has a 99 or who has a 98.5 percent ratio. You should consider the claims settlement ratio as a filter rather than a key decision criterion.

Conclusion

Term life insurance is a long-term contract between you and your insurer and will benefit your family when you’re gone. It is in your best interest to choose the right plan for your family considering all the factors discussed in the article.