I have covered the importance of term insurance in one of my previous blogs too. In this blog I will get deeper into this important topic wherein I will get into some reasons why some people don’t buy life insurance and what are the aspects which should be considered while taking insurance for protection. There is also a concept of Married Women’s Protection Act (MWPA) endorsement about which I had also written previously. This should be considered by husbands when they are taking insurance on themselves.
Why term insurance is needed?
To provide peace of mind to the person earning money for the family. If he passes away during the tenure of the insurance policy, then the family would get the sum assured. This would help those left behind ensuring that the goals can still be managed even though there may not be any cash flow for the family. How do we calculate how much term insurance should be taken would be discussed separately in another blog. But, in general, it would depend on the liabilities, current networth, and the financial goals.
Why some people do not take term insurance?
Waste of money:
They consider it as a waste of money, paying premiums every year as no money is returned on survival. As this excuse was being given by a lot of people, the insurers came up with a varied product like whole life insurance, return of premium, or limited period pay or one-time payment type of products. But these are very expensive products. You need to consider the present value concept. Money is being paid in today’s value and you get back the premium after so many years. The same would also be true even for other endowment products and therefore their internal rate of return is very low. You may argue that the sum insured over a longer period will also lose value. But then, also compare the same amount of premium which you pay for a large insured value in today’s value. If you were to invest the remaining amount, that could provide you the investment return much more than you would receive from most of these products.
Super-optimistic that they will not die
Some people like to think that the probability of their death is lower (they are more health-conscious, family history good, etc) and therefore consider this as a waste of money. Can we really predict our future? What about accidents which can also happen? Even if you may consider yourself a safe driver, can you vouch for others’ driving?
Let us stop fooling ourselves with our own rationalisations and consider this as one of the most important personal finance decisions of our life. If not for ourselves, at least think about the people who are left behind after death. Term insurance is needed until we have enough net worth to take care of family goals. After that, if needed, it can be discontinued.
What are the factors which should be considered for taking term insurance?
1. Who is the Insurer?
Choose the insurer with whom you are comfortable. But before making this decision, do check on their comparison of insurance premiums, claims settlement ratio, their reputation in the market, plans for future in India, etc. Remember premium for term insurance can vary depending on age, gender, health conditions, being a smoker, tenure of insurance, along with other parameters.
2. Provide details accurately
Don’t hide information just to save the premium amount. The whole purpose of taking insurance will not get met if it gets denied in case it is presented for a claim. Insurance works on the principle of utmost good faith.
3. Understand the contract
Do know that every insurance comes with a 15 days free look-up period. So, do read the terms and conditions once you receive the policy documents and if you do not agree to any of the terms, you can surrender the insurance within these 15 days. No questions asked! I have been surprised when meeting some of my clients when I have opened the seal of their insurance document myself, years after they had purchased it!
4.Know the additional riders
Term insurance also comes with additional riders like accidental death benefit, permanent disability rider, and critical illness riders. Do know that term insurance without accident rider also provides claim in case of death. This is an additional benefit which is provided over and above that. Whether these riders are required or not, could depend on various factors including the capacity to pay additional premiums, since these riders can be expensive.
5. Worldwide coverage
Life Insurance does cover death outside India. Just that when the person is relocating, he needs to inform the insurer of the address change. There could be certain unsafe countries where it could be declined, so better to check with the respective insurer. But there will not be too many countries in the world where it could be declined. Also, NRIs can avail of the term insurance. Some insurers need the NRI to be present in India while taking insurance, while few may allow a telemedical facility, subject to terms and conditions, for a few select countries where insurance can be taken even without visiting India.
6. Claim ratio check
This could depend on the investigation procedure by each of the insurers and how the death has happened. Claim within the first few years of taking insurance could have more checks. Also, suicide is not covered within the first year of taking insurance, for obvious reasons. Insurance is not a contract for anyone to make money and therefore this scrutiny. But, if all details were provided correctly while taking insurance (you are also provided a copy of what documents you submitted), and if the death is natural, then there should not be anything to worry about the claim. The claims
7. Fixed insurance premium every year
Insurance is a contract between the insurer and the proposer as on the date of issuance of the policy. So, the premium remains fixed during the entire duration of the insurance policy. Only the taxes, as intimated from Governments periodically could differ. However, since it is a contract for that tenure, you cannot extend it. The premium, during any increase in the tenure, would depend on the age and the health conditions at that point in time. You can, of course, stop the insurance at the point of time, without any minimum time period or penalty, since there is anyways no return of money in pure term insurance.
8. Any health issues after taking insurance
These would not impact and there would not be any change in premium since as discussed earlier, insurance is a contract on the date of taking the insurance and is valid for the entire tenure of the term insurance period.
9. Types of deaths not covered
There could be certain deaths not covered in term insurance like the terrorist attack or death due to war or a natural disaster like earthquake or a tsunami. This could however vary as per terms and conditions of every insurer and you are advised to go through the policy document to understand the terms and conditions.
I hope with this blog you are now convinced that term insurance is necessary for peace of mind. It needs to be enough to take care of family goals. However, over term insurance is also not desirable, since more premium would need to be paid, which would have been better invested for these goals. Feedback or comments are welcome. If you would like to know more about term insurance or would like to avail of one for yourself, then please contact us for further discussion.