Introduction
A term plan is a specific form of life insurance policy designed to offer coverage for a predetermined period or term. In the unfortunate incident of the policyholder’s demise during this term, the chosen nominee is entitled to receive a sum assured as a death benefit. Term insurance stands out as a cost-effective and straightforward method to safeguard your family’s financial well-being in the event of your unexpected passing.
However, many people make common mistakes while choosing a term plan that can affect their coverage and benefits. Here are 10 mistakes that you should avoid while buying a term plan.
10 Mistakes to Avoid When Choosing A Term Plan
1. Not Comparing Different Plans
One of the biggest mistakes people make while choosing a term plan is not comparing different plans from various insurers. Different plans may have different features, benefits, exclusions, riders, premiums, and claim settlement ratios. Compare these factors before selecting a plan that suits your needs and budget.
You can also read reviews and ratings from other customers to get an idea of their experience with the insurer.
2. Not Choosing the Right Coverage Amount
Another common mistake when choosing a term plan is not choosing the right coverage amount or sum assured. The sum assured is the amount your nominee will receive in case of your death during the policy term. The sum assured should be enough to cover your family’s expenses, liabilities, and future goals.
A thumb rule for calculating the sum assured is to multiply your annual earnings by 10 to 15 times. However, this may vary depending on age, lifestyle, dependents, debts, and inflation. You can use online tools like a Term Plan Calculator to estimate the sum assured based on your inputs.
3. Not Choosing the Right Policy Term
The policy term is the duration for which the term plan covers you. The policy term should be long enough to cover your working years and your dependents’ needs. If you choose a short policy term, you may outlive the policy and lose the coverage. If you select a long policy term, you may end up paying higher premiums for unnecessary coverage.
A good way to choose the policy term is to consider your retirement age and your dependents’ age. For example, if you are 30 years old and plan to retire at 60, you can choose a policy term of 30 years. If you have a child who is five years old and will be financially independent by 25, you can choose a policy term of 20 years.
4. Not Disclosing Accurate Information
While buying a term plan, you have to fill out an application form where you have to provide some personal and medical information. The insurer uses this information to assess your risk profile and determine your premium and eligibility. Some of the information that you have to disclose are:
- Your age, gender, occupation, income, marital status, and lifestyle habits
- Your medical history, family history, pre-existing conditions, and current medications
- Your hobbies, sports, travel plans, and any hazardous activities that you engage in
If you hide or misrepresent any information, it may lead to rejection of your claim or cancellation of your policy by the insurer.
5. Not Opting for Riders
Riders are supplementary benefits you can add to your basic term plan for extra coverage and protection. Some of the common riders that are available with term plans are:
- Accidental death benefit rider
- Critical illness rider
- Disability rider
- Waiver of premium rider
Opt for riders that suit your needs and enhance your coverage.
6. Not Reviewing the Policy Document
The policy document is the legal contract between you and the insurer that contains all the terms and conditions of your term plan. It also specifies the inclusions, exclusions, benefits, claims process, and other details of your policy. You should review the policy document carefully before signing it and accepting the policy.
You should check for any errors or discrepancies in the policy document and report them to the insurer immediately.
7. Not Nominating the Right Person
The nominee is the person who will receive the sum assured from the insurer in case of your death during the policy term. You should nominate the right person who is financially dependent on you and who can handle the claim process. You should also update your nominee details if there is any change in your situation, such as marriage, divorce, or childbirth.
You can nominate more than one person as your nominee and specify the percentage of share each will receive.
8. Not Paying Premiums on Time
Premiums are the amount that you have to pay to the insurer to keep your term plan active and valid. You can elect to pay your premiums monthly, quarterly, half-yearly, or yearly, depending on your convenience and budget. You should pay your premiums on time and avoid any delay or default.
If you miss or skip your premium payment, your policy may lapse, and you may lose your coverage and benefits.
9. Not Increasing Your Coverage
As you grow older, your income, expenses, liabilities, and responsibilities may increase. Your existing term plan may not be sufficient to cover your changing needs and goals. You may also face higher risks of health issues and mortality as you age. Therefore, you should increase your coverage periodically to keep up with your changing life goals and requirements.
10. Not Claiming Tax Benefits
One of the advantages of buying a term plan is that you can claim tax benefits on your premium payments and sum assured.
You should claim these tax benefits while filing your income tax returns and save money on taxes. However, you should also note that these tax benefits are subject to change as per the prevailing tax laws and regulations.
Conclusion
Choosing a term insurance plan is a critical financial decision. Avoid these common mistakes to ensure you get the right coverage for your needs. Consider the above points while choosing your plan to make an informed decision. In case you feel you need assistance, remember that it is always a good idea to consult with a financial advisor to tailor the policy to your unique situation.
