Common mistakes to avoid in a term insurance plan
While we can’t predict the future, what we can do is stay prepared regardless of what lies ahead. The very first step is to have a term life insurance policy that protects your family and provides them with financial security while you are away. Yet only three in ten urban Indians subscribe to term insurance plans and even those who do often make mistakes, which could cause hardship for their families despite their best intentions. Therefore, here are some common mistakes to avoid when choosing a term insurance plan:
Insufficient sum insured
The idea behind a term insurance plan is that if something happens to the policyholder their family can continue to lead a comfortable life without worrying about finances. However, if the sum insured is not carefully weighed against the future needs of the family, the insurance proceeds may not last long. This is a fairly common mistake, and data shows that the life insurance coverage of an average Indian policyholder would only cover 8 percent of the family’s expenses after the winning member’s death.
Ideally, the sum insured should be at least 10 to 15 times the annual income of the insured. For a 34-year-old individual with a family of 4 – including himself, his wife and two children – earning 8-10 lakh per year, a sum insured worth 1 crore or more seems sufficient to cover. all major expenses, including the education of the child, marriage, daily expenses and the retirement of the spouse in the event of the sudden death of the insured.
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Limited occupancy time
The financial advantage of the temporary scheme is only applicable if the death of the policyholder occurs during the term of the contract. If the policy owner survives this term, there is usually no maturity benefit until you purchase a Return of Premium Term Plan. In order to save on the cost of premiums, policyholders often choose to opt for a shorter occupancy / insurance period. This could be a major mistake because, at the end of the policy term, the coverage expires. To continue to benefit from it, you may need to purchase a new policy at a much higher premium.
Coverage must be taken out for the maximum duration available. Since a longer term would cover you until a later age, it would also increase the chances of the plan’s benefits being paid. Ideally, one should opt for a temporary scheme with coverage until retirement age, which in most cases is 60-62 years. Until retirement age, all of a family’s significant expenses would have been covered and there would be little need for temporary coverage after that age, as dependents like children would then have grown up.
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Delay in purchasing a term plan
When you buy a temporary plan, you buy coverage against the risk of death. Therefore, it is obvious that the higher the risk, the higher the premium you will pay to cover that risk. For example, 50 lakh term coverage is available for as little as 5,000 per year if you buy it at 25 years old. However, if you buy the same policy at the age of 35, it would cost you almost $ 9,000 per year. So delaying the purchase would directly affect you in terms of how much money you pay for it. Also, since you have to pay the premium every year during the life of the policy, 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 incorrect information
While it’s true that pre-existing conditions and lifestyle habits like smoking and alcohol consumption can negatively affect your term insurance premium, an even more serious mistake is not disclosing them when purchasing your term insurance. ‘a policy.
If it turns out that the death of the policyholder is associated with a health problem which existed at the time of the purchase of the policy and which was not declared, this could lead to the outright rejection of the policy. claim. So think about the big picture and keep your family’s best interests in mind when purchasing the forward plan. Always disclose pre-existing conditions, if applicable.
Insurance to save tax
It is true that life insurance policies come with substantial tax benefits under section 80C of the Income Tax Act. However, saving taxes shouldn’t be your primary goal when purchasing a term insurance policy. Still, it’s common practice to buy insurance as a last minute deal to save on income tax. This is a big mistake because when the goal is tax savings, all calculations tend to focus on the premium in order to optimize the tax output while you should instead focus on the sum insured in order to support your family financially. In addition, when purchasing insurance for tax purposes, there is a tendency to make other mistakes as well, such as purchasing a policy with a shorter term or a lower insured amount.
The author is Chief Business Officer, Life Insurance Policybazaar.com