Steps to Choose the Best Term Life Insurance Plan

Term Life Insurance plans have a very basic structure:

• The plan will offer a death cover
• Will cover you for up to 65 years, and
• Premiums can be paid annually.

Then as more insurers started offering online term insurance plans things started to become a little complex. Today there is limited pay plans, increasing cover plans, staggered pay-out plans, return of premium plans and dozens of combinations. While this profusion of choices is good news, however, with multiple types of plans being offered now, it can get confusing

In this Article we’ll separate the wheat from the shaft and identify the most important variables you need to consider when buying a term insurance plan. 5 Steps which we think will help you in Selecting the Best Term Life Plan are:

• Firstly, identify your needs and the term insurance coverage you seek. Your term insurance coverage should broadly assess how much financial resources your dependents will need to have to provide for themselves if you were to meet and untimely death and the best way to get started on this is to grab a piece of paper and do the followings
  • one estimate your dependent family’s monthly expenses and multiply it 150 times. This multiple of 150 factors future inflation and is a good way to start the process
  • Two add your liabilities on account of home loans credit card bills personal loans etc.
  • Three deduct any liquid assets that you already have like fixed deposits stocks and mutual funds.
  • fourth add your expenses planned on account of important life goals that are likely to happen in the next 15 odd years like your children’s higher studies or the marriage etc , and
  • point 5 finally add the retirement corpus you want to leave for your spouse on his or her retirement.

The total of all these will help you arrive at how much of term insurance cover one should be endeavoring for.

• Secondly, determine the tenure of your plan. Once you know how much cover you need it’s important to determine till what age you need the cover for. You don’t want the tenure to be too little as your policy might lapse before you are done with your financial obligations. You also don’t want the tenure to be too high because the premium charge from you will be high on account of the higher tenure. A very good and scientific way of estimating the right tenure for your term insurance plan is to determine by what year will your liquid net worth i.e. the total investments that you have in mutual funds, provident fund and stocks etc after subtracting your liabilities will be more than the life insurance requirement. We have calculated earlier the age at which these two numbers coincide will be the age until which you need coverage because for start your assets will take care of your dependents upon your demise.

• Third target is to achieve the highest peace of mind per rupee of premium paid. The premium is one of the most important factors that needs to be considered. The reason I use peace of mind rather than coverage per rupee of premium is because consumers often value some key intangibles in decision-making. This can be things like reputation of the life insurer in the eyes of the policyholder, stability of the insurance provider. Since term life insurance is a long-term product often running into 30 – 50 years, it is important for you to be satisfied and happy with your decision of insurance provider which will be a combination of premium and perception of the insurer.

A useful tip here for most insurance companies term insurance policies that are sold online are cheaper than policies sold off line in branches or through insurance agents. So it makes more sense to purchase term insurance plans online as it gives you a clear premium advantage number.

• Fourth, choose your add-ons wisely. Term insurance plans offer riders at reasonable costs which should certainly be considered by you even if it might not fit in your requirements. there are four major riders that are available which are
  • One additional cover for death due to accident. For an amount in addition to your basic death cover shall be paid if you were to die in an accident.
  • Two critical illness cover where a lump sum amount is paid on the diagnosis of one of the listed critical illnesses with the life insurer.
  • three waiver of premium on disability where future premiums are waived off if the policyholder is rendered permanently disabled, and
  • Four waiver of premium upon critical illness where future premiums are waived off on diagnosis of a listed critical illness.

Of the four riders the two waiver of premium riders come at low premiums while the critical illness rider is generally the most expensive one. you have to run some permutations and combinations to see if the additional benefit match up for the premium charged and don’t forget to read the fine print of all these add-ons which are different for all insurance companies.

• Fifth, broadly look at the claim settlement ratio. Claim settlement ratio attracts a lot of consumer attention as it indicates the efficiency at which the policies are being settled. So when you see a number of 95 percent in the claim settlement ratio column, it means 95 out of hundred claims reported to the insurance company were settled. A word of caution here is the claim settlement ratio is merely an indication and if this ratio is over 95 percent then the company has been very efficient about settling claims. You really don’t need to go much deeper into it as to see who has 99 percent ratio or who has 98.5 percent ratio. It is always advisable to use the claim settlement ratio as a filter instead of a key decision making criteria.

Term insurance are long-term contracts which benefit your dependents and it is in your interest to identify the right plans for your family with the use of the 5 considerations explained in this article. I hope you found this article useful share it with your friends.