Earning member is the backbone of the family who supports in achieving financial goals. However, in case of sudden death of earning member, financial goals of the family members may not be always achievable. One of the basic financial planning steps, is to consider a term insurance plan. One should pick a right term insurance plan based on the need. There are several parameters also that needs to be considered while picking up a right term insurance policy. In this article we would provide various tips on how one can choose a best term insurance plan in India.
What is Term Insurance Plan?
Term insurance in simple form is the risk coverage provided by the insurance company to the life insured. In case of unfortunate death of the life insured, a death benefit (sum assured) would be paid to the nominee or legal heirs. There are various types of term insurance plans in India. Some of them have maturity benefits too. One should pick-up the right one based on their need. You can check more details on Life Insurance Plans and how they exactly work.
How to choose a best term insurance plan in India?
Here are some tips to choose a best term plan.
#1 –Term Plan based on your financial goals
Everyone talks about 1 Crore Term plan or 2 Crore term plan. This is like a throwing a fancy number. Based on some recommendations from a friend or relative or a colleague, one would consider some random number as a sum assured and take term plan.
A friend might say consider the sum assured which is equal to annualized expenses x 20 times.
Another friend might ask you to consider the sum assured of annual income x 20 times.
You would have got confused and thought what is the ideal sum assured to consider in term plan?
One should first create their financial goals, assess where they are now and differential money that might be required to take a term plan. In your absence, such financial goals cannot be achieved by your family members, hence, one should consider this gap while purchasing the term plan.
Let us explain with an example.
Mr. Rajesh has financial goals for kids’ education of Rs 20 Lakhs in next 15 years, daughter’s marriage of Rs 50 lakhs in next 20 years, spouse survival for the next 20 years (in the absence of Mr X).
Beyond this they have Rs 1 Lakh per month expenses (1 Lakh x 12 months x 20 years) for Rs 2.4 Crores etc.
If we consider all these items, we may arrive say Rs 3.1 Crores. You can consider inflation also and opt for little higher amount. E.g. Rs 3.5 to Rs 4 Crore or Rs 5 Crore.
Assume Mr. X has accumulated 1 Crore already, the balance can be considered as the sum assured while choosing a term insurance plan. This way, even in the absence of Mr. X, the financial goals can be still achieved + spouse can survive without any hurdles.
#2 – Compare features and benefits in Term Plan
There are different types of term insurance plans. There are simple term plans or different variants like increasing term plan, decreasing term plan, return of premium term plan etc.,
Each one of them has their own pros and cons.
There are term plans that comes with critical illness coverage and riders too.
One should assess them based on their need, family history and opt them. While a simple term plan comes with low premiums, any additional benefits or riders comes with additional premiums.
If you are in the initial phase of your career, start with a simple term insurance plan. Later you can assess and consider another term plan as your income grows.
#3 – Compare the premium of various plans
The biggest mistake many individuals do is taking a low premium term plan without understanding what such plans offer. Low premium term policies come with less features and vice versa. Once you assess the features and the coverage amount you might need, then you can compare various term plans from different insurance companies. Among them you can opt for a low premium one which meets your need.
#4 – Opt for High Claim Settlement Ratio (CSR) Plan
Claim settlement ratio (CSR) of insurance companies is the ratio of total claims paid over the total claims received during the financial year.
Assume an insurance company received 1,000 claims during the year and settled 950 and rejected/repudiated 50 claims. Means the claim ratio is 95% (950/1,000).
This is an important parameter in choosing a term plan. In future in case of death, of life insured, their family should not suffer if the insurance company rejects their claim. Hence opting a high claim settlement ratio term plan is always recommended.
#5 – Prefer Online Plans and avoid offline plans
Under online term plans, one need to login to insurance portal, fill the details and purchase the term plan. In offline mode, one need to approach an agent or branch of the insurance company, fill application form and apply for the term policy. Sometimes insurance agents might not fill all details completely and your insurance claim might get rejected in the future.
Online plans are simple and come with low premium.
One can prefer online term plans as these are simple to purchase and also comes with low premium.
#6 – Solvency Ratio > 1.5
Solvency Ratio would tell whether insurer you selected is capable of settling your claim in the future if the need arises. IRDA has mandated that life insurance companies should maintain a solvency ratio of > 1.5.
In case of natural disaster, the insurer would receive the highest number of claims in a short period and they need to settle them quickly. In such situation solvency ratio would become important. While we may not see natural disasters on a regular basis, but one should keep an eye on this aspect too.
As an example, ICICI Prudential Life insurance company solvency ratio is 2.15.
Should you consider these parameters while choosing a term plan?
It might not be possible to consider all the parameters indicated above in choosing a life insurance plan. However, try to cover the parameters as much as possible. This is a one step towards making your family secured and provide financial assistance even in your absence.
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