Common mistakes to avoid while choosing a term insurance policy

This piece looks at some common mistakes that one should avoid while choosing term insurance Plan.

insufficient sum insured

The purpose behind buying a term insurance policy is that if the life insured dies, his family can live well without worrying about finances. What if the sum assured cannot last long after the death of the insured? This can happen if the sum assured is not evaluated carefully based on the future needs of the family.

Naval Goel, Founder and CEO, PolicyX.com said, “The mistake most people make is vague. term insurance Cover that fails to meet their future financial requirements. This usually happens when buyers do not calculate their insurance needs keeping in mind the inflation rate and several dependent factors.”

Making the price the sole determinant for policy purchase

Experts say that it is best not to make price the sole determining factor while buying or choosing a policy.

Piyush Trivedi, Joint President, Kotak Life Insurance said, “The important factors that one must go into in choosing the right term insurance plan are the claim settlement ratio, suitability of policy benefits to one’s needs, reputation and financial position of the insurer. These factors help support the family during the claims process.”

Delay in buying term insurance

When you buy a term plan, you are buying protection against the possibility of death. Consequently, the greater the risk, the higher the premium you will pay to cover that risk.

Sajja Praveen Choudhary, Head, Term Life Insurance, Policybazaar.com, said, “If you buy a ₹50 lakh term insurance at the age of 25, you can pay the least ₹5,000 per year. When you turn 35, however, the same policy will cost you close to approx. ₹9,000 per year. As a result, delays in purchases will have a direct impact on the amount you will pay. Also, because you will have to pay premiums every year for the term of the policy, failing to lock it in at a fair value can be a costly mistake.”

giving false information

People make mistakes by hiding important information related to their medical history, financial status etc. Such information has a direct bearing on policy issuance and claim settlement. Choudhary said, “While it is true that pre-existing diseases and lifestyle factors such as smoking and drinking can increase your term insurance premium, not reporting them at the time of buying a policy is an even bigger mistake. For example, suppose that the death of the policyholder occurs due to the health condition accompanying him at the time of purchase of the policy. In such case, the insurer may reject the claim outright if he had not disclosed such pre-existing diseases.”

Choosing a policy that does not require therapy

Avoiding therapy is one of the biggest mistakes. Medicare ensures that accurate and complete health details are obtained and considered while issuing the policy. There will be no disconnection at the claim stage relating to non-disclosure, incomplete disclosure etc. Further, Trivedi said that one can also seek a medical report from the insurer for his reference and record and use it for his regular medical check-up routine.

Buying a policy to save tax

Life insurance policies offer significant tax saving benefits for up to ₹1.5 lakh under section 80C of the Income Tax Act. And, as per Section 10(10D) of the Income Tax Act, any bonus (i.e. policy proceeds) paid on maturity or on the death of the policyholder is completely tax-free, subject to certain terms and conditions.

However, saving tax should not be your primary motivation for buying a term insurance policy. However, it is common to buy insurance at the last minute to save on income taxes. This step taken by many is again a big mistake because when the goal is tax savings, all the calculations focus on premiums to optimize tax expenditure.

limited tenure

The death benefit is paid to the nominee only when the policyholder dies within the policy term. Unless you opt for Term Insurance (TROP Plan) with return of premium. However, no maturity benefit is paid if the policyholder survives that term. He receives only the total premium paid by him to the insurer during the policy term. People often make the mistake of opting for shorter tenure/coverage period to save money on premiums.

However, suppose you buy a policy for a shorter term and the policy term expires; In that case, you need to renew your existing term policy or purchase a new one, potentially at higher premium rates.