Term insurance plans are an affordable way to secure your family’s future even after you are gone. From ensuring your family does not have to compromise their standard of living to taking care of your child’s education expenses, term insurance plans are crucial for breadwinning members of a family.
Insurance companies generally have various term insurance plans that you can choose from. The plans vary from features to benefits being offered. While this does give us a list of options to explore and avail the policy, it also tends to confuse us as to what is the best plan for us.
Here’s all you need to know about choosing the right term insurance plan with adequate coverage.
Choosing the Right Term Insurance Plan
There are several aspects that you should keep in mind and factor into your decision when it comes to choosing a suitable term plan. These include:
- Coverage: The first thing to be decided is the amount of coverage you need and the amount that will be enough to ensure your family’s comfort in case of your unfortunate demise. A term insurance plan calculator can be used to get an estimate of coverage based on your requirements.
- Tenure: Term insurance plans with return of premiums have maturity benefits whereas pure term plans do not offer the same if the policyholder survives the term. It is important to figure out the right length of coverage, to ensure comprehensive protection for your family when you are not around.
- Price: Avoid buying a term insurance plan with a premium that is out of your budget as the inability to pay a premium will lead to you losing all the benefits of the term insurance plan. Make sure you can afford the premium, even in the long run.
- Supplement the Life Cover: There are several add-on riders that you can choose from to maximize the benefits offered in your term insurance plan. Waiver of Premium riders, critical illness riders, Accidental Death Benefit Riders, and Family Income Benefit Riders are amongst a few that can be chosen to get additional benefits at a nominal cost.
- Claim Settlement Ratio: Always ensure that you choose an insurer that has a high claim settlement ratio. This ratio indicates the percentage of claims settled (the number of claims settled/ approved to the total number of claims received) in a year by the company
- Solvency Ratio: Another aspect to check while choosing an insurer is the company’s solvency ratio. This indicates the insurer’s cash flow and capability to settle claims received.
Whether you need to calculate the coverage or, the premium you may have to pay for that coverage or calculate a suitable policy term, there are various types of term insurance plan calculators available online that can be used to make an informed choice.
How Much Term Insurance Coverage is Adequate
Coverage is one of the most important aspects that you need to decide before buying a term insurance plan. This is mentioned as the ‘sum assured’ in the plan. The more coverage you have, the better it will be, while inadequate coverage will fall short of the mark in helping your family meet their financial requirements in times of need. The popular ways of calculating coverage include:
- Income Replacement: The concept behind this method of calculation is that term insurance plans should have a sum assured that is sufficient to replace your income. The value should be calculated as a product of the number of remaining working years you have and your present annual income.
- Expense-Based: In this calculation, you need to figure out your financial liabilities like debts, loans, etc., your total daily expenses, and factor in your life goals, like retirement planning, children’s education, weddings, etc. Basically, this is the cost of taking care of all your dependents for the rest of their lives and is the sum assured that you ideally need in your term insurance plan.
- Human Life Value (HLV): You can use an online term insurance plan calculator to calculate the HLV. It accounts for several factors including your income, expenses, financial goals, liabilities, inflation, etc. to give you an idea of the coverage you need.
Choosing a Policy Tenure
The life cover of a term plan is only valid for the duration of the policy term. Regular term plans do not have any maturity benefits in case the insured survives the term. Hence, choosing the right tenure is crucial, and here’s how you can do this:
- Based on Remaining Working Years: The term insurance should be valid for the number of years that you plan to keep working. This way, if something happens to you, the pay out from the plan will be able to help replace your income for the family.
- Your Longest Debt: People may avail several loans over the course of their life. Ensure these liabilities are not passed on to your next of kin by opting for a policy term that covers even your longest-duration loan/debt.
- Life Goals: Whether it’s a new car or dream home or an international vacation, choose a policy term that covers the slated achievement of these goals, so your family does not have to compromise or have financial worries in your absence.
Term insurance plans have affordable premiums owing to their features and are among the most preferred ways of planning for your family’s financial security. However, one must put in due research and carefully consider their needs before they purchase term insurance plans to ensure adequate coverage and complete peace of mind.