The two main areas to focus on in insurance planning are life and health protection. Life protection through term insurance and health protection through health insurance play a crucial role in managing risks, providing financial security to loved ones, and saving out-of-pocket expenses in unexpected emergencies.

Let’s take a closer look at life protection through term insurance:

What is term insurance?

Term insurance is the oldest and most affordable form of risk protection. For a specified period, it provides financial security to your family in your absence for a fixed premium. If the policyholder unfortunately passes away during the policy term, the nominee receives a lump sum death benefit.

If the insured survives the term, the policy’s purpose is to offer life protection by charging risk premiums (known as premiums) for the specified period. Hence, no maturity benefit is payable under the policy.

Except for suicide within the first year, term insurance covers all types of death worldwide.

Considering the variety of policies and complex procedures available for ordinary people, it is important to understand the factors to consider before choosing a term insurance plan. Here are six such factors explained:

6 Factors to Consider Before Choosing Term Insurance

1. Identify the right coverage needs:

Before purchasing a term insurance policy, it is essential to assess your coverage requirements. Consider factors like your family’s living expenses, outstanding loans, and future financial goals to bridge any mortality gaps. This ensures your family can cover expenses in the event of an unfortunate incident.

Let’s look in more detail:

How much coverage does one need?

The purpose of term insurance is to ensure that dependents maintain a similar standard of living in the event of the insured’s sudden death.

This means the size of term insurance should be sufficient to replace the insured’s income and cover expenses, including servicing outstanding loans and liabilities.

The best way to calculate term insurance size is to consider the size of liabilities, types and timing of expenses, investment income from various asset classes, inflation rates, tax rates, and macroeconomic factors.

2. Choose the right policy term:

The policy term should be selected based on your age, retirement age, and financial goals.

How a person decides the policy term primarily depends on choosing one of two approaches and understanding why they need term insurance:

a) Creating an asset to repay debt/liabilities:

In this approach, the policy term protects the policyholder until age 60 or 65. That is, Policy Term = (65 years) – (current age).

Term insurance should cover until the person receives “regular income” and until family debts, liabilities, or responsibilities are settled within this period.

b) Creating a financial estate for loved ones:

Here, the policyholder aims for reasonable protection of life expectancy between ages 75 and 85, intending to create an estate for the family and maintain financial independence.

Policy Term = (85 years) – (current age)

Achieving financial goals with a significant corpus allows fulfilling all financial obligations and providing the family with the same standard of living even in your absence.

3. Understand which riders to include:

Riders are add-on benefits that can enhance your policy coverage. Along with the base term plan, riders can cover critical illness, disability, and premium waiver benefits.

For instance, if diagnosed with a critical illness or suffering permanent disability due to an accident, the rider waives future premiums. Term insurance covers death, illness, and disability.

Evaluate the exact purpose of riders such as Accident Death Benefit Rider, Critical Illness Rider, and decide whether to add them to the base term plan or purchase a standalone comprehensive offer.

4. Evaluate the premium amount:

Premium pricing plays a crucial role as it should be commensurate with the value you receive.
The premium amount should be affordable and sustainable for the entire policy term, depending on your age, policy term, etc. When choosing a plan, consider your income, budget, and other financial obligations.

5. Brand evaluation:

This parameter assesses the financial strength and stability of the insurance company providing the term insurance policy.

The solvency ratio is a financial metric indicating an insurer’s ability to meet long-term financial obligations. Persistence ratios at 13 and 61 months measure the percentage of policyholders continuing to pay premiums after those durations. The claim settlement ratio indicates the percentage of claims settled by the insurer within a specific period.

The solvency ratio is a financial metric indicating an insurer’s ability to meet long-term financial obligations. Persistence ratios at 13 and 61 months measure the percentage of policyholders continuing to pay premiums after those durations. The claim settlement ratio indicates the percentage of claims settled by the insurer within a specific period.

Choose a company with strong market reputation, solid financial position, and a high claim settlement ratio.

6. Claim experience:

This factor helps assess the insurer’s track record in claim settlement, including frequency of claim settlement, number of complaints per 10,000 claims, and average time taken to settle claims.

The claims paid ratio measures the number of claims settled versus claims received in a specific timeframe. The complaint ratio measures the number of claims-related complaints per 10,000 customers.

Choosing a policy that provides adequate coverage, affordable premiums, necessary riders, and adds value to your money while meeting your personal needs becomes easier with these six tips. Before purchasing a policy, evaluate these factors carefully and read all terms and conditions thoroughly to ensure a secure financial journey for yourself and your family.