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In life, we prioritise our safety and that of our family’s above anything else. This sentiment ideally should extend to choosing a term insurance plan. The term policy should essentially align with your financial requirements, now and the ones that could arise in the future, while taking care of your loved ones’ financial security. For this reason, you should consider buying life insurance. If you are at your first job and your career is just taking off, you will look for insurance coverage that fits your budget. A term insurance plan will be the right call for you as the premium charged is lower than other types of life insurance. However, while selecting the right term insurance plan, when you compare the different types of term insurance plans out there, you will find yourself gravitating towards the cheapest plan. After all, term insurance doesn’t earn you any returns on maturity. So, how does it make sense to invest more than the bare minimum?
While the low premium is the driving force behind your decision to buy a certain term insurance plan, it may not work for you for a number of reasons. The affordability of the plan could potentially lead you to compromise on the financial security and safety of your loved ones. The insurer could reject the claim or impose restrictions that do not align with their best interests. In focusing on the premium charged, you may ignore other parameters of the cheap term insurance that are equally, if not more, important. Why choose a term life insurance that endangers the future of your family instead of safeguarding it?
To avoid these unpleasant outcomes and ensure the term insurance works for the objectives you have set, you need to consider the following four factors:
1. Yours and your family’s needs
The key decision-maker for buying the right term insurance plan is understanding the financial requirements of your family as well as of yourself. You need to consider their life goals such as studying abroad, starting a business, buying a home, etc. Factoring in their aspirations helps you formulate a more realistic picture of what they need when you are gone. Similarly, you need to be cognizant of the debt you’ve taken on in your name or will be taking on in the future. In the event of your demise, your debt and liabilities need to be paid off by your family. Your insurance should be sufficient to cover these payments.
2. The tenure of the term insurance plan
Tenure refers to the term for which the insurance coverage is provided. Once the plan reaches maturity, you will get the insured sum of money. It is imperative you take into consideration the tenure of the term insurance plans when selecting one. If you select a plan with a shorter tenure, the plan may not be valid for the latter part of your life, which is when you’d need it the most. A longer tenure will save you the trouble of buying another term insurance policy once this one expires. The tenure should be long enough to cover the possibility of any unforeseen event that leads to your unfortunate demise. Ensure that the tenure of the term insurance plan is concurrent with the years you are working. This enables you to make the term insurance premium payments comfortably, ensuring that your term policy does not lapse due to no payment.
3. The insurer’s reputation in resolving claims
To gauge the insurance company’s reputation in resolving claims, you should start by looking at their claim settlement ratio. The claim settlement ratio refers to the number of insurance claims honoured by the insurance company in a year, in proportion to the total insurance claims they have received in that year. The higher the claim settlement ratio means that the insurance company has held their end of the agreement and has paid the nominees. The lower the claim settlement ratio implies that they are more likely to reject a claim. Tata AIA Life has a claim settlement ratio of 98.02% for FY 20-21
The other two indicators that will help you make an informed decision are the claim rejection ratio, which is the ratio of the number of claims rejected in a year with respect to the total claims received, and the claim pending ratio, which refers to the number of claims that are pending to be resolved in a year, in proportion to the total number of claims received by the insurance company in that year. If the claim rejection ratio is above 50% then even if it is the cheapest term insurance plan available in the market, chances of your money going to waste are higher. Instead of risking all your money in the name of affordability, you’d rather buy a more expensive one from an insurance company that has a lower claim rejection ratio. On the other hand, if the claim pending ratio is high, the insurance company is possibly inefficient in resolving claims. This could cause a lot of trouble and back and forth for your loved ones who will have to constantly follow up to get what is owed to them. Therefore, when selecting a term insurance plan, ensure that the claim settlement ratio is high, the claim rejection ratio is low, and the claim pending ratio is low, giving you and your loved one's peace of mind with respect to making a claim.
4. The maturity age of the term insurance plan
The maximum maturity age varies across the different term insurance plans available in the market, usually between the range of 65 years to 80 years. As you age, the chances of you being sick or developing any illnesses increase. This implies that the higher the maturity age the better, as you get coverage for a longer period of time. Therefore, look at the maturity age when selecting a term insurance plan.
Along with the affordability of a policy, these factors are crucial and should be considered when making a decision about term insurance. With all the information about plans available on the internet, you can do thorough research before buying an online term plan.
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