10 common mistakes to avoid while buying Term Insurance

A term insurance policy is the simplest form of life insurance policy. In it, the policyholder pays a premium; against it, the insurer provides a life cover at an assured sum for a set period. However, despite being this simple, making mistakes while purchasing a term insurance plan is more common than you may think.

Generally, these mistakes are a simple oversight of what is important and what can be ignored. Unfortunately, these small ignorances can turn into significant financial troubles. Therefore, to ensure that you do not make these mistakes, here is a list of the 10 common mistakes people make while buying term insurance and how to avoid them.

Mistake no. 1: Not knowing your adequate coverage

One of the most common mistakes while purchasing term insurance is failing to determine the right coverage. One can fail both ways by over or underestimating their adequate coverage. Opting for insufficient coverage can leave your family underfunded during crises. On the other hand, buying excessive coverage can strain your budget unnecessarily.

How to avoid it:

To ensure adequate coverage, calculate coverage based on actual financial requirements. Start by assessing your current financial obligations, such as loans, dependents’ expenses, and lifestyle needs. Also factor in future goals, inflation, and potential emergencies. For this, you can use online insurance calculators or consult experts to determine a coverage amount that balances affordability and sufficiency.

Mistake no. 2: Hiding health details or ignoring riders and add-ons

It is a common myth that term insurance is only for healthy people who do not have any pre-existing conditions or are at risk of developing any health conditions later in life. Guided by this misinformation, people lie about their policies, which usually leads to claim rejections.

How to avoid it:

Always be truthful about your health and lifestyle details, as honesty ensures your claims won’t face rejection. To address potential health concerns, explore additional riders like critical illness or accidental death coverage. These riders can help safeguard your family and cover medical or unforeseen expenses, reducing stress.

Mistake no. 3: Prioritising cost over long-term needs

Prioritising cost over long-term needs is a common trend among policy buyers. They generally focus solely on low premiums policy, which is short-term and ignores inflation. While such a policy may save you a bit in the short term, it compromises coverage, loses value over time due to inflation, and leaves you uninsured during crucial years.

How to avoid it:

You need to focus not only on short-term gains but also on the various comprehensive benefits. Choose policies with inflation-adjusted coverage to maintain relevance over time. Further, ensure that your policy term is aligned with significant life milestones, like retirement or your dependents’ financial independence, to ensure long-term security.

Mistake no. 4: Overlooking the claim settlement ratio

Claim settlement ratio is like the litmus test of an insurance company. It indicates the total number of claims settled by the company against the claims received during the year. Selecting an insurer with a poor claim settlement ratio might risk non-payment. Always prioritise insurers with high settlement records.

How to avoid it:

In the Indian insurance market, a claim settlement ratio of 90% and above is considered good. So, when you shop for your next insurance policy, ensure the company has a track record of a consistent 90% or more claim settlement ratio for at least three years.

Mistake no. 5: Relying solely on employer-provided insurance

No, employers are not legally required to provide term insurance plans. However, many employers offer group term life insurance as part of employee benefits to attract and retain talent. The downside is that employer insurance might not suffice in case of job loss.

How to avoid it:

While the added benefit of employer-provided insurance is great, it must not be your primary policy. Always make sure to have a personal term plan for assured security.

Mistake no. 6: Ignoring tax benefits or forgetting to integrate with financial plans

Term insurance provides several financial benefits apart from the assured sum. These include tax-saving aspects under section 80C or section 10(10D). Neglecting tax benefits or failing to integrate term insurance with overall financial plans can result in missed savings and gaps in financial security.

How to avoid it:

To maximise savings, understand tax benefits available through sections 80C and 10(10D). This will ensure maximum benefit from a term insurance plan. Additionally, align your term insurance with your broader financial goals to ensure it complements your investments, debts, and future financial needs seamlessly.

Mistake no. 7: Overlooking policy details and updates

Most people take all term insurance policies as the same. And to add to this disaster, they even consider it a one-and-done thing. So, neither do they properly review their policy nor update it. However, failing to review policy terms or forgetting regular reviews can lead to unpleasant surprises, such as exclusions or outdated coverage that doesn’t align with life changes like marriage or children.

How to avoid it:

Read the fine print thoroughly to understand exclusions and claim processes. Schedule periodic reviews of your policy to update it as your financial responsibilities evolve, ensuring it remains relevant and sufficient.

Mistake no. 8: Naming inadequate nominees

The nominee is the person who is entitled to the benefits of the policy in the event of the policyholder’s death. Not naming the nominee(s) correctly or failing to update them (if wished for) can delay benefits.

How to avoid it:

Always name the correct nominee(s) based on your current circumstances, such as dependents or key family members. Regularly update nominee details to reflect life changes, such as marriage or new dependents, ensuring smooth benefit disbursement.

Mistake no. 9: Opting for lump sum payouts only

Lump sum payouts are the most common options for a term insurance policy. While taking the policy benefits in lump sum has its benefits, they are not the best options for everyone. Lump sum payouts may not suit individuals prone to overspending or those needing sustained financial support, such as families with ongoing expenses or dependents.

How to avoid it:

Avoiding this mistake is simple. Do not take lump sum payouts. Depending on your financial standing, try to estimate the possible struggles your family might face after your death. Based on this information, device your payout plan.

Mistake no. 10: Not trusting the internet

Many still hesitate to rely on the internet for critical decisions like buying term insurance. This lack of trust can lead to missed opportunities for better policies or affordable premiums. Additionally, overlooking customer feedback might result in the selection of unreliable insurers.

How to avoid it:

Leverage online comparison tools to explore policy options and find the best features at competitive rates. You should also read customer reviews and forums to gain insights into insurers’ reliability and claim settlement experiences.

FAQs

What is a term insurance policy?

A term insurance policy provides life cover for a set period in exchange for premium payments.

How can I choose the right coverage amount for term insurance?

Calculate your coverage based on financial obligations, future goals, and potential emergencies using online calculators or expert advice.

Why is the claim settlement ratio important in choosing an insurer?

A high claim settlement ratio indicates reliability and a higher likelihood of claim approval by the insurer.

What are the tax benefits of term insurance?

Term insurance offers tax deductions under section 80C and tax exemptions under section 10(10D), contributing to financial savings.