If you wish to secure the well being of your loved ones in your absence, there is no better option than to buy a good term plan having an adequate life cover. But sometimes even doing so may not be enough. I was left stumped the other day when a friend asked me: “My family members’ financial management skills are not good. Will buying a term insurance plan for them suffice?”
When buying a term insurance plan, you need to visualise today what could happen to your family tomorrow in your absence. Pose the following questions to yourself: How will they manage their life goals without you? How will they take care of their daily expenses and maintain their current lifestyle? Are they financially savvy enough to be able to manage, in your absence, the huge amount received as death benefit? If not, could they fall prey to the financial vultures/agents, give in to their coaxing, and make the wrong financial decisions?
Let us look at some of the key factors one needs to consider when buying a term plan. If you buy a term plan based only on its low premium, the chances that it may not fulfil your family’s future requirements are very high.
Wide variety of options available today
Like the plain-vanilla ice cream, today’s term insurance plans too are totally customisable. Just as you can add fruits or nuts, sprinklers, sauces and other toppings to a plain-vanilla ice cream, similarly a term insurance plan too provides a wide range of choices in the matter of coverage, level or increasing sum assured options, joint life coverage, sum assured increase at critical life stages, death benefit payout options, critical and terminal illness benefit, accidental death benefit, premium payment frequencies and modes, additional protection through riders, and so on. Here are few points to keep in mind while choosing the right term plan.
Right sum assured: The first step is to decide the right sum assured. You do not want your family’s finances to fall short of their needs. The ideal sum assured should always be 15-20 times or more of your annual income. If you also want to combat the menace of rising inflation, go for the increasing sum assured option.
Accident coverage: If you travel frequently or are engaged in a hazardous occupation, then buying the accidental death benefit rider is advisable. It will provide your family with an additional sum assured due to accidental death.
Critical illness coverage: If your family has a history of critical illness, then you should also consider having this feature in your term plan where an additional benefit is payable on diagnosis of any of the listed critical illnesses.
Select the right insurer: People select their insurer by comparing their claim settlement ratios. However, this may not help always. You could well select an insurer with a claim settlement ratio of 99.5 per cent. But if you have suppressed facts while filling the proposal form, your claim could be denied. You could then end up falling in the 0.5 per cent rejected claims category. All insurers are good. Select the one that best fits your requirements. As long as you have declared all the facts correctly, your claim will not be rejected.
Select the right death benefit payout option
Today’s term insurance plans offer three-four types of death benefit payouts. These options provide great relief to those people who fear that their family members are not capable of handling their finances. Let us examine these options briefly.
Lump sum payout: Under this option, the entire sum assured is paid at one go to the nominees listed in the policy or to the legal heirs, in case no nominees are appointed by the policyholder.
Lump sum payout with fixed monthly/annual income: Under this option, a percentage of the sum assured is paid out instantly to the nominees on approval of the claim. The remaining amount is paid as a monthly/annual income, which is a fixed percentage of the remaining sum assured for a fixed number of years.
Lump sum payout with increasing monthly/annual income: This option helps in providing a monthly/annual income which tries to match pace with rising inflation. Here again, a percentage of the sum assured is paid out to the nominees on approval of the claim. The remaining amount is paid out as a monthly/annual income, which increases at a pre-determined percentage on a simple interest basis on every policy/death anniversary.
Fixed or increasing monthly/annual income: Here the entire sum assured is utilised for providing a monthly/annual income to the nominee and no lump sum payment is done. This monthly/annual income can either be on a fixed basis or an increasing basis for the desired months or years as chosen.
Is the premium right for you?
Finally, take into consideration the depth of your pocket. It does not make sense to choose a very high premium plan and then not be able to pay for it. It is best to go for a term plan that is both feature-loaded and is also light on the pocket. One can buy a term plan at the lowest premium by selecting from one of the online options.
Choosing the right plan has the highest possible significance in financial planning.
If you are worried about the poor financial management skills of your loved ones, then choose an appropriate death benefit payout option. By doing so, you will protect your family members in your absence against fraudulent agents or investment schemes and greedy relatives.
Through this option, you can also protect them from overspending and other temptations that come with having huge amounts of money. Choosing the right death payout option will protect the death benefit amount from being eroded before it fulfils its defined purpose.
The author is director–health, life and strategic initiatives, Coverfox.com