Term life insurance is a simple product. It insures the policyholder’s life till the regular premiums are paid. In case of the sudden demise of the policyholder, the insurer pays a lump sum amount to the family. Over the years buying a term a life insurance has become very easy. All companies offer online services with add-ons.

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However, the wide variety of policies and varied nature of the add-ons can lead to confusion for customers. Here are the important things to consider before buying a term life insurance policy.

Insurance cover amount

The term life insurance cover amount should factor in your monthly expenses, outstanding loans, future expenses, existing insurance, annual income, and savings. The future expenses should be adjusted according to inflation before deciding on the right amount of cover.

The rule of thumb for calculating the cover amount is that you should be covered for at least 8-10 times you annual income plus any outstanding debts.

Policy period

Deciding on the policy period is the next important choice. If you are purchasing a policy at a young age, then it is advisable to go for the maximum available policy period to get a relatively lower premium.

Ideally, the policy period should not be too little as the policy might lapse before your financial obligations are completed. Similarly, the period should not be too long as the premium for that will be too high on account of a higher tenure. Ideally, the cover period should cover you till you are 60-65 years of age.

Medical tests

It is advisable not to avoid taking medical tests. There are two ways to go about it, some companies put buyers through extensive medical tests and others merely ask the buyer to give a declaration of good health. Going for a medical test is beneficial as the premiums may be lower if the test shows the buyer is in good health. Importantly, if a buyer goes through a medical test the onus of detecting a pre-existing disease shifts to the insurance company.

Pick add-ons

There are four major riders (add-ons) that companies offer: Additional cover for death due to accident, cover for critical illness, waiver of premium on disability and waiver of premium on critical illness.

Out of these, the waiver of premium on disability and waiver of premium on critical illness come at a low premium. The cover for critical illness rider is the most expensive. It is advisable to read the fine print of all the add-ons as they tend to be different for different insurance companies.

Select the right insurer

It is important to do some basic checks before choosing an insurance company. It is advisable to perform the following four checks:

Claim Settlement Ratio or claims paid ratio of an insurance company is the percentage of claims that are paid/settled by the company. This indicates the ease of settlement with the insurer. A high claim settlement ratio is ideal.

Solvency Ratio: It indicates the insurance company’s ability to meet its long-term liabilities. A higher solvency ratio indicates financial strength making the company an ideal choice.

Financial background: It is advisable to research the financial background of the insurance company to check its ability to take care of short-term and long-term liabilities.

Market reputation: The market reputation of the company is an indicator of the quality of services provided by the insurer, customer support and grievance resolution.

Choose suitable pay-out option

The premium for your insurance policy depends on the pay-out option you choose. A lump sum pay-out or a regular monthly income pay-out (if available in your plan) can be chosen. The choice should be made as per the requirement and feasibility as the premium will vary depending on the pay-out option.

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(Edited by : Thomas Abraham)