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News & Views

Monday, Oct 3, 2016

Should you buy term insurance policy only on basis of premium?

[Source : The Economic Times]

Sameer is nearly 30. He is married and will be a father soon. He and his wife are doing well in their respective careers. He is servicing a car loan and a home loan for Rs 4 lakh and Rs 50 lakh respectively. The couple realise the need for life insurance and are thinking about a plan to buy. They feel a plain vanilla term insurance would suffice, and are drawn to plans with the lowest premiums. Should annual premium be the only criteria for choosing a plan, or is there more to it?

Life insurance is a critical aspect of financial planning, especially for Sameer and his wife, given their outstanding liabilities. They must first ascertain how much they want to insure themselves for and the policy tenure. The premium comes next. While determining the sum assured, Sameer must take into account his current household expenses, amount and tenor of outstanding debt, envisaged future expenses and his estate.

The term of the policy should be roughly based on his time to retirement. The lower the term and the sum assured, the lower the premium. He must try to get the right life cover for the longest term possible. Even though it might come at a slightly higher premium, his overall savings in life insurance premiums through his entire working career will be much higher.

While it is prudent to opt for a product that is competitively priced, Sameer must remember that cheap does not mean best. A cheaper policy would be no good if the insurer’s claim settlement statistics are not up to the mark. This would defeat the very purpose of buying life insurance. Moreover, it is important to compare key features across a few shortlisted options.

Is he looking for any riders, such as critical illness, accidental death or disability? Do they come at an extra cost or are they included in the basic policy? Does he have a preference for a payout option? Will his choice come at a higher annual premium? He must evaluate the online variants of the policies, as these are most likely to be cheaper.

There is no such thing as the ‘best’ or the ‘right’ term insurance plan. A lot depends on what Sameer and his wife are comfortable with and what their preferences are. Moreover, they must bear in mind that life insurance needs have to be re-evaluated regularly and the sum assured, tenor and riders need to be re-adjusted.

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