Common mistakes to avoid while choosing a term insurance policy

This piece looks at some common mistakes one should avoid while choosing a term insurance plan.

Insufficient sum assured

The objective behind buying a term insurance policy is that if the insured passes away, his/her family can continue to live well without worrying about finances. What if the insurance proceeds may not last long after the insured person’s demise? This situation can happen if the sum assured is not carefully appraised based on the family’s future needs.

Naval Goel, founder and CEO, PolicyX.com said, “The prevalent mistake that the majority of people tend to make is to take a vague term insurance cover that fails to meet their future financial requirements. It generally happens when buyers don’t calculate their insurance needs, considering the inflation rate and several dependent factors accurately.”

Making price the sole determinant for policy purchase

Experts say it is best not to make price the sole determinant factor while buying or selecting a policy.

Piyush Trivedi, joint president, Kotak Life Insurance, said, “Key factors which should go into choosing the right term insurance plan are the claim settlement ratio, suitability of policy benefits to one’s need, reputation and financial standing of the insurer. These factors help in supporting the family during the claim process.”

Delay in buying term insurance

When you purchase a term plan, you are buying protection against the possibility of death. As a result, the larger the risk, the higher the premium you will pay to cover that risk.

Sajja Praveen Chowdary, head, term life insurance, Policybazaar.com, said, “If you buy a ₹50 lakh term insurance at the age of 25, you can pay as little as ₹5,000 per year. When you are 35 years old, though, the same policy will cost you close to ₹9,000 per year. As a result, delaying the purchase will have a direct impact on the amount you pay. Furthermore, because you must pay the premium every year for the duration of the policy, failing to lock it in at a reasonable price could be an expensive mistake.”

Giving out incorrect information

People tend to make mistakes by hiding crucial information related to their medical history, financial status, etc. Such information lays a direct impact on the issuance of the policy and claim settlement. Chowdary said, “While it is true that pre-existing diseases and lifestyle behaviours such as smoking and drinking can raise your term insurance premium, failing to report them when purchasing a policy is an even worse mistake. For instance, suppose the policyholder dies due to a health condition that existed with him at the time of policy purchase. In such a case, if he hadn’t disclosed such pre-existing diseases, the insurers might reject the claim altogether.”

Selecting a policy that doesn’t require medicals

Avoiding medicals is one of the biggest mistakes. Medicals ensure that correct and complete health details are captured and considered while issuing the policy. There would not be any disconnect at the claim stage related to non-disclosure, incomplete disclosure, etc. Besides, Trivedi said that one could seek the medical reports from the insurer for one’s reference and records and use the same for their regular medical check-up routine.

Buying a policy for saving tax

Life insurance policies do provide significant tax saving benefit for up to ₹1.5 lakh under Section 80C of the Income Tax Act. And, as per Section 10(10D) of the Income Tax Act, the sum assured plus any bonus (i.e. the policy proceeds) paid on maturity or on death of the policyholder are entirely tax-free, subject to certain terms and conditions.

However, saving taxes should not be your primary motivation for purchasing a term insurance policy. Nonetheless, it is common to buy insurance as a last-minute attempt to save on income taxes. This step taken by many is again a big mistake because when the goal is tax savings, all calculations tend to focus on premium to optimize the tax outgo.

Limited tenure

The death benefit is paid to the nominee only if the policyholder passes away within the policy term. Unless you select term insurance with return of premiums (TROP plan). Still, there is no maturity benefit paid if the policyholder survives that period. He/she only receives the total premium paid by him/her to the insurer during the policy period. People frequently make the error of choosing a shorter tenure/coverage term to save money on premiums.

However, suppose you buy a policy for a shorter period and end up outliving the policy term; in that case, you need to renew your existing term policy or purchase a new one, potentially at higher premium rates.