Ch. 6: How to Buy Term Insurance?

Term insurance is the simplest and the most cost-effective type of life insurance there is. It pays your family a sum of money (called the Sum Assured) in case you die within the term of the policy. All you need to do is purchase a suitable plan from any of the 15+ insurance companies in the market - and pay premiums regularly to keep the plan active..

Term insurance is one of the best ways to secure your family’s financial future and ensure they don’t have to give up on their current lifestyle as well as dreams - when you aren’t around. The cover amount can be used to manage daily expenses, education costs, medical costs, and emergencies, as well as to pay off loans and liabilities if any.

• The insurer won’t pay the claim if you die due to suicide, within one year of taking the policy. All the premium payments made in the first year, however, will be returned to your family.
• If you outlive your policy duration and the policy terminates, you will not get anything back.

Modern term insurance policies can be personalised for your family’s specific needs. Based on whether you'll have a steady income in the future or not, you can choose to pay off premiums quickly and enjoy the cover for a longer period. And you can even choose to include a feature that will automatically increase the cover amount, as time progresses - without you having to do anything. Basically, there are a lot of options that help you customise a perfect cover that fits all your family's current and future needs.

Let’s now take you through the whole process step-by-step, so you make no mistake:

A term insurance policy is a legal contract between you and the insurance company. You, the individual who pays for the policy, are the policyholder. You can purchase the policy for yourself or any other family member. The individual whose life is insured is the life assured.

You will be required to enter a few personal details to get a quote for the premium amount. At this stage, you can also customise the policy

• Evaluate your life cover: Your coverage should be to the point of meeting your dependents' present everyday expenses and future necessities. Children's education fees, marriage, spouse's old age needs, and forthcoming liabilities are a portion of the elements to consider.
• Pick your policy term: Work out the length for which your loved ones will require monetary support. The cover duration should be a little more than your retirement age, ideally 5 years beyond retirement.
• Pick a premium instalment mode: Term plans grant a one-time instalment of the whole premium. Or you can go for periodic premiums for the entire policy period like monthly, quarterly, half-yearly, or yearly instalments.
• Select the payout choice: When you're not around anymore, you want your family to be prepared to deal with the huge life change that comes. Choose the right claim payout option, based on your family's comfort and financial knowledge. If your spouse is not financially well-versed, choose the 'lump-sum + income' option, where a percentage of the sum assured is credited on death, and the remaining amount is credited every month over a period of 10 to 15 years.
• Investigate riders: You can build your base coverage with riders for a negligible ascent in the premium. Such additional items give extra payouts, covering possibilities, for example, deaths due to accidents.
• Regular Pay and Limited Pay Options: If you choose the Regular Pay option, your premium payment duration becomes equal to the policy duration. Thus, you have to pay the premiums until the end of your policy term. Based on your convenience, you can choose how frequently you want to pay the premiums - monthly, quarterly, half-yearly, or yearly premium payment modes.
  
  The limited pay option allows you to finish your premium liability in fewer years compared to the policy term. For any reason, if you don’t want to continue paying premiums for the long term, you can choose the Limited Pay option at the time of buying your term insurance policy.

Before you get your policy, you must clearly and accurately describe all your health conditions and lifestyle conditions like smoking, alcohol consumption, etc.

If you have a chronic health condition, insurers are likely to request an additional premium over and above the standard premiums calculated for a healthy individual (it is safe to assume a 50% higher premium, this depends on the type of health condition). The insurer may even reject the proposal because of your health condition.

You need to inform them about your age, gender, medical history, current health conditions, lifestyle habits, education qualifications , annual income, the nature of your profession, and family’s medical history.

There are many more declarations that a customer needs to make when purchasing term insurance.

In view of such information, the insurer evaluates the likelihood of your family raising a life claim. Some factors like a higher age, an unhealthy lifestyle, or a hazardous profession can elevate the premium amount.

You need to name the individual who will receive your term plan's financial benefits, i.e., the nominee.

Here are a few crucial aspects you should be aware of

• The nominee can be any family member like mother, father, spouse, child.
• It can also be any distant relative such as a nephew, uncle, or aunt. However, when it comes to distant relatives, it is important to prove that they have an insurable interest. This means that your death should cause some sort of financial or emotional loss in their lives.
• There can be multiple nominees in a single policy. The death benefit will be shared by them in the percentage decided by you.
• If the nominee is a minor, i.e., less than 18 years of age - you will have to select and declare an appointee for them. The sum assured will be paid to the appointee on behalf of the minor nominee.
• The nominee/s can be changed any number of times or as may be specified by the insurance company at the time of policy renewal.
• If the nominee happens to pass away during the span of the policy, you are required to update the change in their status. If they fail to do so, it is presumed that the policy has no nominee. In this case, the claim amount is given to your first legal heir. This may be your spouse, child, mother, or father.

After filling out the policy proposal form and choosing your nominee, you need to pay your first premium.

Once the payment is made, the insurance company will go through your profile and the details you have shared in the policy proposal form. This is done to check if the insurance company will be able to cover the risk associated with that particular profile.

These are the possible outcomes

• If everything looks okay, the insurer accepts your proposal.
• If your profile looks risky, the insurer will either reject your proposal or increase the premium.

If your proposal is accepted, the policy gets issued and the cover starts.

So, what happens next?

The first-year premium has already been paid by you while filling the policy form. The subsequent premiums will be paid on renewal, depending on the premium payment frequency you’ve chosen.

The purpose of term insurance is to cover risk - it is a pure risk plan and aims at protecting your family and their needs after your death. And it does its job well, at a very low cost. If you have financial dependents, we strongly recommend that you purchase a term insurance plan to protect their financial future, so they can continue living a comfortable life, even when you are not around.