Term Insurance: How to Avoid Making Costly Errors?

A term insurance policy is a cornerstone of financial planning, offering high coverage at affordable premiums to secure your family’s future. However, mistakes made while purchasing or managing a term insurance policy can lead to inadequate coverage, claim rejections, or financial strain. Understanding these pitfalls and taking proactive steps can help you maximise the benefits of term insurance and avoid costly errors.

This guide outlines common mistakes policyholders make and offers practical tips to ensure you get the most out of your term insurance plan.

Importance of Avoiding Mistakes in Term Insurance

A term insurance policy is designed to provide financial protection to your loved ones in your absence. Mistakes, whether during policy selection or management, can compromise this objective, leaving your family financially vulnerable. Taking the time to evaluate your needs and make informed decisions ensures that your policy aligns with your financial goals and responsibilities.

Common Mistakes to Avoid in Term Insurance

Choosing Inadequate Coverage

One of the most common mistakes is underestimating the required sum assured. Insufficient coverage may not be enough to meet your family’s financial needs, including daily expenses, loan repayments, and long-term goals.

How to Avoid:

● Calculate the sum assured based on your income, financial responsibilities, and future goals.

● A general rule of thumb is to opt for coverage that is 10-15 times your annual income.

Delaying the Purchase

Procrastinating on buying term insurance can lead to higher premiums as age and health significantly impact costs. Waiting until later in life may also reduce your chances of qualifying for a policy due to health issues.

How to Avoid:

● Start early to lock in lower premiums and ensure comprehensive coverage.

● Even young professionals should consider investing in term insurance to secure their financial future.

Ignoring Inflation

While a sum assured may seem sufficient today, inflation can erode its value over time, leaving your family underinsured in the future.

How to Avoid:

● Consider inflation while determining the sum assured.

● Opt for policies that allow you to increase coverage periodically or during major life events.

Not Disclosing Complete Information

Failing to disclose critical details, such as pre-existing medical conditions, lifestyle habits, or smoking history, can lead to claim rejection. Insurers investigate claims thoroughly, and discrepancies in information can invalidate your policy.

How to Avoid:

● Be honest and transparent while filling out the application form.

● Provide accurate details about your health, occupation, and lifestyle.

Choosing the Cheapest Policy

While affordability is important, selecting a policy solely based on the lowest premium can be a mistake. Cheap plans may offer limited features or inadequate coverage.

How to Avoid:

● Balance cost and coverage by comparing policies from multiple insurers.

● Look for a policy that offers the best value for your specific needs.

Ignoring Riders and Add-Ons

Many policyholders overlook the importance of riders, which can provide additional protection for specific risks, such as critical illnesses or accidental death.

How to Avoid:

● Evaluate your needs and consider adding riders to enhance your policy.

● Popular riders include Critical Illness, Accidental Death Benefit, and Waiver of Premium.

Failing to Review Policy Terms

Skipping the fine print can lead to misunderstandings about what your policy covers and excludes. This can create problems during the claim process.

How to Avoid:

● Carefully read the policy document to understand inclusions, exclusions, and claim procedures.

● Clarify any doubts with your insurer before finalising the policy.

Not Informing the Nominee

Your nominee should be aware of the policy details, including the sum assured, policy number, and claim process. Failing to inform them can delay claim settlement.

How to Avoid:

● Keep your nominee informed about the policy and provide them with all necessary documents.

● Ensure their contact details are updated in the policy.

Allowing the Policy to Lapse

Missing premium payments can lead to policy lapse, leaving your family without financial protection.

How to Avoid:

● Set reminders for premium due dates or opt for automatic payments.

● If you miss a payment, use the grace period to renew your policy without penalties.

Ignoring the Claim Settlement Ratio

The claim settlement ratio (CSR) of an insurer indicates their reliability in processing claims. Choosing a company with a poor CSR can result in delays or rejections.

How to Avoid:

● Research and choose an insurer with a high CSR.

● Regularly check IRDAI reports for updated CSR data.

Tips to Maximise the Benefits of Term Insurance

Start Early

Buying term insurance early ensures lower premiums and longer coverage. It also allows you to secure coverage before any health issues arise.

Use a Premium Calculator

A term insurance premium calculator helps you compare policies and choose one that fits your budget while offering adequate coverage.

Periodically Review Your Policy

As your financial responsibilities evolve, review your policy to ensure it aligns with your current needs. Update your coverage, add riders, or change your nominee if necessary.

Opt for Flexible Payout Options

Many insurers offer flexible payout options, such as lump sum, monthly income, or a combination. Choose a plan that best suits your family’s financial situation.

Keep Documents Organised

Maintain a file with all policy-related documents, including the policy document, premium receipts, and contact details of the insurer. This ensures a smooth claim process for your nominee.

Conclusion

Term insurance is a powerful financial tool that provides security and peace of mind for your family. By avoiding common mistakes, such as inadequate coverage, delayed purchase, or failing to disclose information, you can maximise the benefits of term insurance and ensure seamless financial protection.

Take the time to evaluate your needs, compare policies, and make informed decisions. A well-chosen term insurance policy is not just a financial product—it’s a commitment to your family’s future and well-being.