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Term Insurance

What NOT to Consider While Buying a Term Plan

When the entire world is opinionating on the subject of “things to consider” while going on a vacation, raising a child, buying a car, planning for retirement, etc. I guess it also makes sense to list some of the things that you don’t need to consider while buying a term plan. How about that!!!

The next most logical thought that comes to the mind is if it’s not important then why to read about it? Point being, here we will try and list things that form those little questions (read doubts) in our mind that the popular advisory entities don’t mention (their assumption being that the reader is already aware or the doubt by itself is too basic).

Let’s get started with what’s not to worry about while buying a term plan.

  1. Claim Ratio of the Insurance Company - Of the numerous articles and search pages that you would have come across or that financial wizard of a friend you would have spoken to, all would have highlighted the importance of the claim settlement ratio of the insurer you are considering to buy the plan from. The fact of the matter is you don’t have to. Let’s see why, the claim ratio of the insurer is derived from the simple mathematical calculation i.e.

CLAIM SETTLEMENT RATIO = No of Claims Settled/ Total Number of Claims Received

So in a year if the insurer receives 100 claims and pays 50 then for that year its claim ratio will be 50% (which is low). This generally happens for a variety of reasons mostly for new insurers where the denominator in the equation itself is very low i.e. the total number of claims that the company receives is very low and a small number of those are not eligible and so their claims are denied, this small number damages the company’s overall ratio at a great length. This is just about the equation whereas the bigger picture to see is that an Insurer proactively tries to settle all claims, as the disrepute it attracts due to not paying a claim (in money terms) far outweighs the settled amount. This is a company ratio and has got nothing to do with your one on one contract with the insurer.
What you should do to take care of this aspect is to make sure that you have divulged all information to the insurer in the proposal form and at the time of a medical examination, truly and to the best of your knowledge. Hiding a simple smoking habit can cost your dependents their financial independence.

  1. Insurance Company Winding Up or Acquired - This has come up for discussion 7 times out of 10 during our customer meetings. Although this line of worry is slowly diminishing in the metros, but still worth a mention here. The answer is again a You don’t have to worry about this, as the insurance regulator IRDAI has laws to make sure that an insurer cannot wind up. The Insurance policy is a contract between the insured and the insurer and the existing laws make sure that irrespective of the situations or the conditions, the clauses of the contract are honored by the insurer.
    So what happens if an Insurer decides to windup business in our country? The only way that can happen is if another insurer takes over (in a way acquires) the operations of that company and the insured’s contract with all its terms, conditions and clauses stays as it is.
  1. Should One Choose a Private Insurer over a Public Sector Insurer – The answer to this is also simple. It doesn’t matter. Please focus all your energies in choosing the term plan you want to buy from the variety available in terms of cost, benefits, features, add-ons, etc. This is how you will be able choose the plan that perfectly fits your requirement, everything else (hygiene) is the same whether it’s the Life Insurance Corporation of India or any other Private Sector Insurer. They will abide by the same laws laid down by the regulator.
  1. What if the insured person dies in a war or a terrorist activity – Interestingly, this is among one of the questions that generally doesn’t come to the mind but now that we are talking about it, let’s understand this bottom-line statement. Life Insurance policies cover the event of death irrespective of the reason of death. So whether it’s a terrorist activity, natural calamity, war or even the most extreme case of suicide (after 1 year of policy issuance), it really doesn’t matter. So, when you take the term plan you should be clear in your mind that your contingency plan for your family is intact, irrespective of the circumstances of death.

The Final Words – Go ahead and decide what term plan best suits your needs. Whether a lump sum payment or a monthly income option or a whole life term plan or just a plan to take care of your mortgage. Focus on the right things to decide and not bother about the things that really don’t matter.

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