Buying a term insurance policy is a fundamental step toward securing your family’s financial future. But a single misstep in the buying process can render your entire effort useless, leaving your loved ones vulnerable and without the financial protection you intended for them.
This article highlights the most common and dangerous mistakes people make with term insurance. By understanding and avoiding these pitfalls, you can ensure your policy is a genuine shield for your family, not a broken promise.
Mistake #1: Underestimating Your Coverage Needs
The most critical mistake is buying too little coverage. Many people get a policy to simply tick a box, choosing a small sum assured without a proper calculation. While a ₹1 Crore term insurance plan has become a popular benchmark, it might not be enough depending on your family’s specific situation.
- The Problem: In an unfortunate event, a low sum assured may not be enough to cover your family’s existing debts (like a home loan), their daily living expenses, and crucial future goals (like your children’s education). Inflation will also erode the value of a small sum assured over time.
- How to Avoid It: Don’t guess. Use a Human Life Value (HLV) calculator to get a realistic estimate of the coverage you need. This tool considers your income, expenses, debts, and future goals to arrive at a precise number. A good rule of thumb is to aim for a sum assured that is at least 10-15 times your annual income.
Mistake #2: Delaying the Purchase
Procrastination is the enemy of term insurance. Many people wait until they are older, married, or have kids to buy a policy, thinking they don’t need it when they are young. This delay can be a costly mistake.
- The Problem: Term insurance premiums are directly tied to your age and health. The older you are, the higher the premium. If you develop a health condition later in life, your premiums could skyrocket, or you might even be denied a policy altogether.
- How to Avoid It: Buy a term insurance policy as early as possible, ideally in your 20s or early 30s, when you are young and healthy. This locks in a low premium for your entire policy term, saving you a substantial amount of money over the years.
Mistake #3: Hiding Health or Lifestyle Information
When filling out your application, it can be tempting to withhold details about your health or smoking habits to get a lower premium. However, this act of non-disclosure is a recipe for disaster.
- The Problem: If an insurance company discovers that you provided false or incomplete information during the application process, they have the legal right to reject a claim. Your family, already in a difficult situation, would be left with no financial support.
- How to Avoid It: Always be completely honest and transparent about your health, medical history, and lifestyle habits. While it might result in a slightly higher premium, it ensures that your family will receive the payout without any legal complications. The peace of mind is well worth it.
Mistake #4: Ignoring the Insurer’s Claim Settlement Ratio
Many people choose a policy based on the lowest premium, ignoring the most important metric: the insurer’s claim settlement ratio (CSR).
- The Problem: The CSR indicates the percentage of claims an insurer settles in a year. An insurer with a low CSR may be more likely to reject a claim or delay the payout process, which can be devastating for a grieving family that needs immediate financial support.
- How to Avoid It: Always choose an insurer with a consistently high claim settlement ratio, ideally over 98%. This indicates a reliable and trustworthy company that has a strong track record of honoring its promises. You can find this information on the insurance regulator’s website.
Mistake #5: Choosing the Wrong Payout Option
When purchasing a policy, you often have a choice of how your family will receive the payout: as a lump sum, as a regular monthly income, or a combination of both. Choosing the wrong option can cause financial strain.
- The Problem: A lump sum payout can be overwhelming for a family member who is not a financial expert. They might not know how to invest it wisely, and the money could be depleted quickly. A monthly income option might be too restrictive if a large sum is needed to pay off debts immediately.
- How to Avoid It: Consider your family’s financial literacy and needs. A combination payout, which gives them an immediate lump sum to clear debts and a steady monthly income for living expenses, is often the best choice for most families.
Final Thoughts: A Little Vigilance Goes a Long Way
Term insurance is a powerful tool, but it requires careful attention to detail. By avoiding these common mistakes—from underestimating the need for a 1 crore term insurance plan to choosing a company with a low claim settlement ratio—you can ensure your policy works exactly as it was intended. Your vigilance today will protect your family’s tomorrow.
