10 Term Plan Buying Mistakes to Avoid for a Secure Future

Buying a term plan is a crucial aspect of financial planning. Given the uncertainty surrounding future financial obligations and responsibilities, it is vital to possess a policy that protects your interests. Hence, having a term insurance policy is necessary to ensure the well-being of your family in the unfortunate event of your passing.

The significance of having a term insurance policy that provides essential life insurance coverage and financial protection for your loved ones in your absence cannot be overstated. Numerous life insurance companies in India offer a range of policies that can be purchased at a reasonable premium. Nevertheless, to fully optimise the benefits of your life insurance, it is vital to select a policy that aligns with your specific needs.

This article aims to elucidate the 10 common mistakes you should avoid while buying a term plan, ensuring you don't experience any regrets down the line.

1. Not buying the policy early:

Many young professionals think that purchasing a term plan in their early years is unnecessary. However, getting yourself covered with life insurance at a young age when you are in good health proves to be the wise approach in terms of obtaining extensive coverage at a lower premium. The term life insurance premium remains constant throughout the policy duration. However, your vulnerability to illnesses and other health conditions increases as you age, resulting in an elevated risk for life insurance companies to provide the assured sum. Consequently, the premium you have to pay also escalates significantly with each passing year. Thus, it is highly recommended to secure yourself with a term life insurance policy as soon as you start earning.

2. Getting insufficient sum assured:

The primary objective of a term plan is to provide financial assistance to the insured's family in the unfortunate event of their untimely death. Its purpose is to alleviate the financial burden faced by the family members left behind. However, if the insurance coverage amount fails to adequately meet the needs of the insured's family, it renders them vulnerable and defeats the purpose of the policy. Unfortunately, this is a common mistake made by policyholders when buying a policy. Insufficient coverage in a term plan is unable to fulfil the financial requirements of the family, often resulting from an inaccurate estimation of future insurance needs. Such situations can arise when the sum assured is not appropriately calculated, failing to consider factors such as inflation rate, liabilities, loans, children's education, and other dependent factors.

3. Opting for a shorter term:

A prevalent mistake when it comes to buying a term plan is the tendency to opt for cheap plans or shorter terms to pay lower premiums, believing that it will save money. However, this decision often proves to be more costly in the long run.

Take an example of a young professional named Sarah, aged 30, who decides to purchase a term life insurance policy with a duration of only 5 years. She opted for the shorter term because the premiums were more affordable at the time. However, after the maturity of the policy, when she turned 35, Sarah realised that she still had financial responsibilities, such as a mortgage, a growing family, and other debts.

Since Sarah's short-term policy has ended, she now needs to apply for a new term plan at the age of 35. However, the new policy's premiums are significantly higher due to her increased age and potentially changed health conditions. Furthermore, she may even face difficulties getting coverage due to any health issues that may have arisen during those 5 years.

Moreover, if Sarah had initially opted for a longer-term policy, such as a 20 or 30-year term, she would have enjoyed the benefit of consistent premiums throughout that duration. This would have provided her with financial security and peace of mind, even as her responsibilities increased.

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4. Focusing only on the policy premium:

In many cases, customers tend to prioritise the cost of a term plan over its suitability and usefulness. However, experts argue that individuals should consider several key factors when selecting a term insurance plan. These factors include the plan's relevance to the buyer's needs, the insurer's claim settlement ratio, financial stability, and reputation. These considerations are crucial as they have long-term implications for the buyer's purchase. Therefore, choosing a plan solely based on a lower price is unwise and can have lasting consequences.

5. Providing incorrection information:

Concealing or providing inaccurate information is one of the most common mistakes people make when purchasing a term plan. Essential details like medical history, financial status, etc. are crucial for insurers to assess an individual's case. Unfortunately, individuals often withhold information about pre-existing conditions, lifestyle habits, and other relevant factors in an attempt to lower the premium amount. However, failing to disclose such information during the policy application process is a more significant mistake than not obtaining a term plan at all.

If a policyholder were to pass away due to a pre-existing condition that was not disclosed to the insurer during the purchase, the insurer is likely to reject the claim. It is vital to understand that the insurer relies on accurate information to assess risk and determine appropriate coverage. Therefore, honesty and transparency are crucial when providing information to the insurer to avoid potential claim rejections.

6. Purchasing without doing thorough research:

A significant number of individuals lack familiarity with insurance terminology, which often leads to purchasing a term plan without a comprehensive understanding of its features and terms. Making an uninformed decision during the purchase or renewal of a term life insurance policy can result in inadequate coverage and higher premiums. To avoid such scenarios, it is advisable to conduct thorough research by comparing policy features, benefits, premiums, terms and conditions, claim processing time, fees, and more.

Numerous financial websites provide the opportunity to compare a wide range of life insurance policies from various insurance companies. Additionally, reading customer reviews can offer valuable insights into both the life insurance company and its policies. By utilising these resources, you can make an informed decision and select the term plan that best suits your needs.

7. Ignoring the fine print:

Despite constant advice from financial experts, many individuals still tend to overlook the importance of carefully reading all the policy-related documents before purchasing an insurance policy. These documents contain vital information about the policy, such as product features, terms and conditions, inclusions and exclusions, exemptions, and more, which policyholders should be fully aware of. Failing to read the policy document before buying the term plan can potentially lead to disputes and complications in the future.

It is crucial to thoroughly read and understand all the policy documents to make an informed decision and mitigate the risk of future disputes. Some policy terms may be complex or difficult to comprehend, in which case it is advisable to seek assistance from an insurance agent or financial advisor. Their expertise can help clarify any doubts or uncertainties you may have and ensure a comprehensive understanding of the policy before making a purchase decision.

8. Choosing the unsuitable payout option:

Another common mistake policyholders make when purchasing a term plan is choosing the wrong claim payout option. The claim payout option determines how the sum assured will be disbursed to the policyholder's beneficiaries in the event of their death. Often, policyholders fail to carefully consider their family's financial needs and select an inappropriate payout option. For instance, opting for a lumpsum payment may seem attractive initially, but it may not be the best choice if the beneficiaries lack financial management skills or have long-term financial goals. Conversely, selecting a periodic income option might limit the beneficiaries' flexibility and fail to meet their immediate financial requirements. It is crucial to assess the family's specific needs and consult with a financial advisor to choose the most suitable claim payout option that provides adequate financial support and aligns with the beneficiaries' long-term goals. Making an informed decision in this regard can ensure that the term plan truly serves its intended purpose and offers the necessary financial protection to the policyholder's loved ones.

9. Not understanding the requirement of riders:

A common mistake made when purchasing a term life insurance plan is either opting for excessive riders or forgoing them altogether. Riders are additional features that can be added to the base policy to provide extra coverage or benefits. While riders can enhance the policy's value, selecting too many riders can lead to unnecessary costs and inflate the premium amount. On the other hand, choosing no riders at all might result in insufficient coverage and the inability to address specific needs or risks. It is crucial to carefully assess the available riders and consider one's individual circumstances and requirements before deciding which riders, if any, to include in the policy. Balancing the need for additional coverage with the associated costs is essential to ensure that the chosen riders provide meaningful benefits and align with the policyholder's specific needs, offering comprehensive protection without unnecessary expenses. Seeking guidance from an insurance professional can help navigate the selection process and make informed decisions about the appropriate riders to enhance the term life insurance plan.

10. Not telling the nominee about the term plan:

A common mistake among policyholders is buying a term plan without informing their families about it. This oversight can have detrimental consequences if an unfortunate event occurs and their loved ones are unaware of the policy's existence or unable to locate the necessary documents. In such cases, the purpose of purchasing the term life insurance policy to provide security for the family is defeated. Despite faithfully paying premiums, obtaining appropriate coverage and term, and selecting the right policy, the family will not benefit from it if they remain uninformed and unable to initiate the claim process. It is crucial to ensure that family members are aware of the policy's details and are prepared to file a claim if needed. Ultimately, the insurance company will only settle the claim when it is properly submitted.

Key Takeaways:

When it comes to securing your family's financial well-being in the event of your absence, buying the right term plan is a crucial financial goal. To ensure a secure future for your loved ones, it is important to avoid potential mistakes when purchasing your policy. Take the time to conduct thorough research and compare different term life insurance policies online, avoiding any hasty decisions. Carefully review the fine print of the policy document to make an informed choice that suits your needs. Moreover, be on the lookout for discounts offered by insurance companies for purchasing life insurance policies online. Lastly, remember to renew your policy on time to maintain uninterrupted coverage and fulfil your financial responsibility towards your family. By avoiding these common pitfalls and taking proactive steps, you can ensure that your loved ones are well-protected and financially secure.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.