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Myths on Term Insurance

A myth is a story or a belief which may or may not be true. Just as you hear myths on legendary heroes and warriors passed on from generation to generation life insurance is also subject to myth. Time to bury myths about a term insurance policy.

You would buy or not buy term life insurance on the advice of friends or relatives and this makes you vulnerable to misconceptions on term life insurance. My friend cannot be wrong. I have followed his advice all my life. But in choosing a good life insurance policy which matches your needs…He might be wrong.

If I don’t die I get nothing from my term insurance policy

A term life insurance policy is a pure survival policy where if the Policy holder dies, his family (nominee) gets the money (sum assured) promised under the policy. If the policyholder does not die within the term of the policy no money is paid under a term life insurance policy. A low premium is charged.

A traditional endowment life plan invests the premiums you pay in fixed income securities. A Ulip invests your premiums in (shares and mutual funds).These policies are insurance cum investment policies. They have high charges inbuilt in them (paid to agents to sell the policy or portfolio managers who have to invest the money) which is taken from your premium.

You’re better off not paying these charges and investing your money yourself in equity or in fixed income securities. A term life insurance policy caters solely to your insurance needs which is why you take insurance. Never mix insurance with investment. Pay a lesser premium on the term plan and invest the money you save in a good investment.

If you are alive you need a term insurance policy

A term insurance policy is a must if you are just married or have young children. If you die young, the term policy pays your family the sum assured, and they can meet their day to day expenses.

If you are unmarried and have no dependents your money can be put to better use by taking a health insurance policy. If you are seriously ill a health policy takes care of the medical bills. A term policy would give you the sum assured only on your death which would not help pay your medical bills.

As you grow older a high premium is paid for the term policy. You would have sufficient savings by the age of 55 years to meet most financial emergencies and you do not need a term insurance plan.

If you are married and have no children you can invest your money in fixed income or equity rather than paying premiums on a term life insurance policy.

I will insure myself for twice my annual income

You need to take sufficient life insurance (coverage) across your working years. If you are in your twenties you need a coverage (sum assured) of at least 20 times your annual salary.

If you are in your forties you need a coverage (sum assured) of at least 10-15 times your annual salary. If you are in your fifties you need a coverage (sum assured) of at least 5 times your annual salary.

Only the breadwinner of the family requires a term insurance policy

Yes... The breadwinner definitely requires a term insurance policy. If your spouse is working and she were to die you would lose this income and this would affect the quality of life of your children.

Better education and saving for children’s marriage would be difficult for you to manage alone. The sum assured you get on your wife’s death from the term life insurance policy would help you bear these expenses.

If I am a smoker I will not get a term insurance policy

You would have to disclose that you are a smoker when you take a term life insurance policy. You would have to take a medical test and higher premiums would be charged compared to a non smoker.

I can take a term insurance policy and invest the difference in a good investment

This is true in most cases. Taking a term plan and availing a cheaper premium than a unit linked insurance plan or an endowment plan is a good idea. The difference in premium is then invested in a good mutual fund or a fixed deposit depending on the risk you are willing to bear.

If you have a disabled child and want to leave money for his/her upkeep then a whole life insurance plan is a better bet .You pay premiums for a fixed time period and you get the maturity amounts 60 years after you take the policy or when you are 80 years whichever is later.

You get nothing in your lifetime but your disabled child is well taken care of.

Will my online term life insurance policy settle your family’s claim?

Online term life insurance policy is a recent concept, and an accurate assessment of its claim settlement can be made only with time. However premiums are 40-50% lesser than offline plans.

However there is no reason to believe Insurer will not settle your claim. You would have to fill the online form yourself (without the agents help) and this means you would disclose more details about yourself (Better disclosure on smoking).

The sum assured taken is generally high (You insure yourself for a high amount in an online plan) say over INR 50 Lakhs and this makes medical tests compulsorily.

This means the Insurer knows your medical history (as you make a better disclosure while filling the online term insurance forms) and this means your family’s claim should be easily settled.

Wrong disclosure means your family’s claim is rejected. Just don't believe any myths on term insurance.Get your facts right.

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