Common Term Insurance Myths - Explained
Life insurance is a contract between the insurance company and the insured customer in which the insurance company agrees to pay the sum assured in the event of maturity of the policy or on the death of the policyholder in return for a considerable amount called as premium. Term insurance is a type of life insurance in which the coverage is provided for a particular period of term i.e. 5 years, 10 years etc. There are certain myths among the general public regarding the term insurance which are addressed in this article with clear explanation.
Pure term insurance is the only life insurance product which does not carry a savings component and is intended to only cover the life of the insured customer. Money back term insurance policies have been introduced in the market which return your money after the policy period and also provide death benefit in case of death during the policy period. But the point to be noted here is that the premium to be paid in case of the return of premium policies would be high compared to the pure term insurance policies.
Let us debunk the myths regarding the term insurance in the minds of common people:-
Waste of Money:
Term insurance is considered as a waste of money as people think of it as the benefit received after the death of the policyholder. Most people would be interested to reap the benefits of their investment while they are alive and only few people think of their families after their death. There are many instances where the family of the breadwinner faced dire financial crunches due to the sudden death of the policyholder without any proper financial security for the family.
Pure term insurance provides death benefit to the nominee of the policyholder in case of death of the insured during the policy period. If the insured survives the policy period, then no survival benefit would be provided to the policyholder in a pure term insurance policy. A term insurance policy should be taken to safeguard the financial interests of your family. Term insurance is only for protection and cannot be compared with any other investment tool.
For instance your investments in Mutual funds yields you return after a certain period of time, likewise term insurance provides coverage against death during the policy period for a specified premium. Most people compare life insurance with investments which leads to poor financial status of the family after the death of the breadwinner.
Term insurance proceedings in the event of the death of the policyholder can act as liquid asset thereby preventing the family of the deceased from facing financial crunch where the policyholder is the sole bread earner of the family.
Mr. A and Mr. B are business owners where Mr. A has decided to take a term insurance policy for himself as he is the sole bread earner in the family while Mr. B being the sole bread winner of the family who doesn’t believe in the concept of term insurance invested the same premium amount in purchasing a piece of land. Both of them have a considerable number of properties such as Houses, Lands etc. which are considered as Non liquid assets. It is important to note here that there are certain expenses which are incurred every month by both of them. One bad day Mr. A and Mr. B met with an accident and both of them succumbed to injuries. Mr. A’s family approached the insurance company for the death proceedings and were able to get the claim amount within a month’s time while the family of Mr. B were left to fend for themselves as there was no income after the demise of Mr. B.
Both of the families have properties which are non liquid assets which couldn’t be sold immediately and converted to liquid asset. Having a term insurance policy helped the family of Mr. A to preserve their properties and also get the liquid amount to run their family for a definite period of time.
Will take higher cover once my salary is increased:
In India, most of the people face mid life financial crisis due to poor financial planning in the early stages of their job. When suggested to take a life insurance policy most of us give reasons such as “My salary is low, how can I pay life insurance premium”, “ I will take life insurance once my salary reaches certain amount”, “ Will purchase a high sum assured policy once I get bonus or hike or promotion” etc.
One must understand that the expenses would be increasing exponentially with your salary and you might find yourself in the same situation few years later where you would not be able to pay premium for your life insurance policy. This is called as postponement which results in not availing the life insurance coverage at any point of time. Let us understand the side effects of this situation with an example: For instance Mr. Robert aged 25 recently joined in a MNC company and he was approached by a life insurance agent to purchase a term insurance policy. Robert income was Rs.5 Lac and accordingly he was eligible for a life insurance cover up to Rs.50 Lacs. The yearly premium to be paid for the sum assured of Rs.50 Lacs was a meagre Rs.8k. But Mr. Robert felt that the sum assured is very less and decided to take the life insurance once his salary is increased.
While travelling to work one day he met with an accident and succumbed to injuries. Since he was not having a life insurance policy, his family was left with no choice but to pick up odd jobs to support their needs. Had he decided to take the life insurance as per his eligibility, after his demise his family would not had faced such situations.
Term life insurance should be taken immediately after taking up a job so that your family would be secured after your demise. There would always be a room for another term life insurance policy in case your salary increases in the future and if you feel the need for higher sum assured.
Life insurance is for married people:
Few people link life insurance with major events in their life such as Marriage, Children etc. It is generally assumed that there would be responsibilities only after marriage and children are born which is partially false. In most of the cases you would have parents dependent on you and if there is delay in purchasing the life insurance, in case of any unforeseen event your parents might be at risk.
Having a life insurance as soon as you join a job is advisable so that the coverage continues and the at the time of marriage if necessary sum assured can be increased or new life insurance policy can be taken. If you are planning to take a life insurance policy after marriage, then few insurance companies are offering couples life insurance policies in which both the husband and wife are covered under a single policy.
Normally the sum assured of the wife would be 3/4rth of the husband’s and the policy would continue even after the death of any one of them. It is to be noted that term insurance should be taken if there are any dependents on you and not only after marriage.
Once taken coverage cannot be increased:
Term insurance as the name suggests is offered only for a particular period of term such as 5 years, 10 years etc. There is a common mis conception among the people that once the term insurance plan is taken the coverage cannot be increased at a later stage. It is to be noted that few insurance companies offer increasing term insurance plans where the sum assured increases at a certain percentage with the completion of each year.
The sum assured increased would in general be equal to that of the inflation prevailing at that time. There are few term life insurance policies where the midterm revision of sum assured is possible. Insurance companies would ask the insured customers to fill the proposal forms and undergo any medical tests to underwrite the new risk. The acceptance of proposal to increase the sum assured would rest with the underwriter of the insurance company and the decision would be taken after examining different conditions.
For instance, a person with critical illness history when requests for enhancement of life insurance coverage may face denial from the insurance company as the risk of death in this case is higher. In short the sum assured in your term life insurance policy can be increased depending on the risk acceptance by the insurance company. Most of us opt for second or third term life insurance policy as our income increases; this can be avoided by taking a single term insurance plan with increasing coverage.
I’m Healthy, I don’t need insurance:
Insurance is a protection against financial crisis to be faced by the family of the policyholder in case of sudden death of the insured. Many people link insurance with illness and are of the wrong opinion that insurance is required to people who fall ill. It is concerning that few people think that they wouldn’t get sick as they are healthy and therefore don’t require any kind of insurance.
This is the wrong perception which needs to be eliminated at the individual level. Covid-19 is an eye opener for those kinds of people who think that they would not fall sick and therefore don’t require any term life insurance. Being healthy should not be linked with investing in insurance for yourself as a small investment today can help your family tomorrow in a big way.
Insurance companies prefer people with no disease than that of people with existing diseases due to the quantity of risk associated. A person with illness has a higher mortality rate when compared to a person with no existing illness. Life insurance works on the concept of mortality rate, higher the mortality rate higher would be the premium. This is the reason why the premium is high for higher age groups as the mortality ratio increases with increase in age.
I have company provided term insurance cover:
Most of the employers offer term life insurance to their employees as a part of their entitlements; the coverage may vary depending on the designation of the employees. Top management employees would generally be given higher coverage compared to that of the bottom level employees in an organization. The premium for the coverage would be paid by the employer to the insurance company directly and in case of any death claim the proceedings would be paid to the nominee of the deceased.
There is myth among people that it is not necessary to purchase a term life insurance policy separately if employer is offering the term life insurance already. It is to be noted that the employer offered term life insurance would only be valid till the time you work in the company and expires the next day you resign the company or the company terminates you. It is highly impossible to get a term life insurance policy in a day or two as there would be many procedures involved before issuing the policy. In case if you feel that you would be working continuously and there would be no break in your career, then in that scenario you would need term insurance after your retirement or if there is any break in between your job switch.
For instance let us assume that Mr. Max aged 28 is working with an MNC and he was being offered Rs.30 Lacs term life coverage. When he was suggested by his friend to take a term life insurance policy with coverage 15 times his annual income he brushed it off saying that his company is providing him term life coverage and he doesn’t require any extra coverage. Due to recession he was terminated from the services of the company and was asked to leave immediately. This left him with no term life insurance coverage and above this he met with an accident and succumbed to his injuries. Now without a valid term life insurance plan his family’s financial security is at stake.
Term insurance is only needed if I take a loan:
In case of a loan disbursement, financial institutions and banks generally ask for a term life insurance policy with coverage equal to that of the loan amount to be taken by the Customer. This is done by the financial institutions to secure their loans against any unforeseen event where the policyholder would no longer able to pay the loan. Few people are mislead that the term life insurance is required only if there are any loans outstanding. This is completely wrong as the term life insurance is intended to cover your family’s financial situation in case of your sudden demise.
Although it is justified to have a term life insurance policy in case if you have an outstanding loan, it is completely acceptable to have a term life insurance policy even though there is no loan. Term life insurance policies are designed to pay claim to the nominee in case of death of the policyholder and has no link with the loan availed by the customer.
Term plans cannot be customized:
Term insurance plans are intended to provide the claim in case of death of the policyholder and this is the basic feature in a term insurance plan. There is myth among few people that the term insurance plans cannot be customized as per their requirements. Term insurance plans can be customized by adding the necessary add-ons such as the Accidental disability rider, Critical illness rider, Waiver of premium rider etc. let us understand these riders and how they can be customized in your term insurance policy.
- Accidental disability rider: Accidental disability rider is offered as add-on coverage by the insurance companies in their term life insurance plans on payment of extra premium. Accidental disability rider provides the claim to the insured in case of accidental disability due to an accident and the base policy continues to remain in force. The base policy triggers in case the policyholder is dead due to accidental or natural causes. Under this rider, the permanent total disability and permanent partial disability are covered. This rider can be added to the base policy on payment of additional premium, the validity of this rider would be less than or equal to the validity of the term policy.
- Critical Illness rider: Critical illness can be defined as the life threatening illness which has the highest probability to lead to death within a short period of time. Critical illnesses such as Cancer, Heart Attack, and Severe Burns etc. can be covered under the term insurance policy as add-on on payment of extra premium. Critical illness sum assured would be more than that of the base sum assured or a part of the base sum assured would be provided in case of diagnosis with any of the specified critical illness. The critical illness rider can be added to your base policy and the customization can be done on payment of required additional premium.
- Waiver of premium rider: Waiver of premium rider comforts the insured by waiving off the premium in case of critical illness or accidental disability of the insured person. For instance if you opt for waiver of premium rider with your base term insurance policy at the time of purchase and after few days if you meet with an accident, then all the future premiums payable under your policy would be waived off by the insurance company and the coverage would continue till the policy period. In short this add-on helps the customer to continue the term insurance policy without paying premiums in case of any disability or critical illness. Your term life insurance policy can be customized by opting for waiver of premium rider on payment of extra premium to the insurance company.
Buying a term insurance is a lengthy process:
There were days where the term insurance policy purchase process would take more than a months’ time. This was due to the medical tests involved which are required for issuance of a term insurance policy. Medical tests needs to be done only in the authorized diagnostic centers and the reports would be sent to the insurance companies directly from the hospitals or diagnostic centers. This was a bit lengthy process and the issuance of a term life insurance policy would take some time compared to the other general insurance policies such as Motor insurance or Fire insurance.
With the advent of technology the term life insurance policy issuance process has been bought down to as low as 7 days. Now most of the life insurance companies are carrying out the “tele medicals” where the entire health declaration form the customer is taken on phone and the life insurance application is processed within a short period of time. Earlier medical tests were carried out to understand the health condition of the proposer and the same is now being done through tele medicals. In case if there is any pre existing injury or illness the insurance companies may stress for the physical medical tests to be carried out by the proposer and the records to be submitted to the insurance companies for further processing.
We at Policybachat help our customers to select the suitable term insurance policy and guide through the process of life insurance policy issuance. Due to the innovation in technology the term insurance issuance policy has been drastically reduced and our team of agents would assist you in each and every step of life insurance policy purchase. For best term life insurance quotes please visit Our Portal and get the best term insurance policy quotes by comparing the term insurance quotes from all the top life insurance companies.