Top 5 Mistakes to Avoid When Buying a Term Insurance

In the ever-evolving world of personal finance, getting a term insurance is often regarded as a smart move. However, mistakes can happen, and when it comes to insurance – particularly term insurance – these mistakes can prove costly. In this post, the focus is on the top 5 mistakes that one should avoid while purchasing term insurance in 2024.

1. Delay in Buying Term Insurance

Though term insurance is frequently discussed, a common mistake is postponing the decision to buy it. This was mainly noted with an individual named Chandu. Since Chandu had just begun working and was planning to go for higher studies, he decided to delay the purchase of his term insurance, leading to its denial due to his lack of an active source of income. Therefore:

• Don't delay buying term insurance merely due to busyness or the intent to pursue higher education.
• Term insurance requires an active income, so buy when you have one.
• Purchasing at an early stage could reduce the premium by around 10 to 15%.

2. Over-declaration

One might deem full disclosure as ideal, but over-declaration is a problem. There are instances where individuals, in an attempt to come across as transparent, declare too much and tip the insurer off to potential risks. One individual declared himself a 'smoker' because he was often around smokers, although he was not one himself. Another declared that he was depressed just because he was feeling low for a couple of days. Instead:

• Only declare relevant and verified health problems.
• Don't over-declare based on assumptions and temporary health situations.
• Consult with a medical professional before declaring your health condition.

3. Miscalculation of Expenses

Another common mistake is miscalculating the expenses when calculating the policy cover. Many times, individuals don't consider inflation or increase in family size while calculating the insurance cover, leading to a lower cover than actually required.

• Base your policy cover on annual expenses can be a good approach.
• Revise your calculations every few years to account for inflation and changes in lifestyle.
• Buy a new term plan or top-up your existing plan when needed.

4. Multiple Insurers

While having insurance is a good thing, getting them from multiple providers can be a headache for the nominees as they would need to file claims with all of them. Therefore, try to limit your policies to one or two insurers.

5. Not Informing Nominee Correctly

Not informing the nominee about the policy is another huge mistake. Many times nominees might not even know they are the nominee, leading to large amounts of unclaimed money. Keep the nominee informed:

• Send your nominee the policy document and insure they acknowledge its receipt.
• Properly document and store your insurance policies to ensure they don’t get lost.
• The importance of all this cannot be understated. The insurance regulatory authority of India reported 25,000 crores unclaimed mainly because of such issues.

Bonus Tip: Don't Mix Investment and Insurance

Remember that insurance and investment are two different elements of personal finance and should be treated differently. While insurance is about creating a safety net against possible future risks, investing is about growing your money at a solid rate. Mixing the two might lead to suboptimal results.

Given these points, it's evident that being aware and proactive can potentially save a lot of unnecessary stress and financial loss when buying term insurance. Avoid these mistakes, and ensure you get the most suitable term insurance.