Top Mistakes to Avoid When Buying Decreasing Term Life Insurance

Decreasing term life insurance is a policy type designed to match reducing financial liabilities, such as home loans or business debts. However, selecting an appropriate plan requires informed decision-making. Many policyholders purchase insurance without fully understanding its features, coverage structure, or long-term implications. Let's understand the primary mistakes to avoid when buying decreasing term life insurance.

Decreasing term life insurance is a policy type designed to match reducing financial...

8 Things to Keep in Mind Before You Buy Term Insurance

While buying insurance, buyers often make simple mistakes that can lead to inadequate coverage or unnecessary costs. Here are the top 8 pitfalls to watch out for.

1.Not Knowing Your Adequate Coverage

People often make the error of not picking the correct coverage when buying a term life insurance policy. Individuals may overestimate or underestimate the required sum assured. Selecting inadequate coverage to save on premium costs may compromise your family’s ability to manage essential expenses. On the other hand, choosing too much insurance can cause you to pay more than needed.

2.Focusing Only on Premium Cost

When buying a decreasing term plan, don’t just focus on premium cost. The lowest premium may not provide enough cover when it matters most.

It is important to review:

The benefit reduction schedule
Its alignment with your outstanding liabilities
Specific terms, conditions, and exclusions

For example, if you have a 20-year home loan and want to purely cover it, your cover should last for at least as long as the loan. This ensures your loan will be paid off if something unexpected happens to you.

3.Ignoring Policy Riders

Another mistake people sometimes make is skipping optional riders in their life insurance. Riders such as critical illness cover, accidental death benefit, and premium waiver can significantly enhance policy coverage. Adding the right riders can make a big difference.

4.Overlooking the Claim Settlement Ratio

The claim settlement ratio helps determine an insurance company's reliability. It shows the number of claims handled by the company compared to the total number of claims made during the year. It is important to choose insurers with a good history of settling claims.

5.Not Sharing the Correct Medical Information

While saving money on premiums now may sound appealing, the claim may be turned down later. If important health/medical details are withheld, the insurer may reject the claim.

6.Assuming all Term Insurance Policies are the Same

Another common belief is that there are no differences between various term plans, which is not correct. Term insurance policies vary; some provide pure risk cover, while TROP plans refund all premiums at the end of the policy term.
When considering the best term insurance, it is essential to evaluate your specific needs. A decreasing term insurance plan is suitable for covering liabilities that reduce over time. On the other hand, a level term policy, in particular, is advantageous for safeguarding a family's overall financial stability and well-being.

7.Treating Term Insurance as an Investment

Yes, term insurance brings tax savings, but just thinking of it as a form of investment excludes its many other purposes. Many policyholders question the utility of term insurance if no payout occurs at maturity; however, it is designed as a protection tool rather than an investment. You should keep in mind that term insurance acts as a form of safety, rather than a source of additional gain.

8.Opting for Lump Sum Payouts Only

Most people choose lump sum payouts when buying a term insurance policy. While some may find lump sum payouts desirable, they may not work for all situations. For individuals with dependents requiring regular income, monthly payout options may be more suitable than lump sum benefits.

Term Insurance Advantages and Disadvantages

Here’s a quick look at the key advantages and disadvantages of decreasing term life insurance to help you evaluate if it suits your needs:

Advantages	Disadvantages

Affordable premiums	No maturity benefit
Ideal for covering specific debts like mortgages	Reduced payout over time
Simple and easy to understand	Doesn’t account for inflation
Tax benefits under Section 80C and Section 10(10D) of the Income Tax Act, 1961	No investment or savings component

Conclusion

Decreasing term life insurance is a cost-effective way to protect loans and financial obligations, but only if chosen wisely. Common mistakes like underestimating coverage, ignoring riders, or assuming all term insurance policies are the same can lead to gaps in protection. Avoiding these mistakes ensures your term life insurance truly protects your loved ones when it matters most. Before you buy a plan, learn about term insurance advantages and disadvantages. Remember, term insurance is beneficial when aligned with specific financial goals and family responsibilities.

FAQ

on Mistakes to Avoid When Buying Decreasing Term Life Insurance

1.Is term life insurance worth it if claims are denied?

Certainly not. Transparency ensures your policy actually serves its purpose.

2.What are the disadvantages of decreasing term insurance?

Decreasing term insurance has a few drawbacks. The biggest is that the coverage amount reduces over time, and may not cover anything but your mortgage, leaving your loved ones at risk if your financial needs change. It also doesn’t offer any maturity benefit.

3.What is one important element of decreasing term insurance?

One of the primary benefits is affordability; since the death benefit decreases over time, the premiums are generally lower than those of traditional term policies. This cost-effectiveness allows policyholders to secure essential coverage to protect specific liabilities.

4.Is it better to have decreasing life insurance?

It depends on your financial goals. Decreasing life insurance is ideal if you're looking to protect a specific liability, like a home loan.

5.What is the difference between level cover and decreasing cover?

Level term coverage remains the same throughout the term of your policy, while decreasing term coverage reduces over time. It's important to select the right insurance for your needs and think carefully about what you want to cover.

6.What is the main disadvantage of term life insurance?

Term life insurance does not offer survival or maturity benefits, and coverage ends if the insured survives the policy term.

7.What is the thumb rule for buying term insurance?

A general rule is to opt for a cover of at least 10 to 15 times your annual income. This ensures your family can maintain their lifestyle and meet essential expenses like education, marriage, or daily living costs in your absence.

8.Is term insurance worth it?

Absolutely, when chosen wisely. If the policy doesn't align with your specific requirements, such as the right coverage amount or policy duration, it may not provide the intended level of protection.