Life insurance is certainly one of the main the different parts of any individual’s financial plan. However there’s lot of misunderstanding about life insurance, mainly because of the way life insurance products have already been sold over the years in India. We have discussed some typically common mistakes insurance buyers should avoid when buying insurance policies.

1. Underestimating insurance requirement: Many life insurance buyers choose their insurance covers or sum assured, based on the plans their agents want to market and how much premium they can afford. This a wrong approach. Your insurance requirement is really a function of one’s financial situation, and has nothing do with what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers say that a cover of 10 times your annual income is adequate because it provides your loved ones 10 years worth of income, if you are gone. But this is not always correct. Suppose, you’ve 20 year mortgage or home loan. How will your loved ones pay the EMIs after 10 years, when the majority of the loan remains outstanding? Suppose you’ve very young children. Your family will come to an end of income, when your young ones require it probably the most, e.g. for his or her higher education. Insurance buyers need to think about several factors in deciding how much insurance cover is adequate for them.

· Repayment of the whole outstanding debt (e.g. home loan, car loan etc.) of the policy holder

· After debt repayment, the cover or sum assured needs to have surplus funds to generate enough monthly income to cover all of the living expenses of the dependents  Groepsverzekering of the policy holder, factoring in inflation

· After debt repayment and generating monthly income, the sum assured should also be adequate to generally meet future obligations of the policy holder, like children’s education, marriage etc.

2. Choosing the lowest priced policy: Many insurance buyers like to purchase policies that are cheaper. This really is another serious mistake. An inexpensive policy is no good, if the insurance company for whatever reason or another cannot fulfil the claim in the event of an untimely death. Even though the insurer fulfils the claim, if it requires a very long time to fulfil the claim it is obviously not a desirable situation for category of the insured to be in. You need to look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to pick an insurer, that may honour its obligation in fulfilling your claim in a reasonable manner, should such an unfortunate situation arise. Data on these metrics for all the insurance companies in India will come in the IRDA annual report (on the IRDA website). It’s also advisable to check claim settlement reviews online and only then select a company that has a good history of settling claims.

3. Treating life insurance as an investment and buying the incorrect plan: The common misconception about life insurance is that, it can be as a good investment or retirement planning solution. This misconception is essentially due to some insurance agents who like to market expensive policies to earn high commissions. If you compare returns from life insurance to other investment options, it just does not make sense as an investment. If you are a investor with quite a long time horizon, equity is the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP can lead to a corpus that is at the least three to four times the maturity level of life insurance plan with a 20 year term, with the exact same investment. Life insurance should always been seen as protection for your loved ones, in the event of an untimely death. Investment should be a completely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own personel evaluation you need to separate the insurance component and investment component and pay careful attention as to the portion of one’s premium actually gets allocated to investments. In early years of a ULIP policy, merely a small amount goes to buying units.

An excellent financial planner will always advise you to purchase term insurance plan. A term plan is the purest form of insurance and is really a straightforward protection policy. The premium of term insurance plans is much significantly less than other forms of insurance plans, and it leaves the policy holders with a bigger investible surplus that they can invest in investment products like mutual funds that give higher returns in the long run, compared to endowment or money-back plans. If you are a term insurance policy holder, under some specific situations, you might decide for other forms of insurance (e.g. ULIP, endowment or money-back plans), along with your term policy, for your specific financial needs.

4. Buying insurance for the goal of tax planning: For several years agents have inveigled their clients into buying insurance plans to truly save tax under Section 80C of the Income Tax Act. Investors should know that insurance is just about the worst tax saving investment. Return from insurance plans is in the product range of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives near to 9% risk free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives higher tax free returns within the long term. Further, returns from insurance plans may possibly not be entirely tax free. If the premiums exceed 20% of sum assured, then compared to that extent the maturity proceeds are taxable. As discussed earlier, the main thing to see about life insurance is that objective is to offer life cover, to not generate the most effective investment return.

5. Surrendering life insurance policy or withdrawing from it before maturity: This is a serious mistake and compromises the financial security of your loved ones in the event of an unfortunate incident. Life Insurance shouldn’t be touched before unfortunate death of the insured occurs. Some policy holders surrender their policy to generally meet an urgent financial need, with the hope of purchasing a brand new policy when their financial situation improves. Such policy holders need to consider two things. First, mortality isn’t in anyone’s control. That is why we buy life insurance in the initial place. Second, life insurance gets very expensive whilst the insurance buyer gets older. Your financial plan should provide for contingency funds to generally meet any unexpected urgent expense or provide liquidity for a time period in the event of an economic distress.

6. Insurance is really a one-time exercise: I’m reminded of an old motorcycle advertisement on television, which had the punch line, “Fill it, shut it, forget it” ;.Some insurance buyers have the exact same philosophy towards life insurance. If they buy adequate cover in a good life insurance plan from the reputed company, they assume that their life insurance needs are cared for forever. This is a mistake. Financial situation of insurance buyers change with time. Compare your present income with your income ten years back. Hasn’t your income grown repeatedly? Your lifestyle would also provide improved significantly. If you purchased a life insurance plan ten years ago based on your own income in those days, the sum assured won’t be enough to generally meet your family’s current lifestyle and needs, in the unfortunate event of one’s untimely death. Therefore you should purchase yet another term want to cover that risk. Life Insurance needs have to be re-evaluated at a regular frequency and any additional sum assured if required, must certanly be bought.

Leave a Reply

Your email address will not be published. Required fields are marked *