Life insurance is one of the most important components of any persons financial plan. However there is lot of unawareness about life insurance, mainly due to the way life insurance products have been sold over the years in The indian subcontinent. We have discussed some common mistakes insurance buyers should avoid when buying plans.
- Underestimating insurance requirement: annuities Many life insurance buyers choose their insurance covers or sum assured, based on the plans their agents want to sell and how much premium they can afford. This a wrong approach. Your insurance requirement is a function of your particular predicament, and has nothing do with what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisors say that a cover of 10 times your annual income is adequate because it gives your family 10 years worth of income, when you are gone. But this is not always correct. Suppose, you have 20 year mortgage or home loan. How will your family pay the EMIs after 10 years, when most of the loan is still outstanding? Suppose you have very young children. Your family will come to an end of income, when your children want it the most, e. grams. for their advanced schooling. Insurance buyers need to consider several factors in deciding how much insurance policy is adequate for them.
- Choosing the least expensive policy: Many insurance buyers like to buy policies that are cheaper. This is another serious mistake. A cheap policy is no good, if the insurance company i really enjoy seeing or another cannot fulfil the claim in the event of an early death. Even if the insurance organisation fulfils the claim, if it takes many years to fulfil the claim it is certainly not a desirable situation for category of the insured to be in. You should look at metrics like Claims Settlement Relation and Duration wise settlement of death claims of different life insurance companies, to select an insurance organisation, that will honor its obligation in fulfilling your claim regularly, should this unfortunate situation arise. Data on these metrics for the insurance companies in The indian subcontinent is available in the IRDA annual report (on the IRDA website). You should also check claim settlement reviews online and only then choose a company that has a good status settling claims.
- Treating life insurance as an investment and buying the wrong plan: The common disbelief about life insurance is that, it is also as a good investment or retirement planning solution. This disbelief is basically due to some insurance agents who like to sell expensive policies to earn high commissions. If you compare returns from life insurance to other investment options, it simply does not sound right as an investment. If you are an adolescent investor with a long time horizon, fairness is the best wealth creation instrument. Over a 20 year time horizon, investment in fairness funds through DRINK will result in a corpus that is at least three or four times the maturation amount of life insurance plan with a 20 year term, with the same investment. Life insurance should always been viewed as protection for your family, in the event of an early death. Investment should be a fully separate consideration. Even though insurance companies sell Unit Linked Insurance policy (ULIPs) as attractive investment products, to your own evaluation you should separate the insurance component and investment component and pay consideration as to the area of your premium actually gets allocated to investments. In the early years of a ULIP policy, just a bit goes to buying units.
A good financial planner will always give you advice to buy term insurance policy. A term plan is the most natural form of insurance and is a straightforward protection policy. The premium of term insurance policy is much less than other styles of insurance policy, and it leaves the policy cases with a much wider investible surplus that they can invest in investment products like mutual funds that offer more achieable returns ultimately, compared to endowment or money-back plans. If you are a term insurance policy holder, under some specific situations, you may opt for other styles of insurance (e. grams. ULIP, endowment or money-back plans), in addition to your term policy, for your specific financial needs.
- Buying insurance when it comes to tax planning: For many years agents have inveigled their clients into buying insurance policy to save tax under Section 80C of the Income tax Act. Investors should realize that insurance is among the worst tax saving investment. Return from insurance policy is in the product range of 5 — 6%, whereas Public Provident Fund, another 80C investment, gives close to 9% without risk and tax free returns. Fairness Linked Saving Schemes, another 80C investment, gives more achieable tax free returns over the long term. Further, returns from insurance policy may not be entirely tax free. If the premiums exceed 20% of sum assured, then fot it extent the maturation proceeds are taxable. As discussed earlier, the most important thing to note about life insurance is that objective is to provide life cover, not to generate the best investment return.
- Surrendering life insurance policy or pulling out from it before maturation: This is a serious mistake and compromises the financial security of your family in the event of an unfortunate incident. Life insurance should not be handled prior to the unfortunate death of the insured occurs. Some policy cases give up their policy to meet an urgent financial need, with the hope involving a new policy when their particular predicament improves. Such policy cases need to remember two things. First, mortality is not in your control. That is why we buy life insurance in the first place. Second, life insurance gets very expensive as the insurance buyer gets older. Your financial plan should contribute towards contingency funds to meet any unexpected urgent expense or provide liquidity for a period of time in the event of a financial distress.
- Insurance is a one-time exercise: I am reminded of an old motorcycle advertisement on television, which had the punch line, “Fill it, closed it, forget it”. Some insurance buyers have the same philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan from a most respected company, they assume that their life insurance needs are taken care of forever. This is a mistake. Particular predicament of insurance buyers change with time. Compare your current income with your income a decade back. Has never your income grown many times? Yourself would also have improved significantly. If you bought a life insurance plan a decade ago based on your income back then, the sum assured will not be enough to meet your family’s current lifestyle and needs, in the unfortunate event of your early death. Therefore you should obtain an additional 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, should be bought.
Investors should avoid these common mistakes when buying plans. Life insurance is one of the most important components of any persons financial plan. Therefore, innovative consideration must be specialized in life insurance. Insurance buyers should exercise discretion against questionable selling practised in the life insurance industry. It is always best for engage a financial planner who talks about your whole collection of investments and insurance on a of utilizing holistic basis, so that you can take the best decision with regards to both life insurance and investments.