Life insurance is certainly one of the most important the different parts of any individual’s financial plan. However there is large amount of misunderstanding about life insurance, mainly due to the way life insurance products have already been sold over the years in India. We have discussed some traditional 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 just how much premium they could afford. This a wrong approach. Your insurance requirement is a function of your financial situation, and has nothing do with what items are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers say that the cover of 10 times your annual income is adequate because it offers your loved ones 10 years worth of income, if you are gone. But this is simply not always correct. Suppose, you’ve 20 year mortgage or home loan. How will your loved ones pay the EMIs after 10 years, when all the loan continues to be outstanding? Suppose you’ve very young children. Your family will run out of income, when your kids want it the most, e.g. for their higher education. Insurance buyers need to take into account several factors in deciding just how much insurance cover is adequate for them.
· Repayment of the entire 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 the living expenses of the dependents of the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured must 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 buy policies that are cheaper. That is another serious mistake. Groepsverzekering A low priced policy isn’t any good, if the insurance company for reasons uknown or another cannot fulfil the claim in case of an untimely death. Even if the insurer fulfils the claim, when it has a lengthy time to fulfil the claim it is obviously not just a desirable situation for family of the insured to be in. You ought 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 timely manner, should such an unlucky situation arise. Data on these metrics for 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 choose a company that has a great track record of settling claims.
3. Treating life insurance as an investment and buying the incorrect plan: The most popular misconception about life insurance is that, it is also as a great investment or retirement planning solution. This misconception is largely due with a insurance agents who like to market expensive policies to earn high commissions. In the event that you compare returns from life insurance to other investment options, it simply doesn’t seem sensible as an investment. If you’re a new investor with quite a while horizon, equity is the better wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is at the least three to four times the maturity amount of life insurance plan with a 20 year term, with the exact same investment. Life insurance should been regarded as protection for your loved ones, in case of an untimely death. Investment should be described as a completely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, on your own evaluation you need to separate the insurance component and investment component and pay consideration from what portion of your premium actually gets allocated to investments. In the first years of a ULIP policy, merely a touch goes to purchasing units.
A great financial planner will always advise you to buy term insurance plan. A term plan may be the purest form of insurance and is a straightforward protection policy. The premium of term insurance plans is much less than other forms of insurance plans, and it leaves the policy holders with a bigger investible surplus that they can spend money on investment products like mutual funds that provide higher returns in the long term, compared to endowment or money back plans. If you’re a term insurance coverage holder, under some specific situations, you might go for other forms of insurance (e.g. ULIP, endowment or money back plans), as well as your term policy, for your specific financial needs.
4. Buying insurance for the goal of tax planning: For many years agents have inveigled their clients into buying insurance plans to truly save tax under Section 80C of the Income Tax Act. Investors should recognize that insurance is probably 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 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 not be entirely tax free. If the premiums exceed 20% of sum assured, then to that particular extent the maturity proceeds are taxable. As discussed earlier, the most important thing to see about life insurance is that objective is to supply life cover, never to generate the very best investment return.
5. Surrendering life insurance coverage or withdrawing as a result before maturity: This can be a serious mistake and compromises the financial security of your loved ones in case of an unlucky incident. Life Insurance should not be touched before the unfortunate death of the insured occurs. Some policy holders surrender their policy to generally meet an urgent financial need, with the hope of shopping for a fresh policy when their financial situation improves. Such policy holders need to remember two things. First, mortality is not in anyone’s control. That is why we buy life insurance in the first place. Second, life insurance gets very expensive since the insurance buyer gets older. Your financial plan should give contingency funds to generally meet any unexpected urgent expense or provide liquidity for a time period in case of an economic distress.
6. Insurance is a one-time exercise: I’m reminded of a vintage 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. After they buy adequate cover in a great life insurance plan from the reputed company, they believe that their life insurance needs are looked after forever. This can be a mistake. Financial situation of insurance buyers change with time. Compare your overall income along with your income 10 years back. Hasn’t your income grown repeatedly? Your lifestyle would likewise have improved significantly. If you purchased a life insurance plan 10 years ago based on your own income back then, the sum assured won’t be enough to generally meet your family’s current lifestyle and needs, in the unfortunate event of your untimely death. Therefore you should obtain one more 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 be bought.