Avoid These Six Common Life Insurance Mistakes

Life insurance is one of the most important components of any individual’s financial plan. However, there are many misunderstandings about life insurance, mainly due to the way life insurance products have been sold over the years in India. We’ve looked at some common mistakes insurance buyers should avoid when shopping for insurance policies.

1. Underestimation of Insurance Requirement: Many life insurance buyers choose their insurance coverage or the sum insured, based on the plans their agents want to sell and the premium they can pay. This is the wrong approach. Your insurance requirement is a function of your financial situation and has nothing to do with the products available. Many insurance buyers use basic rules like 10 times annual income for coverage. Some financial advisers say that coverage of 10 times your annual income is adequate because it gives your family 10 years of income when you are away. But this is not always correct. Suppose you have a 20-year mortgage or home loan. How will your family pay EMIs after 10 years, when most of the loan is still outstanding? Suppose you have very young children. Your family will run out of income when your children need it most, for example for higher education. Insurance buyers must consider several factors when deciding which insurance coverage is right for them.

Repayment of all outstanding debt (for example, home loan, car loan, etc.) from the policy holder

After payment of the debt, the coverage or insured sum must have surplus funds to generate sufficient monthly income to cover all the living expenses of the dependents of the insured, taking into account inflation.

After the payment of the debt and the generation of monthly income, the insured sum must also be adequate to meet the future obligations of the insured, such as the education of the children, marriage, etc.

2. Choose the cheapest policy: Many insurance buyers like to buy cheaper policies. This is another serious mistake. A cheap policy is not good if the insurance company for some reason or another cannot fulfill the claim in the event of premature death. Even if the insurer complies with the claim, if it takes a long time to fulfill the claim, it is certainly not a desirable situation for the insured’s family. You need to look at metrics such as the claims settlement rate and the smart settlement of the duration of death claims from different life insurance companies, to select an insurer that fulfills its obligation to fulfill your claim in a timely manner, if applicable. that such an unfortunate situation arises. Data on these metrics for all insurance companies in India is available in IRDA’s annual report (on the IRDA website). You should also check out online claims settlement reviews and only then choose a company that has a good claims settlement record.

3. Treat life insurance as an investment and buy the wrong plan: The common misconception about life insurance is that it is also a good investment or retirement planning solution. This misconception is largely due to some insurance agents who like to sell expensive policies to earn high commissions. If you compare life insurance returns to other investment options, it just doesn’t make sense as an investment. If you are a young investor with a long-term horizon, equities are the best instrument for creating wealth. In a 20-year time horizon, investment in equity funds through the SIP will result in a corpus that is at least three or four times the maturity amount of the life insurance plan with a 20-year term, with the same investment. Life insurance should always be viewed as protection for your family, in the event of an untimely death. Investing should be a completely separate consideration. Although insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation, you should separate the insurance component and the investment component and pay particular attention to the part of your premium that is actually spent. assigned to investments. In the early years of a ULIP policy, only a small amount goes toward unit purchases.

A good financial planner will always advise you to buy a term insurance plan. A temporary plan is the purest form of insurance and is a simple protection policy. The premium for term insurance plans is much lower than other types of insurance plans, leaving policyholders with a much larger investment surplus who can invest in investment products such as mutual funds that provide much higher returns. long-term, compared to endowment or cash-back plans. If you are the holder of a term insurance policy, in some specific situations, you can opt for other types of insurance (for example, ULIP, endowment or money-back plans), in addition to your term policy, for your financial needs specific.

4. Buying insurance for tax planning purposes: For many years, agents have persuaded their clients to purchase tax-saving insurance plans under Section 80C of the Income Tax Act. Investors should realize that insurance is probably the worst investment for saving taxes. The return on insurance plans is in the 5-6% range, while the Public Provident Fund, another 80C investment, offers about 9% risk-free and tax-free returns. Equity-linked savings schemes, another 80C investment, provide much higher tax-free returns in the long run. Also, insurance plan returns may not be completely tax-free. If premiums exceed 20% of the sum insured, then, to that extent, the proceeds of maturity are taxable. As mentioned above, the most important thing to keep in mind about life insurance is that the goal is to provide life coverage, not to generate the best return on investment.

5. Give up your life insurance policy or withdraw it before it expires: 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 touched until the unfortunate death of the insured occurs. Some policyholders give up their policy to meet an urgent financial need, hoping to buy a new policy when their financial situation improves. These policyholders must remember two things. First, mortality is not under anyone’s control. That is why we buy life insurance in the first place. Second, life insurance becomes very expensive as the insurance buyer ages. Your financial plan should provide contingency funds to cover any unexpected urgent expenses or provide liquidity over a period of time in the event of financial difficulties.

6. Insurance is a one-time exercise: I remember an old motorcycle ad on television that said, “Fill it up, close it up, forget it.” Some insurance buyers have the same philosophy regarding life insurance. Once they buy the right coverage in a good life insurance plan from a reputable company, they assume that their life insurance needs are covered forever. This is a mistake. The financial situation of insurance buyers changes over time. Compare your current income with your income ten years ago. Hasn’t your income grown several times? His lifestyle would have also improved significantly. If you purchased a life insurance plan ten years ago based on your income at the time, the insured sum will not be enough to meet your family’s current lifestyle and needs, in the unfortunate event of your untimely death. Therefore, you must purchase an additional term plan to cover that risk. Life insurance needs have to be reassessed regularly and any additional sums insured if necessary must be purchased.

Conclution

Investors should avoid these common mistakes when buying insurance policies. Life insurance is one of the most important components of any individual’s financial plan. Therefore, a lot of attention should be paid to life insurance. Insurance buyers should be wary of questionable sales in the life insurance industry. It is always beneficial to hire a financial planner who analyzes your entire investment and insurance portfolio comprehensively, so that you can make the best decision regarding life insurance and investments.