Life insurance is one of the most important things in an individual financial plan. However there is a lot of misunderstanding about life insurance, mainly due to the way life insurance products have been sold over the years in India. We have discussed the common mistakes that insurance buyers should avoid when purchasing insurance policies.
1. Underestimating the insurance requirement: Many life insurance buyers choose their insurance cover or guaranteed amount, depending on the strategies their agents want to sell and how much they can afford. This method is incorrect. Your insurance requirement is a function of your financial status, and has nothing to do with available products. Many insurance buyers use the six rules as ten times the annual income cover. Some financial advisers say that ten times more cover of your annual income is enough because it gives your family 10 bucks, when you leave. But this is not always right. Suppose you have a mortgage for 20 years or a mortgage. How will your family repay the EMIs after 10 years, with most of the loans still outstanding? Suppose you have very young children. Your family will run out of income, when your children need it most, e.g. with their higher education. Insurers need to consider a number of factors in determining the amount of insurance available to them.
Repayment of all outstanding debt (eg home loan, car loan etc.) by the policyholder
After the payment of the loan, the cover or the guaranteed amount must have a surplus to make a monthly income sufficient to cover all living expenses of the policyholder, including in the amount of money
· After paying off debt and making monthly income, the guaranteed amount should also be sufficient to meet the future obligations of the policy owner, such as children’s education, marriage etc.
2. Cheap policy selection: Most insurance buyers prefer to buy cheaper policies. This is another serious mistake. A cheap policy is useless, if an insurance company for some reason or another cannot file a claim in the event of a sudden death. Even if the insurer fills the claim, if it takes too long to file the claim, it is not a desirable condition for the insured family to be in it. You should look at metrics such as the Claims Settlement Ratio and Duration of Disease Disease Claims for different life insurance companies, choosing insurance, which will honor its obligation to complete your claim in a timely manner, in the event of such a serious situation. Details on these metrics for all insurance companies in India can be found in the IRDA’s annual report (on the IRDA website). You should also look at online claims payment reviews and choose a company with a good track record of paying claims.
3. Treating life insurance as an investment and buying the wrong plan: A common misconception about life insurance is, and is, a good investment or retirement plan. This misconception is largely due to some insurers who prefer to sell expensive policies to get higher commissions. When you compare the benefits of life insurance with other investment options, it makes no sense like investing. If you are a young investor with a long career, equity is a great tool for creating great wealth. For more than 20 years, investing in a SIP fund will result in at least three or four times the value of the life insurance policy maturity in a 20-year period, with the same investment. Life insurance should always be considered to protect your family, in the event of your sudden death. Investment should be a completely different consideration. Although insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, to evaluate yourself you have to separate the insurance component from the investment component and pay attention to which part of your premium is being invested. In the early years of ULIP policy, only a small amount goes to procurement units.
A good financial planner will always advise you to buy a temporary insurance plan. A timetable is a form of pure insurance and is a straightforward security policy. The premium for insurance plans is much smaller than for other types of insurance strategies, and it leaves policymakers with more investment to invest in investment products as joint ventures that offer higher profits in the long run, compared to dividends or repayment plans. If you are the owner of a term insurance policy, under certain circumstances, you may choose other types of insurance (eg ULIP, share or reimbursement plans), in addition to your term term policy, for your specific financial needs.
4. Purchasing insurance for tax purposes: For many years agents have incorporated their clients into the purchase of tax-free insurance schemes under Section 80C of the Income Tax Act. Investors should realize that insurance is probably the worst tax-savings investment. The return on insurance plans is 5 – 6%, and the Public Provident Fund, another 80C grant, offers about 9 percent risk-free and tax-free. Equity Linked Saving Schemes, another 80C investment, offers the highest free returns in the long run. In addition, the return of the insurance plan may not be completely free. If the premiums exceed 20% of the guaranteed amount, then that maturity is taxable. As mentioned earlier, the most important thing to note about life insurance is that the purpose is to provide life cover, not to make a very good investment profit.
5. Providing life insurance or withdrawal before maturity: This is a serious mistake and jeopardizes your family’s financial security in the event of a tragic event. Life Insurance should not be touched until the unfortunate death of the insurers.