Avoid These Six Common Life Insurance Mistakes

Avoid These Six Common Life Insurance Mistakes

Avoid These Six Common Life Insurance Mistakes, Life insurance is one of the most important components of any person’s financial plan. However, there are many misunderstandings regarding life insurance, mainly because of how life insurance products were sold in India over the years. We have discussed some common mistakes that insurance policy buyers should avoid when purchasing insurance policies.

1. Underestimation of insurance requirements. Many life insurance buyers choose insurance policies or the insured amount based on the plans that their agents want to sell and what premium they can afford. This is the wrong approach. Your insurance claim depends on your financial situation and has nothing to do with what products are available. Many insurance buyers use thumb rules such as 10x annual income to cover.Some financial advisors say that covering 10 times your annual income is adequate because it gives your family 10 years of income when you are gone. But this is not always correct. Suppose you have a mortgage for 20 years or a mortgage. How will your family pay EMI after 10 years when most of the loan is still not repaid? Suppose you have very young children.Your family will run out of income when your children need it most, for example, for their higher education. Insurance buyers must consider several factors when deciding which insurance cover is right for them.

Repayment of all outstanding debt (e.g., mortgage, car loan, etc.) of the Insured

After repayment of the debt, the insurance cover or the secured amount must have excess funds to obtain sufficient monthly income to cover all expenses for the living of the insured's dependents, taking into account inflation.

After paying off the debt and earning a monthly income, the guaranteed amount should also be sufficient to meet the future obligations of the insured, such as education of children, marriage, etc.

2. Choosing the cheapest policy. Many buyers of insurance policies prefer to buy policies cheaper. This is another serious mistake. A cheap policy is not suitable if the insurance company for one reason or another cannot fulfill the requirement in the event of premature death. Even if the insurer fulfills the requirement, if it takes a very long time to satisfy it, this is certainly undesirable for the insured's family.You should consider indicators such as the claims settlement ratio and the claims settlement deadlines of various life insurance companies in order to choose an insurer who will fulfill its obligations to fulfill your requirement in the event of such an unfavorable situation. Data for these indicators for all insurance companies in India is available in the IRDA Annual Report (on the IRDA website). You should also check online claims settlement reviews and only then choose a company that has good claims settlement experience.

3. Consider life insurance as an investment and buy the wrong plan: A common misconception about life insurance is that it is also a good solution for investment or retirement planning. This misconception is largely due to some insurance agents who like to sell expensive policies in order to earn high commissions. If you compare life insurance income with other investment options, it just doesn't make sense as an investment.If you are a young investor with a long horizon, then capital is the best tool for creating wealth. Over a 20-year period, equity investments through SIP will result in a composition that is at least three to four times the maturity of a 20-year life insurance plan with the same investment. Life insurance should always be considered as protecting your family in case of premature death. Investments should be a completely separate consideration.Despite the fact that insurance companies sell related insurance plans (ULIP) as attractive investment products, for your own assessment you should separate the insurance component and the investment component and carefully monitor how much of your premium actually goes to the investment. In the early years of ULIP, only a small amount goes to purchase units.

A good financial planner will always advise you to buy a term insurance plan. The term “plan” is the purest form of insurance and is a simple protection policy.The premium on term insurance plans is much lower than other types of insurance plans, and this gives policyholders a much greater surplus that they can invest in, that they can invest in investment products, such as mutual funds, which yield much higher returns in long term versus gifted or money back plans. If you are a holder of an urgent insurance policy, in some specific situations you can choose other types of insurance (for example, ULIP, donation or refund plans), in addition to your term policy, for your specific financial needs.

4.Buying insurance for tax planning purposes. For many years, agents have been attracting their customers to purchase insurance plans to save tax in accordance with section 80C of the Income Tax Act. Investors should understand that insurance is probably the worst investment for tax savings. Profitability from insurance plans ranges from 5-6%, while the State Security Fund, another 80C investment, provides nearly 9% of risk-free and tax-free income.Equity-related savings schemes, another 80C investment, provide much higher tax returns in the long run. In addition, income from insurance plans cannot be fully tax exempt. If premiums exceed 20% of the guaranteed amount, then in this case the income from repayment is taxable. As mentioned earlier, the most important thing to note with regard to life insurance is that the goal is to provide life insurance, and not to maximize the return on investment.

5. Refusal from the life insurance policy or cancellation of it before the due date. This is a serious mistake that compromises your family’s financial security in the event of an accident. Life insurance must not cover the death of the insured before an accident. Some policyholders are abandoning their policies to meet urgent financial needs, hoping to buy a new policy when their financial situation improves.Such policy holders must remember two things. First, mortality does not control anyone. That is why we buy life insurance in the first place. Secondly, life insurance becomes very expensive as the buyer of the insurance gets older. Your financial plan should include contingency funds to cover unforeseen urgent expenses or provide liquidity for a period of time in case of financial difficulty.

6. Insurance is a one-time exercise: I remember an old motorcycle advertisement on television in which there was a line: "Fill, close, forget." Some insurance buyers have the same philosophy regarding life insurance. Once they buy adequate coverage in a good life insurance plan from a reputed company, they assume that their life insurance needs will be taken care of forever. This is mistake. The financial situation of insurance buyers changes with time.Compare your current income with your income ten years ago. Has your income not increased several times? Your lifestyle would also greatly improve. If you acquired a life insurance plan ten years ago, based on your income, then the guaranteed amount will not be enough to meet your current lifestyle and the needs of your family in the event of an accident of your premature death. Therefore, you should buy an additional time plan to cover this risk. Life insurance needs should be regularly reviewed and any additional amount guaranteed if necessary should be purchased.

Conclusion

Investors should avoid these common mistakes when buying insurance policies. Life insurance is one of the most important components of any person’s financial plan. Therefore, thoughtful attention should be paid to life insurance. Insurance buyers should exercise caution with regard to doubtful sales practiced in the life insurance industry. It is always helpful to engage a financial planner who reviews your entire investment and insurance portfolio in an integrated manner so that you can make the best decision both in terms of life insurance and investment.