Life insurance is among the most significant aspects of any individual’s financial plan. However there is certainly great deal of misunderstanding about life insurance, mainly as a result of way life insurance products have been sold over the years in India. We have discussed some common mistakes insurance buyers should avoid when buying insurance policies.
1. Underestimating insurance requirement: Many life insurance buyers choose their ตัวแทนประกันชีวิต AIA covers or sum assured, based on the plans their agents wish to sell and exactly how much premium they are able to afford. This a wrong approach. Your insurance requirement is actually a function of your finances, and has nothing use what items are available. Many insurance buyers use thumb rules like ten times annual income for cover. Some financial advisers state that a cover of 10 times your annual income is adequate since it gives your household a decade amount of income, when you find yourself gone. But this may not be always correct. Suppose, you may have 20 year mortgage or mortgage loan. How will your family pay the EMIs after 10 years, when most of the loan is still outstanding? Suppose you have very young kids. Your family will run out of income, as soon as your children need it probably the most, e.g. for advanced schooling. Insurance buyers need to consider several factors in deciding just how much insurance cover is adequate to them.
· Repayment of the entire outstanding debt (e.g. home mortgage, car loan etc.) of the policy holder
· After debt repayment, the cover or sum assured must have surplus funds to create enough monthly income to protect each of the living expenses in the dependents in the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured ought to be adequate to meet future obligations of the policy holder, like children’s education, marriage etc.
2. Choosing the cheapest policy: Many insurance buyers like to buy policies that are cheaper. This is another serious mistake. A cheap policy is not any good, if the insurer for whatever reason or any other cannot fulfil the claim in the case of an untimely death. Even when the insurer fulfils the claim, when it takes a long time to fulfil the claim it is definitely not just a desirable situation for group of the insured to stay in. You should look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of various life insurance companies, to select an insurer, which will honour its obligation in fulfilling your claim in a timely manner, should such an unfortunate situation arise. Data on these metrics for all of the insurance companies in India is available in the IRDA annual report (on the IRDA website). You need to check claim settlement reviews online and merely then pick a company that has a good 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 the fact that, it is additionally as a great investment or retirement planning solution. This misconception is basically because of some insurance agents who choose to sell expensive policies to earn high commissions. Should you compare returns from life insurance to other investment options, it really fails to make sense being an investment. Should you be a young investor with quite a while horizon, equity is the ideal wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is certainly at least 3 or 4 times the maturity level of life insurance plan with a 20 year term, with similar investment. life insurance should been considered as protection for the family, in the case of an untimely death. Investment should be an entirely separate consideration. Even though insurance providers sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your evaluation you should separate the insurance coverage component and investment component and pay careful attention to what part of your premium actually gets allocated to investments. In the early many years of a ULIP policy, just a small amount would go to buying units.
A good financial planner will invariably advise you to buy term insurance plan. An expression plan is the purest kind of insurance and it is a straightforward protection policy. The premium of term insurance plans is far less than other kinds of insurance plans, and it leaves the policy holders with a much bigger investible surplus that they may invest in investment products like mutual funds that offer much higher returns in the long run, compared to endowment or money-back plans. Should you be a term insurance policy holder, under some specific situations, you could go for other kinds of insurance (e.g. ULIP, endowment or money back plans), along with your term policy, for the specific financial needs.
4. Buying insurance just for tax planning: For several years agents have inveigled their customers into buying insurance wants to save tax under Section 80C of the Tax Act. Investors should understand that insurance is probably the worst tax saving investment. Return from insurance plans is within the range of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives close to 9% risk-free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives higher tax free returns over the long term. Further, returns from insurance plans might not be entirely tax free. When the premiums exceed 20% of sum assured, then to that extent the maturity proceeds are taxable. As discussed earlier, the most important thing to notice about life insurance is the fact that objective is to provide life cover, not to generate the very best investment return.
5. Surrendering life insurance policy or withdrawing from this before maturity: This is a serious mistake and compromises the financial security of the family in case of an unfortunate incident. life insurance must not be touched till the unfortunate death of the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of purchasing a brand new policy when their financial situation improves. Such policy holders must remember two things. First, mortality is not really in anyone’s control. That is why we buy life insurance to start with. Second, life insurance gets very expensive as the insurance buyer gets older. Your financial plan must provide for contingency funds to satisfy any unexpected urgent expense or provide liquidity for a period of time in the event of an economic distress.
6. Insurance coverage is a 1-time exercise: I am reminded of your old motorcycle advertisement on television, that have the punch line, “Fill it, shut it, forget it”. Some insurance buyers have a similar philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan coming from a reputed company, they assume that their life insurance needs are cared for forever. It is a mistake. Financial situation of insurance buyers change as time passes. Compare your present income along with your income 10 years back. Hasn’t your income grown several times? Your way of life would also have improved significantly. Should you bought ตัวแทนประกันชีวิต 10 years ago according to your income back then, the sum assured is definitely not enough to satisfy your family’s current lifestyle and requires, within the unfortunate ljnicn of your own untimely death. Therefore you should buy yet another term intend to cover that risk. life insurance needs need to be re-evaluated in a regular frequency and then any additional sum assured if required, needs to be bought.
Conclusion – Investors should avoid these common mistakes when purchasing insurance policies. life insurance is probably the most significant elements of any individual’s financial plan. Therefore, thoughtful consideration must be devoted to life insurance. Insurance buyers should exercise prudence against questionable selling practised in the life insurance industry. It is usually beneficial to engage an economic planner who looks at your whole portfolio of investments and insurance on a holistic basis, to be able to take the best decision in relation to both life insurance and investments.