Life insurance is among the most crucial components of any individual’s financial plan. However there’s lot of misunderstanding about life insurance, mainly because of the way life insurance products have now 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, on the basis of the plans their agents want to market and how much premium they are able to afford. This a wrong approach. Your insurance requirement is a function of one’s financial situation, and has nothing do using what items are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers say that a cover of 10 times your annual income is adequate because it gives your family 10 years worth of income, if you are gone. But this isn’t always correct. Suppose, you have 20 year mortgage or home loan. How will your family pay the EMIs after 10 years, when most of the loan remains outstanding? Suppose you have very young children. Your household will go out of income, when your young ones want it probably the most, e.g. due to their higher education. Insurance buyers need to think about several factors in deciding how much insurance cover is adequate for them.

· Repayment of the whole outstanding debt (e.g. home loan, car loan etc.) of the policy holder

· After debt repayment, the cover or sum assured must 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 cheapest policy: Many insurance buyers like to purchase policies which are cheaper. This really is another serious mistake. A cheap policy is not any good, if the insurance company for some reason or another cannot fulfil the claim in the case of an untimely death. Even if the insurer fulfils the claim, when it takes a extended time to fulfil the claim it is unquestionably not really a desirable situation for group of the insured to be in. You need to look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to pick an insurer, which will honour its obligation in fulfilling your claim in an appropriate manner, should such an unlucky situation arise. Data on these metrics for all your insurance companies in India comes in the IRDA annual report (on the IRDA website). It’s also advisable to check claim settlement reviews online and only then select a company that has a great background of settling claims.

3. Treating life insurance as an investment and buying the wrong plan: The common misconception about life insurance is that, it can be as a great investment or retirement planning solution. This misconception is essentially due to some insurance agents who like to market expensive policies to earn high commissions. Groepsverzekering If you compare returns from life insurance to other investment options, it really doesn’t seem sensible as an investment. If you’re a young investor with a long time horizon, equity is the greatest wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP can lead to a corpus that is at least 3 or 4 times the maturity number of life insurance plan with a 20 year term, with exactly the same investment. Life insurance should been seen as protection for your family, in the case of an untimely death. Investment should be considered a completely separate consideration. Although insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own personel evaluation you must separate the insurance component and investment component and pay attention as to the portion of one’s premium actually gets allocated to investments. In early years of a ULIP policy, only a bit goes to purchasing units.

A great financial planner will always advise you to purchase term insurance plan. A term plan is the purest type of insurance and is a straightforward protection policy. The premium of term insurance plans is significantly less than other forms of insurance plans, and it leaves the policy holders with a much bigger investible surplus that they may purchase investment products like mutual funds that give higher returns in the long term, in comparison to endowment or money-back plans. If you’re a term insurance coverage holder, under some specific situations, you may opt 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 objective of tax planning: For quite some time agents have inveigled their clients into buying insurance plans to save lots of tax under Section 80C of the Income Tax Act. Investors should know that insurance has become the worst tax saving investment. Return from insurance plans is in the number of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives near to 9% risk free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives higher tax free returns on the long term. Further, returns from insurance plans may possibly not be entirely tax free. If the premiums exceed 20% of sum assured, then compared to that extent the maturity proceeds are taxable. As discussed earlier, the most crucial thing to notice about life insurance is that objective is to offer life cover, not to generate the best investment return.

5. Surrendering life insurance coverage or withdrawing from it before maturity: This is a serious mistake and compromises the financial security of your family in the case of an unlucky incident. Life Insurance should not be touched before 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 new 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 initial place. Second, life insurance gets very expensive while the insurance buyer gets older. Your financial plan should provide for contingency funds to generally meet any unexpected urgent expense or provide liquidity for a period of time in the case of an economic distress.

6. Insurance is a one-time exercise: I’m reminded of an old motorcycle advertisement on television, which had the punch line, “Fill it, shut it, forget it” ;.Some insurance buyers have exactly the same philosophy towards life insurance. When they buy adequate cover in a great life insurance plan from a reputed company, they think that their life insurance needs are looked after forever. This is a mistake. Financial situation of insurance buyers change with time. Compare your current income along with your income ten years back. Hasn’t your income grown repeatedly? Your lifestyle would also have improved significantly. If you bought a life insurance plan ten years ago based on your own income back then, the sum assured won’t be sufficient to generally meet your family’s current lifestyle and needs, in the unfortunate event of one’s untimely death. Therefore you should buy yet another term intend to cover that risk. Life Insurance needs need to be re-evaluated at a regular frequency and any extra sum assured if required, must be bought.

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