Keep away from All these Half dozen Prevalent Everyday living Insurance FlawsOn July 9, 2022 by Shazaib Khatri75
Life insurance is one of the most important components of any individual’s financial plan. However there is large amount of misunderstanding about life insurance, mainly as a result of way life insurance products have already been sold through 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, based on the plans their agents want to sell and just how much premium they could afford. This a wrong approach. Your insurance requirement is just a function of one’s financial situation, and has nothing do using what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers say that the 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 is not always correct. Suppose, you have 20 year mortgage or home loan. How will your family pay the EMIs after 10 years, when the majority of the loan is still outstanding? Suppose you have very young children. Your household will come to an end of income, when your young ones need it probably the most, e.g. due to their higher education. Insurance buyers need to consider several factors in deciding just 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 meet future obligations of the policy holder, like children’s education, marriage etc.
2. Choosing the cheapest policy: Many insurance buyers like to get policies which are cheaper. That is another serious mistake. A low priced policy is no good, if the insurance company for some reason or another cannot fulfil the claim in the case of an untimely death. Even when the insurer fulfils the claim, if it requires a lengthy time to fulfil the claim it is certainly not really a desirable situation for category of the insured to be in. You must look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to select an insurer, that may honour its obligation in fulfilling your claim in a timely manner, should such an unlucky situation arise. Data on these metrics for all your insurance companies in India is available in the IRDA annual report (on the IRDA website). It’s also wise to check claim settlement reviews online and only then pick a company that’s a good track record of settling claims.
3. Treating life insurance being an investment and buying the wrong plan: The most popular misconception about life insurance is that, it can also be as a good investment or retirement planning solution. This misconception is essentially due to some insurance agents who like to sell expensive policies to earn high commissions. In the event that you compare returns from life insurance to other investment options, it simply doesn’t sound right being an investment. If you’re a young investor with a long time horizon, equity is the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP can lead to a corpus that’s at least 3 or 4 times the maturity amount of life insurance plan with a 20 year term, with the same investment. Life insurance should been regarded as protection for your family, in the case of an untimely death. Investment should be described as a completely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you need to separate the insurance component and investment component and pay attention from what portion of one’s premium actually gets allocated to investments. In early years of a ULIP policy, only a touch goes to purchasing units.
An excellent financial planner will always advise you to get term insurance plan. A term plan is the purest type of insurance and is just a straightforward protection policy. The premium of term insurance plans is a lot significantly less than other kinds of insurance plans, Bedrijf and it leaves the policy holders with a much larger investible surplus that they can purchase investment products like mutual funds that provide much higher returns in the long term, in comparison to endowment or money back plans. If you’re a term insurance policy holder, under some specific situations, you might decide for other kinds of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, for the 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 truly save tax under Section 80C of the Income Tax Act. Investors should know that insurance is just about the worst tax saving investment. Return from insurance plans is in the product 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 much higher tax free returns within the long term. Further, returns from insurance plans may possibly not be entirely tax free. If the premiums exceed 20% of sum assured, then to that extent the maturity proceeds are taxable. As discussed earlier, the most important thing to note about life insurance is that objective is to provide life cover, never to generate the very best investment return.
5. Surrendering life insurance policy or withdrawing as a result before maturity: This can be a serious mistake and compromises the financial security of your family in the case of an unlucky incident. Life Insurance should not be touched until the unfortunate death of the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of buying a brand new policy when their financial situation improves. Such policy holders need to remember two things. First, mortality isn’t in anyone’s control. That’s why we buy life insurance in the initial place. Second, life insurance gets extremely expensive while the insurance buyer gets older. Your financial plan should offer contingency funds to meet any unexpected urgent expense or provide liquidity for a time frame in the case of a financial distress.
6. Insurance is just a one-time exercise: I’m reminded of a vintage motorcycle advertisement on television, which had the punch line, “Fill it, shut it, forget it” ;.Some insurance buyers have the same philosophy towards life insurance. If they buy adequate cover in a good life insurance plan from a reputed company, they assume that their life insurance needs are cared for forever. This can be a mistake. Financial situation of insurance buyers change with time. Compare your present income along with your income ten years back. Hasn’t your income grown several times? Your lifestyle would likewise have improved significantly. If you got a life insurance plan ten years ago based on your income in the past, the sum assured won’t be adequate to meet your family’s current lifestyle and needs, in the unfortunate event of one’s untimely death. Therefore you should obtain one more term intend to cover that risk. Life Insurance needs need to be re-evaluated at a regular frequency and any additional sum assured if required, must be bought.