Six Common Life Insurance Mistakes to AvoidOne of the most critical aspects of anyone's financial plan is life insurance. However, there are many misconceptions about life insurance, owing to the way life insurance products have been presented in India over the years. We've gone through some typical blunders that insurance customers should avoid while purchasing plans.
Operation Liberation1. Underestimating the need for insurance: Many life insurance purchasers select their policy covers or sum insured based on the plans that their brokers wish to offer and the amount of premium they can afford. This is a bad strategy. Your insurance needs are determined by your financial circumstances, not by the products that are offered. Many insurance purchasers utilise rule of thumbs such as 10 times annual income as a guideline for coverage. According to some financial advisors, a cover of ten times your annual income is sufficient because it provides your family with ten years' worth of income after you pass away. However, this isn't always the case. Assume you have a mortgage or home loan with a 20-year term. How will your family pay the EMIs after ten years, while the debt is still in default for the most part? Assume you have a family with extremely young children. Your family will run out of money when it is most needed, such as for your children's higher education. When determining how much insurance coverage is appropriate for them, insurance purchasers must consider a number of criteria.
Repayment of the policyholder's whole outstanding debt (e.g., home loan, auto loan, etc.)
After debt payback, the cover or amount assured should have enough money to generate enough monthly income to support all of the policyholder's dependents' living expenditures, taking inflation into account.
After debt repayment and monthly income generation, the sum promised should be sufficient to fulfil the policyholder's future responsibilities, such as children's schooling, marriage, and so on.
2. Choosing the cheapest policy: Many people choose to purchase policies that are less expensive. This is yet another blunder. A low-cost policy is useless if the insurance company is unable to pay the claim in the case of a premature death for some reason. Even if the insurer honours the claim, if it takes an unreasonable amount of time, it is clearly not a desirable situation for the insured's family. If such an awful event arises, you should look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies to select an insurer that would honour its commitment in completing your claim in a timely way. The IRDA annual report contains data on these indicators for all Indian insurance businesses (on the IRDA website). You could also look at internet claim settlement reviews before deciding on a company with an excellent track record of paying disputes.
3. Buying the wrong life insurance plan and seeing it as an investment: A widespread misperception regarding life insurance is that it can be used as an investment or a retirement planning tool. This misunderstanding is largely attributable to the fact that some insurance brokers prefer to market costlier policies in order to earn hefty profits. When compared to other investing possibilities, life insurance simply does not make sense as an investment. Equity is the ideal wealth development asset if you are a youthful investor with a lengthy time horizon. With the same investment, a 20-year investment in equity funds through SIP will result in a corpus that is at least three or four times the maturity value of a 20-year term life insurance plan. Life insurance should always be viewed as a means of providing financial security to your family in the case of an untimely demise. Investment should be seen as a distinct concern. Even while insurance firms market Unit Linked Insurance Plans (ULIPs) as appealing investment solutions, you should separate the insurance and investment components for your own evaluation and pay close attention to how much of your premium is allocated to investments. Only a small portion of a ULIP policy's initial investment is used to purchase units.
