Life insurance is one of the most crucial components of any individual's financial plan. However There‘s great deal of misunderstanding about life insurance, mainly because of the way life insurance products happen to be sold through the years in India. We‘ve discussed some common mistakes insurance buyers should avoid when buying insurance policies.
1. Underestimating insurance requirement : Many life insurance buyers choose their insurance covers or sum assured, driven by plans their agents wish to sell as well as how much premium they could afford. This a wrong approach. Your insurance requirement is really a function of your respective financial situation, and does not have anything do with what products can be found. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers claim that a canopy of 10 times your annual income is adequate since it gives your loved ones 10 years worth of income, When you‘re gone. However this Isn‘t always correct. Suppose, you‘ve 20 year mortgage or home loan. The way your loved ones pay the EMIs after 10 years, when a lot of the loan remains outstanding? Suppose you‘ve very young children. Your loved ones will expired of income, when your kids need it the foremost, e. g. for their advanced schooling. Insurance buyers got to consider several factors in deciding just simply the amount insurance cover is adequate to the confident people.
· Repayment from the entire outstanding debt (e. g. home loan, car loan etc. ) from the policy holder
· After debt repayment, the cover or sum assured should have surplus funds to generate enough monthly income to cover all of the bills from the dependents from the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured should be also adequate to satisfy future obligations from 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 isn‘t any good, when the insurance company for some reason or another cannot fulfil the claim in case in an untimely death. Even when the insurer fulfils the claim, if this takes a really long time for them to fulfil the claim that is certainly not really a desirable situation for family from the insured to have. You ought to look into metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to select an insurer, that could honour its obligation in fulfilling your claim inside a timely manner, should such an unfortunate situation arise. Data on these metrics for all of the insurance companies in India will come in the IRDA annual report (upon the IRDA website ). It‘s also wise to check claim settlement reviews online and just then select a company which has a good track record of settling claims.
3. Treating life insurance as a good investment and buying the incorrect plan : The common misconception about life insurance is, additionally it is as a very good investment or retirement planning solution. This misconception is largely because of some insurance agents who prefer to sell expensive policies to earn high commissions. In case you compare returns from life insurance with other investment options, in quite simply doesn‘t make sense as a good investment. If you‘re a young investor with a very long time horizon, equity is the greatest wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will create a corpus that‘s a minimum of three or four times the maturity level of life insurance plan having a 20 year term, with a similar investment. Life insurance should always been seen as protection for your loved ones, in case in an untimely death. Investment should become a completely separate consideration. Albeit insurance companies sell Unit Linked Insurance Plans (ULIPs ) as attractive investment products, for your own personal evaluation you ought to separate the insurance component and investment component and pay careful focus on what portion of your respective premium actually gets allocated to investments. In the first many years of a ULIP policy, only a little amount goes to buying units.
A very good financial planner will always advise you to purchase term insurance plan. A term plan is that the purest sort of insurance and is really a straightforward protection policy. The premium of term insurance plans is much lower than other kinds of insurance plans, and it also leaves the policy holders with a lot larger investible surplus that they‘ll put money into investment products like mutual funds that give much higher returns forever, when compared with endowment or a reimbursement plans. If you‘re a term insurance policy holder, under some specific situations, you‘ll choose other kinds of insurance (e. g. ULIP, endowment or a reimbursement plans ), along with your term policy, for the specific financial needs.
4. Buying insurance with the objective of tax planning : For several years agents have inveigled their clients into buying insurance plans to save lots of tax under Section 80C from the Income Tax Act. Investors should understand that insurance has become the worst tax saving investment. Return from insurance plans is inside the choice of 5 - 6%, whereas Public Provident Fund, another 80C investment, gives near 9% risk free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives much higher tax free returns during 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, it is important to note about life insurance is objective is to supply life cover, to not generate the very best investment return.
5. Surrendering life insurance policy or withdrawing from it before maturity : This can be a serious mistake and compromises the financial security of your loved ones in case in an unfortunate incident. Life Insurance shouldn‘t be touched till the unfortunate death from the insured occurs. Some policy holders surrender their policy to satisfy an urgent financial need, using the hope of buying a brand new policy when their financial situation improves. Such policy holders got to remember two things. First, mortality Isn‘t in anyone's control. That‘s why we buy life insurance to begin with. Second, life insurance gets very expensive like the insurance buyer gets older. Your financial plan should provide for contingency funds to satisfy any unexpected urgent expense or provide liquidity for any time period in case of the financial distress.
6. Insurance is really a one-time exercise : I‘m reminded in an old motorcycle advertisement on television, which had the point,
suggestion
. Some insurance buyers have a similar philosophy towards life insurance. After they buy adequate cover in a very good life insurance plan given by a reputed company, they assume that their heart insurance needs are dealt with forever. This can be a mistake. Financial situation of insurance buyers change as time passes. Compare your current income along with your income ten years back. Hasn't your income grown more than once? Your lifestyle would even have improved significantly. In case you bought a life insurance plan ten years back based in your income back then, the sum assured won‘t be enough to satisfy your family's current lifestyle and needs, inside the unfortunate event of your respective untimely death. Therefore you should purchase a further term intend to cover that risk. Life Insurance needs need to be re-evaluated with a regular frequency and any additional sum assured if required, ought to be bought.
Conclusion
Investors should avoid these common mistakes when buying insurance policies. Life insurance is one of the most crucial components of any individual's financial plan. Therefore, thoughtful consideration should be devoted to life insurance. Insurance buyers should exercise prudence against questionable selling practised inside the life insurance industry. It‘s always beneficial to interact a financial planner who looks at the entire portfolio of investments and insurance on the holistic basis, so that you could take the very best decision with regards to both life insurance and investments.
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