Life insurance is one of the most important aspects of any individual’s financial plan. However there exists lot of misunderstanding about life insurance, mainly due to the 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 plans.
1. Underestimating insurance requirement: Many life insurance buyers choose their ตัวแทนประกัน เอไอเอ covers or sum assured, based on the plans their agents desire to sell and exactly how much premium they are able to afford. This an incorrect approach. Your insurance requirement is a purpose of your finances, and contains nothing do with what items are available. Many insurance buyers use thumb rules like ten times annual income for cover. Some financial advisers say that a cover of 10 times your annual income is adequate as it gives your household a decade worth of income, if you are gone. But this is simply not always correct. Suppose, you may have 20 year mortgage or mortgage loan. How can your family spend the money for EMIs after ten years, when a lot of the loan remains outstanding? Suppose you may have very young children. Your household will use up all your income, as soon as your children want it by far the most, e.g. for his or her higher education. Insurance buyers need to consider several factors in deciding how much insurance policy is adequate for them.
· Repayment in the entire outstanding debt (e.g. mortgage loan, car loan etc.) in the policy holder
· After debt repayment, the cover or sum assured must have surplus funds to generate enough monthly income to protect all of the cost of living of the dependents from the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured should also be adequate to meet future obligations in the policy holder, like children’s education, marriage etc.
2. Choosing the cheapest policy: Many insurance buyers want to buy policies which can be cheaper. This is another serious mistake. An inexpensive policy is not any good, if the insurer for some reason or any other cannot fulfil the claim in the case of an untimely death. Even when the insurer fulfils the claim, if this takes a long time to fulfil the claim it is not a desirable situation for group of the insured to be in. You should think of metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to select an insurer, that can honour its obligation in fulfilling your claim in a timely manner, should this kind of unfortunate situation arise. Data on these metrics for all of the insurance firms in India is available in the IRDA annual report (on the IRDA website). You should also check claim settlement online reviews and just then select a company that includes a good history of settling claims.
3. Treating life insurance being an investment and purchasing the wrong plan: The normal misconception about life insurance is the fact, it is additionally as a wise investment or retirement planning solution. This misconception is largely because of some insurance agents who choose to market expensive policies to earn high commissions. In the event you compare returns from life insurance with other investment options, it simply will not sound right as an investment. In case you are a young investor with a long time 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 which is at the very least 3 or 4 times the maturity quantity of life insurance plan with a 20 year term, with the exact same investment. life insurance should always been viewed as protection to your family, in case of an untimely death. Investment should be a totally separate consideration. Although insurance firms sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your evaluation you ought to separate the insurance coverage component and investment component and pay careful focus on what portion of your premium actually gets allocated to investments. In the early years of a ULIP policy, just a small amount goes to buying units.
A good financial planner will invariably give you advice to purchase term insurance policy. An expression plan will be the purest form 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 insurance policy holders using a much bigger investible surplus they can put money into investment products like mutual funds that offer higher returns eventually, when compared with endowment or money back plans. In case you are an expression insurance plan holder, under some specific situations, you could go for other types of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, for your specific financial needs.
4. Buying insurance with regards to tax planning: For several years agents have inveigled their customers into buying insurance plans to save tax under Section 80C from the Income Tax Act. Investors should realize that insurance is probably the worst tax saving investment. Return from insurance plans is incorporated in the variety 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 in the long run. Further, returns from insurance plans will not be entirely tax free. If the premiums exceed 20% of sum assured, then to that particular extent the maturity proceeds are taxable. As discussed earlier, it is essential to remember about life insurance is the fact that objective is to provide life cover, to not generate the most effective investment return.
5. Surrendering life insurance policy or withdrawing as a result before maturity: It is a serious mistake and compromises the financial security of the family in the case of an unfortunate incident. life insurance really should not be touched till the unfortunate death in the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of purchasing a whole new policy when their financial circumstances improves. Such policy holders must remember 2 things. First, mortality will not be in anyone’s control. For this reason 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 case of a monetary distress.
6. Insurance policies are a one-time exercise: I am reminded of an old motorcycle advertisement on tv, which had the punch line, “Fill it, shut it, forget it”. Some insurance buyers have a similar philosophy towards life insurance. After they buy adequate cover in a good life insurance plan coming from a reputed company, they believe that their life insurance needs are looked after forever. It is a mistake. Finances of insurance buyers change eventually. Compare your present income together with your income ten years back. Hasn’t your earnings grown many times? How you live would also provide improved significantly. In the event you bought ตัวแทนประกันชีวิต ten years ago based upon your revenue in the past, the sum assured will not be enough to fulfill your family’s current lifestyle and desires, inside the unfortunate ljnicn of your own untimely death. Therefore you should get yet another term want to cover that risk. life insurance needs must be re-evaluated at 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 one of the most significant aspects of any individual’s financial plan. Therefore, thoughtful consideration has to be focused on life insurance. Insurance buyers should exercise prudence against questionable selling practised in the life insurance industry. It is always beneficial to engage a monetary planner who studies your complete portfolio of investments and insurance on a holistic basis, to be able to go ahead and take best decision in terms of both life insurance and investments.