Life insurance is one of the most important aspects of any individual’s financial plan. However there is great deal 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 choosing insurance plans.
1. Underestimating insurance requirement: Many life insurance buyers choose their ตัวแทนประกันชีวิต เอไอเอ covers or sum assured, based on the plans their agents desire to sell and how much premium they could afford. This a wrong approach. Your insurance requirement is a function of your finances, and has nothing use 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 a decade amount of income, when you find yourself gone. But this is simply not always correct. Suppose, you may have 20 year mortgage or home mortgage. How will your household spend the money for EMIs after 10 years, when most of the loan continues to be outstanding? Suppose you might have very young children. Your family will use up all your income, when your children require it the most, e.g. for their higher education. Insurance buyers have to consider several factors in deciding how much insurance policy is adequate for them.
· Repayment from the entire outstanding debt (e.g. home mortgage, car loan etc.) from the policy holder
· After debt repayment, the cover or sum assured needs to have surplus funds to create enough monthly income to pay for all of the living expenses of the dependents of the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured should also be adequate to satisfy future obligations of the policy holder, like children’s education, marriage etc.
2. Choosing the cheapest policy: Many insurance buyers want to buy policies that are cheaper. This really is another serious mistake. A cheap policy is no good, if the insurer for whatever reason or any other cannot fulfil the claim in the event of an untimely death. Even when the insurer fulfils the claim, if this takes a very long time to fulfil the claim it is certainly not just a desirable situation for family of the insured to be in. You should think about metrics like Claims Settlement Ratio and Duration wise settlement of death claims of numerous life insurance companies, to choose an insurer, that can honour its obligation in fulfilling your claim in a timely manner, should this type of unfortunate situation arise. Data on these metrics for all the insurance providers in India is available in the IRDA annual report (on the IRDA website). You must also check claim settlement reviews online and just then pick a company that includes a good history of settling claims.
3. Treating life insurance as being an investment and purchasing a bad plan: The common misconception about life insurance is the fact that, it is also as a great investment or retirement planning solution. This misconception is largely as a result of some insurance agents that like to promote expensive policies to earn high commissions. In the event you compare returns from life insurance to other investment options, it really does not make sense as an investment. In case you are a young investor with a long time horizon, equity is the greatest wealth creation instrument. Spanning a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is at the very least 3 or 4 times the maturity quantity of life insurance plan having a 20 year term, with similar investment. life insurance should been seen as protection for your family, in case of an untimely death. Investment needs to be a totally separate consideration. Even though insurance firms sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you need to separate the insurance policy component and investment component and pay careful focus on what portion of your premium actually gets allocated to investments. During the early years of a ULIP policy, just a little bit goes toward buying units.
An excellent financial planner will always advise you to purchase term insurance plan. An expression plan will be the purest type of insurance and it is a straightforward protection policy. The premium of term insurance plans is far less than other sorts of insurance plans, plus it leaves the policy holders using a larger investible surplus they can invest in investment items like mutual funds that give higher returns in the long run, compared to endowment or cash back plans. If you are an expression insurance coverage holder, under some specific situations, you might go for other types 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 purpose of tax planning: For quite some time agents have inveigled their customers into buying insurance intends to save tax under Section 80C in the Taxes Act. Investors should realize that insurance is one of the worst tax saving investment. Return from insurance plans is within the variety 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 higher tax free returns in the long run. Further, returns from insurance plans may not be entirely tax free. In the event 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 the fact that objective would be to provide life cover, not to generate the most effective investment return.
5. Surrendering life insurance policy or withdrawing from it before maturity: It is a serious mistake and compromises the financial security of your family in the case of an unfortunate incident. life insurance should not be touched up until the unfortunate death in the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the expectation of purchasing a whole new policy when their financial circumstances improves. Such policy holders need to remember two things. First, mortality will not be in anyone’s control. This is why we buy life insurance to begin with. Second, life insurance gets very costly since the insurance buyer gets older. Your financial plan should 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 coverage is a one-time exercise: I am reminded of your old motorcycle advertisement on television, that have the punch line, “Fill it, shut it, forget it”. Some insurance buyers have the same philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan from a reputed company, they believe that their life insurance needs are cared for forever. It is a mistake. Finances of insurance buyers change eventually. Compare your current income together with your income ten years back. Hasn’t your earnings grown repeatedly? How you live would likewise have improved significantly. In the event you bought ตัวแทนประกันชีวิต เอไอเอ 10 years ago according to your revenue in those days, the sum assured is definitely not enough to meet your family’s current lifestyle and requires, within the unfortunate ljnicn of the untimely death. Therefore you should get yet another term intend to cover that risk. life insurance needs must be re-evaluated with a regular frequency and then any additional sum assured if required, should be bought.
Conclusion – Investors should avoid these common mistakes when choosing insurance plans. life insurance is one of the most significant elements 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 helpful to engage a monetary planner who looks at your complete portfolio of investments and insurance on the holistic basis, to enable you to take the best decision with regards to both life insurance and investments.