Life insurance is probably the most important aspects of any individual’s financial plan. However there is certainly lot of misunderstanding about life insurance, mainly as a result of way life insurance products have been sold over the years in India. We have discussed some common mistakes insurance buyers should avoid when purchasing insurance policies.
1. Underestimating insurance requirement: Many life insurance buyers choose their ตัวแทนประกัน AIA covers or sum assured, based on the plans their agents want to sell and exactly how much premium they are able to afford. This an incorrect approach. Your insurance requirement is really a purpose of your financial situation, and it has nothing use 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 family a decade amount of income, if you are gone. But this may not be always correct. Suppose, you might have 20 year mortgage or home mortgage. How can your loved ones spend the money for EMIs after ten years, when the majority of the loan continues to be outstanding? Suppose you have very young kids. Your household will use up all your income, as soon as your children require it the most, e.g. for their higher education. Insurance buyers must consider several factors in deciding how much insurance policy is adequate to them.
· Repayment from the entire outstanding debt (e.g. mortgage loan, auto loan etc.) of the policy holder
· After debt repayment, the cover or sum assured must have surplus funds to produce enough monthly income to protect each of the living expenses in 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 prefer to buy policies which are cheaper. This really is another serious mistake. An affordable policy is no good, if the insurance company for whatever reason or some other cannot fulfil the claim in the case of an untimely death. Whether or not the insurer fulfils the claim, if this takes a very long time to fulfil the claim it is definitely not a desirable situation for group of the insured to stay in. You should think of metrics like Claims Settlement Ratio and Duration wise settlement of death claims of various life insurance companies, to select an insurer, that will 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 firms in India can be found in the IRDA annual report (on the IRDA website). You must also check claim settlement online reviews and only then pick a company that has a good track record of settling claims.
3. Treating life insurance as being an investment and acquiring the incorrect plan: The most popular misconception about life insurance is the fact, it is additionally as a great investment or retirement planning solution. This misconception is largely because of some insurance agents that like to sell expensive policies to earn high commissions. In the event you compare returns from life insurance to other investment options, it really will not sound right as an investment. In case you are a young investor with quite a long time horizon, equity is the best wealth creation instrument. Spanning a 20 year time horizon, investment in equity funds through SIP will result in a corpus which is a minimum of 3 or 4 times the maturity amount of life insurance plan using a 20 year term, with the same investment. life insurance must always been viewed as protection for your family, in the case of an untimely death. Investment ought to be a completely separate consideration. Despite the fact that insurance firms sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own personel evaluation you should separate the insurance policy component and investment component and pay careful attention to what part of your premium actually gets allocated to investments. In early years of a ULIP policy, merely a little bit goes to buying units.
A great financial planner will invariably advise you to buy term insurance plan. A term plan will be the purest type of insurance and it is a straightforward protection policy. The premium of term insurance plans is much less than other sorts of insurance plans, plus it leaves the plan holders having a much larger investible surplus that they can put money into investment items like mutual funds that give greater returns in the long run, in comparison to endowment or money back plans. In case you are a term insurance plan holder, under some specific situations, you may opt for other kinds of insurance (e.g. ULIP, endowment or cash back plans), along with your term policy, for your specific financial needs.
4. Buying insurance with regards to tax planning: For several years agents have inveigled their clients into buying insurance intends to save tax under Section 80C of the Tax Act. Investors should realize that insurance is one of the worst tax saving investment. Return from insurance plans is in the range 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 over time. Further, returns from insurance plans may 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, the most important thing to notice 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 from it before maturity: This can be a serious mistake and compromises the financial security of the family in case of an unfortunate incident. life insurance should not be touched 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 brand new policy when their financial circumstances improves. Such policy holders have to remember a couple of things. First, mortality will not be in anyone’s control. For this reason we buy life insurance to start with. Second, life insurance gets extremely expensive since the insurance buyer ages. Your financial plan should provide for contingency funds to fulfill any unexpected urgent expense or provide liquidity for a time period of time in case of a financial distress.
6. Insurance policies are a one-time exercise: I am reminded of your old motorcycle advertisement on television, that had the punch line, “Fill it up, shut it, forget it”. Some insurance buyers have the identical philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan from a reputed company, they assume that their life insurance needs are looked after forever. This is a mistake. Financial situation of insurance buyers change with time. Compare your present income along with your income 10 years back. Hasn’t your revenue grown several times? Your lifestyle would also have improved significantly. Should you bought ตัวแทนประกัน AIA ten years ago based on your earnings in those days, the sum assured is definitely not enough to meet your family’s current lifestyle and needs, inside the unfortunate ljnicn of your untimely death. Therefore you should purchase an additional term want to cover that risk. life insurance needs must be re-evaluated with a regular frequency and then any additional sum assured if neccessary, needs to be bought.
Conclusion – Investors should avoid these common mistakes when buying insurance coverage. life insurance is among the most important components of any individual’s financial plan. Therefore, thoughtful consideration should be dedicated to life insurance. Insurance buyers should exercise prudence against questionable selling practised inside the life insurance industry. It is always beneficial to engage a monetary planner who examines your whole portfolio of investments and insurance over a holistic basis, to enable you to consider the best decision in relation to both life insurance and investments.