Life insurance is among the most important aspects of any individual’s financial plan. However there exists 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 buying insurance policies.
1. Underestimating insurance requirement: Many life insurance buyers choose their ตัวแทนประกันชีวิต covers or sum assured, based on the plans their agents wish to sell and just how much premium they can afford. This an incorrect approach. Your insurance requirement is really a function of your financial situation, and has nothing use what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers claim that a cover of ten times your annual income is adequate as it gives your loved ones a decade amount of income, when you are gone. But this is not always correct. Suppose, you might have 20 year mortgage or home loan. How will your family pay for the EMIs after ten years, when a lot of the loan continues to be outstanding? Suppose you have very small children. Your household will run out of income, whenever your children need it by far the most, e.g. for their advanced schooling. Insurance buyers must consider several factors in deciding how much insurance policy is adequate on their behalf.
· Repayment from the entire outstanding debt (e.g. home loan, car loan etc.) of the policy holder
· After debt repayment, the cover or sum assured needs to have surplus funds to produce enough monthly income to protect each of the cost of living in the dependents of the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured should also be adequate to meet future obligations of the policy holder, like children’s education, marriage etc.
2. Picking out the cheapest policy: Many insurance buyers want to buy policies which can be cheaper. This can be another serious mistake. An affordable 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, when it takes a very long time to fulfil the claim it is definitely not just a desirable situation for group of the insured to be in. You should look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to choose an insurer, that will honour its obligation in fulfilling your claim in a timely manner, should such an unfortunate situation arise. Data on these metrics for all the insurance companies in India can be found in the IRDA annual report (on the IRDA website). You should also check claim settlement reviews online and only then choose a company which has a good history of settling claims.
3. Treating life insurance being an investment and buying the incorrect plan: The most popular misconception about life insurance is the fact, it is also as a good investment or retirement planning solution. This misconception is basically as a result of some insurance agents that like to market expensive policies to earn high commissions. In the event you compare returns from life insurance to other investment options, it really does not sound right as being an investment. If you are a young investor with 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 that is a minimum of 3 or 4 times the maturity amount of life insurance plan having a 20 year term, with the exact same investment. life insurance must always been considered as protection for your family, in the case of an untimely death. Investment ought to be a completely separate consideration. Even though insurance firms sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own personel evaluation you need to separate the insurance component and investment component and pay careful focus on what portion of your premium actually gets allocated to investments. In early numerous years of a ULIP policy, just a little bit goes toward buying units.
An excellent financial planner will usually counsel you to buy term insurance coverage. A term plan is definitely the purest form of insurance and is also a straightforward protection policy. The premium of term insurance plans is much less than other kinds of insurance plans, and it leaves the policy holders using 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 might opt for other types of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, to your specific financial needs.
4. Buying insurance for the purpose of tax planning: For quite some time agents have inveigled their clients into buying insurance wants to save tax under Section 80C in the Tax Act. Investors should realize that insurance is one of the worst tax saving investment. Return from insurance plans is in the variety 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 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, it is important to notice about life insurance is the fact objective is to provide life cover, not to generate the very best 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 your family in the event of an unfortunate incident. life insurance really should not be touched until the unfortunate death of the insured occurs. Some policy holders surrender their policy to fulfill an urgent financial need, with the hope of buying a whole new policy when their financial situation improves. Such policy holders must 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 very expensive because the insurance buyer ages. Your financial plan must provide for contingency funds to meet any unexpected urgent expense or provide liquidity for a period of time in the event of a monetary distress.
6. Insurance coverage is a one-time exercise: I am just reminded of the old motorcycle advertisement on television, which had 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 assume that their life insurance needs are looked after forever. This can be a mistake. Finances of insurance buyers change eventually. Compare your present income along with your income ten years back. Hasn’t your earnings grown many times? Your way of life would also provide improved significantly. If you bought ตัวแทนประกันชีวิต เอไอเอ a decade ago according to your income in the past, the sum assured will never be enough to meet your family’s current lifestyle and needs, in the unfortunate ljnicn of the untimely death. Therefore you should buy yet another term plan to cover that risk. life insurance needs need to be re-evaluated at a regular frequency as well as any additional sum assured if neccessary, ought to be bought.
Conclusion – Investors should avoid these common mistakes when choosing insurance coverage. life insurance is one of the most important aspects of any individual’s financial plan. Therefore, thoughtful consideration has to be dedicated to life insurance. Insurance buyers should exercise prudence against questionable selling practised inside the life insurance industry. It is always good for engage an economic planner who examines your complete portfolio of investments and insurance over a holistic basis, to enable you to take the best decision in terms of both life insurance and investments.