Life insurance is among the most significant aspects of any individual’s financial plan. However there exists lot of misunderstanding about life insurance, mainly because of the way life insurance products have been sold through 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 ตัวแทนประกันชีวิต AIA covers or sum assured, based on the plans their agents desire to sell and how much premium they could afford. This an incorrect approach. Your insurance requirement is actually a purpose of your financial situation, and contains nothing use what items are available. Many insurance buyers use thumb rules like ten times annual income for cover. Some financial advisers state that a cover of ten times your annual income is adequate because it gives your family a decade worth of income, when you find yourself gone. But this may not be always correct. Suppose, you might have 20 year mortgage or mortgage loan. How will your family pay the EMIs after a decade, when the majority of the loan is still outstanding? Suppose you might have very young children. Your loved ones will exhaust income, as soon as your children require it the most, e.g. for his or her higher education. Insurance buyers must consider several factors in deciding just how much insurance cover is adequate to them.
· Repayment of the entire outstanding debt (e.g. home mortgage, auto loan etc.) of the policy holder
· After debt repayment, the cover or sum assured should have surplus funds to produce enough monthly income to protect all the cost of living 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 fulfill future obligations in the policy holder, like children’s education, marriage etc.
2. Picking out the cheapest policy: Many insurance buyers prefer to buy policies that are cheaper. This really is another serious mistake. A cheap policy is not any good, if the insurance company for some reason or any other cannot fulfil the claim in the case of an untimely death. Even if the insurer fulfils the claim, if this takes a very long time to fulfil the claim it is certainly not 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 different life insurance companies, to choose an insurer, which 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 is available in the IRDA annual report (on the IRDA website). You should also check claim settlement online reviews and merely then choose a company that includes a good history of settling claims.
3. Treating life insurance being an investment and purchasing a bad plan: The common misconception about life insurance is the fact, additionally it is as a wise investment or retirement planning solution. This misconception is basically as a result of some insurance agents who choose to sell expensive policies to earn high commissions. Should you compare returns from life insurance with other investment options, it just does not sound right being an investment. In case you are a young investor with a long time horizon, equity is the best wealth creation instrument. More than a 20 year time horizon, investment in equity funds through SIP will result in a corpus which is a minimum of three or four times the maturity level of life insurance plan having a 20 year term, with the same investment. life insurance should been viewed as protection to your family, in case of an untimely death. Investment should be a totally separate consideration. Even though insurance providers sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your evaluation you ought to separate the insurance component and investment component and pay careful focus on what percentage of your premium actually gets allocated to investments. During the early many years of a ULIP policy, just a little bit goes toward buying units.
An excellent financial planner will usually give you advice to buy term insurance coverage. A term plan is the purest type of insurance and it is a straightforward protection policy. The premium of term insurance plans is much less than other types of insurance plans, and it leaves the policy holders using a much bigger investible surplus that they can put money into investment products like mutual funds that provide greater returns eventually, in comparison to endowment or money-back plans. Should you be a term insurance policy holder, under some specific situations, you may go for other sorts of insurance (e.g. ULIP, endowment or money back plans), as well as your term policy, for the specific financial needs.
4. Buying insurance just for tax planning: For many years agents have inveigled their clientele into buying insurance wants to save tax under Section 80C from the Tax Act. Investors should realize that insurance is probably the worst tax saving investment. Return from insurance plans is in the selection 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 the long term. Further, returns from insurance plans may not be entirely tax free. In the event 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 that objective is always to provide life cover, never to generate the most effective investment return.
5. Surrendering life insurance policy or withdrawing as a result before maturity: This is a serious mistake and compromises the financial security of your own family in the case of an unfortunate incident. life insurance should not be touched till the unfortunate death from the insured occurs. Some policy holders surrender their policy to fulfill an urgent financial need, with the expectation of purchasing a brand new policy when their financial circumstances improves. Such policy holders need to remember a couple of things. First, mortality is not really in anyone’s control. For this reason we buy life insurance to begin with. Second, life insurance gets very expensive since the insurance buyer ages. Your financial plan must provide for contingency funds to meet any unexpected urgent expense or provide liquidity for a time period of time in case of an economic distress.
6. Insurance policies are a 1-time exercise: I am just reminded of the old motorcycle advertisement on tv, 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 taken care of forever. It is a mistake. Finances of insurance buyers change with time. Compare your current income together with your income a decade back. Hasn’t your earnings grown repeatedly? Your way of life would also provide improved significantly. If you bought ตัวแทนประกัน เอไอเอ a decade ago according to your revenue in those days, the sum assured is definitely not enough to fulfill your family’s current lifestyle and desires, in the unfortunate ljnicn of the untimely death. Therefore you should get an extra term want to cover that risk. life insurance needs must be re-evaluated with a regular frequency as well as any additional sum assured if neccessary, should be bought.
Conclusion – Investors should avoid these common mistakes when purchasing insurance policies. 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 within the life insurance industry. It is always good for engage a financial planner who studies your whole portfolio of investments and insurance on the holistic basis, to be able to take the best decision with regards to both life insurance and investments.