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 through 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 AIA covers or sum assured, based on the plans their agents wish to sell and how much premium they could afford. This an inappropriate approach. Your insurance requirement is actually a function of your financial situation, 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 state that a cover of ten times your annual income is adequate because it gives your loved ones ten years amount of income, when you are gone. But this is simply not always correct. Suppose, you might have 20 year mortgage or home loan. How can your household pay for the EMIs after a decade, when most of the loan continues to be outstanding? Suppose you might have very small children. Your household will use up all your income, when your children need it probably the most, e.g. for advanced schooling. Insurance buyers need to consider several factors in deciding how much insurance policy is adequate on their behalf.
· Repayment from the entire outstanding debt (e.g. mortgage loan, car 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 all 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 from the policy holder, like children’s education, marriage etc.
2. Selecting the cheapest policy: Many insurance buyers like to buy policies which are cheaper. This really is another serious mistake. An inexpensive policy is no good, if the insurance company for reasons unknown or some other cannot fulfil the claim in the event 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 not just a desirable situation for family of the insured to stay in. You should think about metrics like Claims Settlement Ratio and Duration wise settlement of death claims of various life insurance companies, to pick 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 of the insurance providers in India is available in the IRDA annual report (on the IRDA website). You must also check claim settlement online reviews and just then select a company that has a good reputation settling claims.
3. Treating life insurance being an investment and buying the incorrect plan: The normal misconception about life insurance is the fact, it is also as a great investment or retirement planning solution. This misconception is basically as a result of some insurance agents who like to market expensive policies to earn high commissions. In the event you compare returns from life insurance with other investment options, it just will not seem sensible as being an investment. If you are a young investor with quite a while horizon, equity is the ideal wealth creation instrument. More than a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is certainly at least three or four times the maturity level of life insurance plan having a 20 year term, with the same investment. life insurance must always been seen as protection for the family, in case of an untimely death. Investment ought to be a totally separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you should separate the insurance component and investment component and pay careful awareness of what portion 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.
A good financial planner will invariably counsel you to buy term insurance plan. A term plan will be the purest form of insurance and is also a straightforward protection policy. The premium of term insurance plans is much less than other types of insurance plans, and it also leaves the insurance policy holders having a much larger investible surplus that they can invest in investment items like mutual funds that provide much higher returns in the long run, in comparison to endowment or money back plans. Should you be an expression insurance plan holder, under some specific situations, you may opt for other sorts of insurance (e.g. ULIP, endowment or cash back plans), in addition to your term policy, to your specific financial needs.
4. Buying insurance for the purpose of tax planning: For many years agents have inveigled their clientele into buying insurance intends to save tax under Section 80C from the Tax Act. Investors should understand 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 close to 9% risk-free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives much higher tax free returns over the long term. 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 important to remember about life insurance is that objective would be to provide life cover, never to generate the most effective investment return.
5. Surrendering life insurance policy or withdrawing from it before maturity: This is a serious mistake and compromises the financial security of your own family in 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 fulfill an urgent financial need, with the expectation of getting a whole 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 costly because 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 event of a financial 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. After they buy adequate cover in a good life insurance plan coming 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 with time. Compare your current income together with your income 10 years back. Hasn’t your earnings grown several times? Your way of life would also provide improved significantly. Should you bought ตัวแทนประกัน AIA ten years ago based on your income in the past, the sum assured is definitely not enough to meet your family’s current lifestyle and needs, inside the unfortunate ljnicn of your own untimely death. Therefore you should purchase yet another term intend to cover that risk. life insurance needs need to be re-evaluated with a regular frequency and then any additional sum assured if neccessary, ought to be bought.
Conclusion – Investors should avoid these common mistakes when purchasing insurance coverage. life insurance is probably the most essential elements of any individual’s financial plan. Therefore, thoughtful consideration must be devoted to life insurance. Insurance buyers should exercise prudence against questionable selling practised in the life insurance industry. It will always be good for engage an economic planner who examines your whole portfolio of investments and insurance on a holistic basis, to enable you to go ahead and take best decision with regards to both life insurance and investments.