Life insurance is among the most significant aspects of any individual’s financial plan. However there is lot 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 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 desire to sell and exactly how much premium they are able to afford. This a wrong approach. Your insurance requirement is a purpose of your finances, and has nothing do with what goods are available. Many insurance buyers use thumb rules like ten times annual income for cover. Some financial advisers claim that a cover of 10 times your annual income is adequate as it gives your household a decade amount of income, if you are gone. But this is not always correct. Suppose, you have 20 year mortgage or mortgage loan. How can your household spend the money for EMIs after ten years, when a lot of the loan is still outstanding? Suppose you might have very small children. Your loved ones will run out of income, as soon as your children need it probably the most, e.g. for their advanced schooling. Insurance buyers have to consider several factors in deciding exactly how much insurance policy is adequate to them.
· Repayment from the entire outstanding debt (e.g. home mortgage, auto loan etc.) from the policy holder
· After debt repayment, the cover or sum assured must have surplus funds to create enough monthly income to pay for each of the cost of living from the dependents in the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured also need to be adequate to meet future obligations from the policy holder, like children’s education, marriage etc.
2. Choosing the cheapest policy: Many insurance buyers want to buy policies which are cheaper. This really is another serious mistake. A cheap policy is no good, if the insurance company for some reason or another cannot fulfil the claim in case of an untimely death. Whether or not the insurer fulfils the claim, if 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 think about metrics like Claims Settlement Ratio and Duration wise settlement of death claims of various life insurance companies, to choose 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 providers in India can be found in the IRDA annual report (on the IRDA website). You should also check claim settlement reviews online and merely then select a company that has a good history of settling claims.
3. Treating life insurance as being an investment and acquiring a bad plan: The common misconception about life insurance is the fact, it is also as a wise investment or retirement planning solution. This misconception is basically because of some insurance agents who like to promote expensive policies to earn high commissions. Should you compare returns from life insurance to other investment options, it just fails to make sense being an investment. If you are a young investor with quite a long time horizon, equity is the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus which is at least 3 or 4 times the maturity quantity of life insurance plan with a 20 year term, with similar investment. life insurance must always been viewed as protection to your family, in the case of an untimely death. Investment should be a totally separate consideration. Although insurance providers sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your evaluation you should separate the insurance component and investment component and pay careful focus on what part of your premium actually gets allocated to investments. In the early many years of a ULIP policy, only a small amount goes toward buying units.
An excellent financial planner will invariably advise you to get term insurance coverage. A term plan is the purest type of insurance and is also a straightforward protection policy. The premium of term insurance plans is far less than other types of insurance plans, plus it leaves the policy holders having a much larger investible surplus that they may put money into investment products like mutual funds that provide much higher returns eventually, in comparison to endowment or money back plans. Should you be a term insurance coverage holder, under some specific situations, you may go for other types of insurance (e.g. ULIP, endowment or money-back plans), along with your term policy, for your specific financial needs.
4. Buying insurance just for tax planning: For quite some time agents have inveigled their clientele into buying insurance wants to save tax under Section 80C in the Income Tax Act. Investors should realize that insurance is probably the worst tax saving investment. Return from insurance plans is within the selection 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 greater tax free returns over time. Further, returns from insurance plans will not be entirely tax free. When the premiums exceed 20% of sum assured, then to that extent the maturity proceeds are taxable. As discussed earlier, the most important thing to remember about life insurance is that objective is to provide life cover, never to generate the most effective investment return.
5. Surrendering life insurance policy or withdrawing from this before maturity: This can be a serious mistake and compromises the financial security of your own family in the event of an unfortunate incident. life insurance really should not be touched until the unfortunate death in the insured occurs. Some policy holders surrender their policy to fulfill an urgent financial need, with the hope of purchasing a whole new policy when their finances improves. Such policy holders have to remember 2 things. First, mortality is not really in anyone’s control. This is why we buy life insurance to begin with. Second, life insurance gets very costly because the insurance buyer gets older. Your financial plan should provide for contingency funds to satisfy any unexpected urgent expense or provide liquidity for a time period of time in the case of an economic distress.
6. Insurance is a one-time exercise: I am just reminded of an 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. When they buy adequate cover in a good life insurance plan coming from a reputed company, they believe that their life insurance needs are cared for forever. It is a mistake. Financial situation of insurance buyers change eventually. Compare your current income along with your income 10 years back. Hasn’t your earnings grown repeatedly? Your way of life would also have improved significantly. If you bought ตัวแทนประกัน AIA ten years ago based upon your income in those days, the sum assured will not be enough to meet your family’s current lifestyle and requires, inside the unfortunate ljnicn of your untimely death. Therefore you should get an extra term plan to cover that risk. life insurance needs must be re-evaluated at a regular frequency and then any additional sum assured if neccessary, needs to be bought.
Conclusion – Investors should avoid these common mistakes when choosing insurance policies. life insurance is probably the most significant elements 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 in the life insurance industry. It is usually beneficial to engage a financial planner who looks at your whole portfolio of investments and insurance on a holistic basis, so that you can take the best decision with regards to both life insurance and investments.