Life insurance is one of the most essential aspects of any individual’s financial plan. However there is great deal of misunderstanding about life insurance, mainly due to 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 plans.
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 exactly how much premium they are able to afford. This a wrong approach. Your insurance requirement is actually a purpose of your financial situation, and it has nothing do with what goods are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers claim that a cover of 10 times your annual income is adequate since it gives your household ten years amount of income, when you find yourself gone. But this is simply not always correct. Suppose, you have 20 year mortgage or mortgage loan. How will your family pay for the EMIs after ten years, when the majority of the loan is still outstanding? Suppose you may have very young children. Your household will use up all your income, when your children want it the most, e.g. for his or her higher education. Insurance buyers must consider several factors in deciding just how much insurance policy is adequate for them.
· Repayment from the entire outstanding debt (e.g. home loan, auto loan etc.) from the policy holder
· After debt repayment, the cover or sum assured needs to have surplus funds to produce enough monthly income to cover 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 should also be adequate to satisfy future obligations in the policy holder, like children’s education, marriage etc.
2. Picking out the cheapest policy: Many insurance buyers like to buy policies which are cheaper. This can be another serious mistake. An affordable policy is not any good, if the insurer for whatever reason or some other cannot fulfil the claim in the event of an untimely death. Whether or not the insurer fulfils the claim, when it takes a long time to fulfil the claim it is not just a desirable situation for group of the insured to remain. You should think about metrics like Claims Settlement Ratio and Duration wise settlement of death claims of numerous 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 companies in India comes in the IRDA annual report (on the IRDA website). You need to 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 an investment and purchasing a bad plan: The common misconception about life insurance is the fact that, additionally it is as a wise investment or retirement planning solution. This misconception is basically because of some insurance agents that like to market expensive policies to earn high commissions. Should you compare returns from life insurance with other investment options, it simply fails to make sense as an investment. If you are a young investor with quite a while horizon, equity is the ideal wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus which is at the very least three or four times the maturity amount of life insurance plan using a 20 year term, with the exact same investment. life insurance should always been viewed as protection for your family, in case of an untimely death. Investment needs to be a totally 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 coverage component and investment component and pay careful focus on what portion of your premium actually gets allocated to investments. During the early years of a ULIP policy, merely a little bit would go to buying units.
An excellent financial planner will usually give you advice to get term insurance coverage. A term plan is the purest type of insurance and is a straightforward protection policy. The premium of term insurance plans is much less than other kinds of insurance plans, and it also leaves the policy holders using a larger investible surplus they can invest in investment products like mutual funds that offer much higher returns in the long term, in comparison to endowment or cash back plans. Should you be a term insurance policy holder, under some specific situations, you may choose other sorts of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, for the specific financial needs.
4. Buying insurance for the purpose of tax planning: For several years agents have inveigled their customers into buying insurance wants to save tax under Section 80C in the Taxes Act. Investors should understand that insurance is probably 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 9% risk free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives greater 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 the fact objective is to provide life cover, to not generate the very best 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 the family in the event of an unfortunate incident. life insurance should not be touched up until the unfortunate death of the insured occurs. Some policy holders surrender their policy to fulfill an urgent financial need, with the expectation of getting a brand new policy when their financial circumstances improves. Such policy holders must remember two things. First, mortality is not in anyone’s control. This is why we buy life insurance in the first place. Second, life insurance gets very expensive because the insurance buyer gets older. Your financial plan should provide for contingency funds to fulfill any unexpected urgent expense or provide liquidity for a period of time in case of a financial distress.
6. Insurance policies are a 1-time exercise: I am reminded of an old motorcycle advertisement on television, that had the punch line, “Fill it up, shut it, forget it”. Some insurance buyers have a similar philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan coming from a reputed company, they think that their life insurance needs are looked after forever. This is a mistake. Finances of insurance buyers change with time. Compare your existing income with your income a decade back. Hasn’t your revenue grown many times? Your lifestyle would likewise have improved significantly. In the event you bought ตัวแทนประกัน AIA 10 years ago based upon your revenue in those days, the sum assured is definitely not enough to meet your family’s current lifestyle and needs, in the unfortunate ljnicn of your own untimely death. Therefore you should get an additional term want to cover that risk. life insurance needs have to be re-evaluated in a regular frequency as well as any additional sum assured if neccessary, ought to be bought.
Conclusion – Investors should avoid these common mistakes when purchasing insurance plans. life insurance is one of the most essential components of any individual’s financial plan. Therefore, thoughtful consideration should be focused on life insurance. Insurance buyers should exercise prudence against questionable selling practised within the life insurance industry. It is usually helpful to engage a monetary planner who examines your complete portfolio of investments and insurance on the holistic basis, so that you can go ahead and take best decision in relation to both life insurance and investments.