Life insurance is among the most essential aspects of any individual’s financial plan. However there is lot of misunderstanding about life insurance, mainly as a result of way life insurance products have been sold over time 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 เอไอเอ covers or sum assured, based on the plans their agents wish to sell and exactly how much premium they could afford. This an inappropriate approach. Your insurance requirement is really a function of your financial situation, and contains nothing do with what goods are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers state that a cover of 10 times your annual income is adequate as it gives your family 10 years worth of income, when you find yourself gone. But this is simply not always correct. Suppose, you may have 20 year mortgage or home loan. How can your loved ones pay the EMIs after a decade, when the majority of the loan is still outstanding? Suppose you might have very young kids. Your loved ones will exhaust income, as soon as your children require it by far the most, e.g. for 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 loan, car loan etc.) in the policy holder
· After debt repayment, the cover or sum assured should have surplus funds to generate enough monthly income to protect all the living expenses of the dependents in 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. Choosing the cheapest policy: Many insurance buyers like to buy policies which can be cheaper. This really is another serious mistake. An inexpensive policy is no good, if the insurance company for some reason or another cannot fulfil the claim in case of an untimely death. Even when the insurer fulfils the claim, if this takes a long time to fulfil the claim it is not really a desirable situation for family of the insured to remain. You should look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of various life insurance companies, to select an insurer, that can honour its obligation in fulfilling your claim in a timely manner, should this kind 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 must also check claim settlement online reviews and merely then select a company that has a good reputation settling claims.
3. Treating life insurance as being an investment and buying a bad plan: The most popular misconception about life insurance is the fact, it is additionally as a great investment or retirement planning solution. This misconception is basically as a result of some insurance agents who choose to market expensive policies to earn high commissions. In the event you compare returns from life insurance to other investment options, it just does not seem sensible as an investment. In case 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 3 or 4 times the maturity amount of life insurance plan with a 20 year term, with the exact same investment. life insurance should been considered as protection for your family, in the case of an untimely death. Investment ought to be a totally separate consideration. Despite the fact that insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you need to separate the insurance policy component and investment component and pay careful attention to what portion of your premium actually gets allocated to investments. During the early numerous years of a ULIP policy, merely a small amount goes to buying units.
An excellent financial planner will usually give you advice to purchase term insurance policy. An expression plan is definitely the purest form of insurance and is also a straightforward protection policy. The premium of term insurance plans is far less than other kinds of insurance plans, plus it leaves the insurance policy holders having a much larger investible surplus that they may invest in investment goods like mutual funds that give greater returns in the long term, when compared with endowment or money back plans. If you are an expression insurance plan holder, under some specific situations, you might choose other types of insurance (e.g. ULIP, endowment or cash back plans), along with your term policy, for your specific financial needs.
4. Buying insurance with regards to tax planning: For quite some time agents have inveigled their customers into buying insurance plans to save tax under Section 80C in the Income Tax Act. Investors should understand that insurance is probably the worst tax saving investment. Return from insurance plans is incorporated 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 much higher tax free returns over the long term. Further, returns from insurance plans may not be entirely tax free. When the premiums exceed 20% of sum assured, then for that extent the maturity proceeds are taxable. As discussed earlier, it is important to remember about life insurance is that objective is always to provide life cover, never to generate the best investment return.
5. Surrendering life insurance policy or withdrawing from this before maturity: This is a serious mistake and compromises the financial security of the family in the case of an unfortunate incident. life insurance must not be touched up until the unfortunate death from the insured occurs. Some policy holders surrender their policy to fulfill an urgent financial need, with the hope 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 costly as 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 financial distress.
6. Insurance coverage is a 1-time exercise: I am reminded of the old motorcycle advertisement on television, which had the punch line, “Fill it, shut it, forget it”. Some insurance buyers have a similar philosophy towards life insurance. After 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 as time passes. Compare your current income with your income a decade back. Hasn’t your income grown repeatedly? How you live would likewise have improved significantly. If you bought ตัวแทนประกันชีวิต เอไอเอ ten years ago according to your income back then, the sum assured is definitely not enough to meet your family’s current lifestyle and requires, inside the unfortunate ljnicn of your own untimely death. Therefore you should buy yet another term intend to cover that risk. life insurance needs need to be re-evaluated at a regular frequency as well as any additional sum assured if required, should be bought.
Conclusion – Investors should avoid these common mistakes when choosing insurance policies. life insurance is among the most significant components 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 within the life insurance industry. It will always be helpful to engage a financial planner who examines your entire portfolio of investments and insurance on the holistic basis, to be able to go ahead and take best decision in terms of both life insurance and investments.