Life insurance is among the most essential components of any individual’s financial plan. However there is certainly lot of misunderstanding about life insurance, mainly because of 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 policies.
1. Underestimating insurance requirement: Many life insurance buyers choose their ตัวแทนประกันชีวิต AIA covers or sum assured, based on the plans their agents want to sell and just how much premium they are able to afford. This an inappropriate approach. Your insurance requirement is actually a purpose of your financial circumstances, and has 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 since it gives your loved ones ten years worth of income, when you are gone. But this may not be always correct. Suppose, you might have 20 year mortgage or home mortgage. How can your family pay for the EMIs after 10 years, when a lot of the loan remains outstanding? Suppose you might have very small children. Your family will exhaust income, when your children want it by far the most, e.g. for advanced schooling. Insurance buyers need to consider several factors in deciding just how much insurance policy is adequate on their behalf.
· Repayment in the entire outstanding debt (e.g. mortgage loan, car 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 protect all the cost of living from the dependents from 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 can be another serious mistake. A cheap policy is no good, if the insurer for reasons unknown or any other cannot fulfil the claim in the case of an untimely death. Even when 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 family 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 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 the insurance firms in India can be found in the IRDA annual report (on the IRDA website). You must also check claim settlement reviews online and just then pick a company which has a good reputation settling claims.
3. Treating life insurance as being an investment and acquiring the incorrect plan: The normal misconception about life insurance is the fact, additionally it is as a great investment or retirement planning solution. This misconception is basically due to some insurance agents who choose to sell expensive policies to earn high commissions. If you compare returns from life insurance to many other investment options, it just does not make sense being an investment. In case you are a young investor with quite a while horizon, equity is the ideal wealth creation instrument. Spanning 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 quantity of life insurance plan having a 20 year term, with similar investment. life insurance should been viewed as protection for your family, in the case of an untimely death. Investment should be an entirely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own personel evaluation you ought to separate the insurance policy component and investment component and pay careful focus on what portion of your premium actually gets allocated to investments. In the early many years of a ULIP policy, only a little bit goes to buying units.
A good financial planner will always give you advice to get term insurance plan. A term plan is definitely the purest kind of insurance and is a straightforward protection policy. The premium of term insurance plans is far less than other kinds of insurance plans, and it also leaves the policy holders having a much larger investible surplus that they can put money into investment items like mutual funds that give greater returns in the long run, in comparison to endowment or money-back plans. If you are a term insurance plan holder, under some specific situations, you may opt for other sorts of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, for your specific financial needs.
4. Buying insurance for the purpose of tax planning: For quite some time agents have inveigled their clients into buying insurance intends to save tax under Section 80C of the Taxes 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 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, the most important thing to notice about life insurance is the fact objective is to provide life cover, to not 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 your family in case of an unfortunate incident. life insurance should not be touched up until the unfortunate death in the insured occurs. Some policy holders surrender their policy to satisfy an urgent financial need, with the expectation of getting a whole new policy when their financial situation improves. Such policy holders must remember a couple of things. First, mortality is not in anyone’s control. That is why we buy life insurance to start with. Second, life insurance gets extremely expensive since the insurance buyer gets older. 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 monetary distress.
6. Insurance coverage is a one-time exercise: I am just reminded of the old motorcycle advertisement on tv, that have the punch line, “Fill it up, 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 the reputed company, they believe that their life insurance needs are looked after forever. This is a mistake. Financial situation of insurance buyers change with time. Compare your current income along with your income 10 years back. Hasn’t your revenue grown several times? How you live would also provide improved significantly. If you bought ตัวแทนประกันชีวิต เอไอเอ a decade ago based upon your earnings in those days, the sum assured is definitely not enough to fulfill your family’s current lifestyle and desires, within the unfortunate ljnicn of your untimely death. Therefore you should buy an additional term intend to cover that risk. life insurance needs must be re-evaluated with 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 plans. life insurance is among the most important elements of any individual’s financial plan. Therefore, thoughtful consideration has to be devoted to life insurance. Insurance buyers should exercise prudence against questionable selling practised within the life insurance industry. It is always beneficial to engage an economic planner who looks at your complete portfolio of investments and insurance over a holistic basis, to be able to go ahead and take best decision with regards to both life insurance and investments.