Steer clear of These kinds of Half a dozen Frequent Living Insurance Blunders

Life insurance is one of the most crucial the different parts 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 already been sold through the years in India. We’ve discussed some traditional mistakes insurance buyers should avoid when buying insurance policies.

1. Underestimating insurance requirement: Many life insurance buyers choose their insurance covers or sum assured, on the basis of the plans their agents want to sell and simply how much premium they can afford. This a wrong approach. Your insurance requirement is really a function of one’s financial situation, and has nothing do with what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers say that a cover of 10 times your annual income is adequate because it gives your family 10 years worth of income, when you’re gone. But this isn’t always correct. Suppose, you have 20 year mortgage or home loan. How will your family pay the EMIs after 10 years, when a lot of the loan remains outstanding? Suppose you have very young children. Your family will come to an end of income, when your young ones require it the absolute most, e.g. for their higher education. Insurance buyers need to take into account several factors in deciding simply how much insurance cover is adequate for them.

· Repayment of the whole outstanding debt (e.g. home loan, car loan etc.) of the policy holder

· After debt repayment, the cover or sum assured needs to have surplus funds to generate enough monthly income to cover all the living expenses of the dependents of the policy holder, factoring in inflation

· After debt repayment and generating monthly income, the sum assured must 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 get policies which are cheaper. That is another serious mistake. A cheap policy is not any good, if the insurance company for reasons uknown or another cannot fulfil the claim in the event of an untimely death. Even when the insurer fulfils the claim, if it requires a lengthy time and energy to fulfil the claim it is unquestionably not just a desirable situation for category of the insured to be in. You need to look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to choose an insurer, that will honour its obligation in fulfilling your claim in a regular manner, should such an unfortunate situation arise. Data on these metrics for all the insurance companies in India is available in the IRDA annual report (on the IRDA website). It’s also advisable to check claim settlement reviews online and only then choose a company that’s a great history of settling claims.

3. Treating life insurance as an investment and buying the incorrect plan: The normal misconception about life insurance is that, it is also as a great investment or retirement planning solution. This misconception is basically due to some insurance agents who like to sell expensive policies to earn high commissions. In the event that you compare returns from life insurance to other investment options, it simply doesn’t make sense as an investment. If you are a investor with a long time horizon, equity is the greatest wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP can lead to a corpus that is at least three to four times the maturity level of life insurance plan with a 20 year term, with the same investment. Life insurance should always been regarded as protection for your family, in the event of an untimely death. Investment should be considered a completely separate consideration. Although insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own personel evaluation you ought to separate the insurance component and investment component and pay attention from what portion of one’s premium actually gets allocated to investments. In the first years of a ULIP policy, merely a touch goes to buying units.

A good financial planner will always advise you to get term insurance plan. A term plan may be the purest form of insurance and is really a straightforward protection policy.  Bedrijf The premium of term insurance plans is significantly significantly less than other kinds of insurance plans, and it leaves the policy holders with a much larger investible surplus that they may spend money on investment products like mutual funds giving higher returns in the future, compared to endowment or money back plans. If you are a term insurance plan holder, under some specific situations, you might go for other kinds 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 many years agents have inveigled their clients into buying insurance plans to truly save tax under Section 80C of the Income Tax Act. Investors should recognize 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 higher tax free returns within the long term. Further, returns from insurance plans may not be entirely tax free. If the premiums exceed 20% of sum assured, then compared to that extent the maturity proceeds are taxable. As discussed earlier, the most crucial thing to see about life insurance is that objective is to offer life cover, to not generate the very best investment return.

5. Surrendering life insurance plan or withdrawing as a result before maturity: This is a serious mistake and compromises the financial security of your family in the event of an unfortunate incident. Life Insurance shouldn’t be touched until the unfortunate death of the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of buying a fresh policy when their financial situation improves. Such policy holders need to consider two things. First, mortality is not in anyone’s control. That is why we buy life insurance in the very first place. Second, life insurance gets extremely expensive because the insurance buyer gets older. Your financial plan should give contingency funds to meet any unexpected urgent expense or provide liquidity for a time period in the event of a financial distress.

6. Insurance is really a one-time exercise: I am reminded of an old motorcycle advertisement on television, which had the punch line, “Fill it, shut it, forget it” ;.Some insurance buyers have the same philosophy towards life insurance. Once they buy adequate cover in a great life insurance plan from a reputed company, they think 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 together with your income 10 years back. Hasn’t your income grown several times? Your lifestyle would also provide improved significantly. If you purchased a life insurance plan 10 years ago based on your own income back then, the sum assured won’t be adequate to meet your family’s current lifestyle and needs, in the unfortunate event of one’s untimely death. Therefore you should get one more term want to cover that risk. Life Insurance needs have to be re-evaluated at a typical frequency and any additional sum assured if required, should really be bought.

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