Life insurance is probably the most essential aspects of any individual’s financial plan. However there exists 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 เอไอเอ covers or sum assured, based on the plans their agents wish to sell and exactly how much premium they can afford. This an inappropriate approach. Your insurance requirement is a purpose of your financial circumstances, and contains nothing do with what products 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 since it gives your household ten years worth of income, when you are gone. But this is not always correct. Suppose, you might have 20 year mortgage or home mortgage. How can your loved ones pay for the EMIs after ten years, when a lot of the loan is still outstanding? Suppose you may have very young children. Your family will run out of income, whenever your children want it the most, e.g. for his or her higher education. Insurance buyers need to consider several factors in deciding exactly how much insurance cover is adequate on their behalf.
· Repayment in the entire 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 pay for each of the living expenses from the dependents from 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. Selecting the cheapest policy: Many insurance buyers prefer to buy policies which are cheaper. This can be another serious mistake. An affordable policy is not any good, if the insurer for reasons unknown or any other cannot fulfil the claim in the case of an untimely death. Even if the insurer fulfils the claim, if this takes a long time to fulfil the claim it is definitely not really 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 different life insurance companies, to select an insurer, which 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 of the insurance firms in India comes in the IRDA annual report (on the IRDA website). You need to check claim settlement online reviews and merely then pick a company that includes a good reputation settling claims.
3. Treating life insurance being an investment and acquiring the incorrect plan: The common misconception about life insurance is the fact that, it is also as a good investment or retirement planning solution. This misconception is essentially because of some insurance agents that like to promote expensive policies to earn high commissions. In the event you compare returns from life insurance with other investment options, it simply does not seem sensible as being an investment. In case you are a young investor with quite a long time horizon, equity is the best wealth creation instrument. More than a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is a minimum of 3 or 4 times the maturity level of life insurance plan with a 20 year term, with similar investment. life insurance should been seen as protection for your family, in case of an untimely death. Investment ought to be a completely separate consideration. Although insurance firms sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own personel evaluation you should separate the insurance policy component and investment component and pay careful attention to what percentage of your premium actually gets allocated to investments. During the early numerous years of a ULIP policy, only a small amount goes toward buying units.
A good financial planner will invariably counsel you to get term insurance plan. An expression plan is definitely the purest form of insurance and is also a straightforward protection policy. The premium of term insurance plans is much less than other types of insurance plans, and it also leaves the plan holders using a much bigger investible surplus that they can put money into investment products like mutual funds that give higher returns in the long term, in comparison to endowment or money-back plans. Should you be a term insurance policy holder, under some specific situations, you may go for other kinds of insurance (e.g. ULIP, endowment or money-back plans), as well as your term policy, to your specific financial needs.
4. Buying insurance just for tax planning: For several years agents have inveigled their customers into buying insurance wants to save tax under Section 80C from the Income Tax Act. Investors should realize that insurance is probably the worst tax saving investment. Return from insurance plans is within 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 much higher tax free returns in the long run. Further, returns from insurance plans will not be entirely tax free. In the event the premiums exceed 20% of sum assured, then for that extent the maturity proceeds are taxable. As discussed earlier, it is essential to note about life insurance is the fact objective is always to provide life cover, to not generate the most effective investment return.
5. Surrendering life insurance policy or withdrawing as a result before maturity: It is a serious mistake and compromises the financial security of your family in the case of an unfortunate incident. life insurance must not be touched up until the unfortunate death in the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of buying a whole new policy when their financial situation improves. Such policy holders must remember two things. First, mortality is not in anyone’s control. This is why we buy life insurance to start with. Second, life insurance gets very costly 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 time period of time in case of a financial distress.
6. Insurance policies are a one-time exercise: I am reminded of your old motorcycle advertisement on television, 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 can be a mistake. Finances of insurance buyers change eventually. Compare your existing income together with your income ten years back. Hasn’t your earnings grown many times? Your way of life would likewise have improved significantly. If you bought ตัวแทนประกันชีวิต a decade ago based on your earnings in those days, the sum assured will never be enough to meet your family’s current lifestyle and desires, within the unfortunate ljnicn of your untimely death. Therefore you should purchase yet another term want to cover that risk. life insurance needs need to be re-evaluated with a regular frequency as well as any additional sum assured if neccessary, needs to be bought.
Conclusion – Investors should avoid these common mistakes when buying insurance policies. life insurance is among the most significant aspects of any individual’s financial plan. Therefore, thoughtful consideration must be devoted to life insurance. Insurance buyers should exercise prudence against questionable selling practised in the life insurance industry. It is usually good for engage a monetary planner who studies your entire portfolio of investments and insurance on a holistic basis, to be able to take the best decision in relation to both life insurance and investments.