Life insurance is one of the most significant aspects of any individual’s financial plan. However there is certainly great deal 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 choosing insurance policies.
1. Underestimating insurance requirement: Many life insurance buyers choose their ตัวแทนประกัน AIA covers or sum assured, based on the plans their agents desire to sell and just how much premium they are able to afford. This an incorrect approach. Your insurance requirement is a function of your finances, and has nothing use what products 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 as it gives your family a decade amount of income, if you are gone. But this is simply not always correct. Suppose, you have 20 year mortgage or home loan. How will your loved ones spend the money for EMIs after a decade, when most of the loan continues to be outstanding? Suppose you might have very young kids. Your loved ones will exhaust income, whenever your children want it probably the most, e.g. for advanced schooling. Insurance buyers must consider several factors in deciding exactly how much insurance policy is adequate on their behalf.
· Repayment of the entire outstanding debt (e.g. mortgage loan, car loan etc.) in the policy holder
· After debt repayment, the cover or sum assured must have surplus funds to create enough monthly income to pay for all the cost of living of the dependents from the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured ought to be adequate to satisfy future obligations of 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 is another serious mistake. An affordable policy is not any good, if the insurer for whatever reason or any other cannot fulfil the claim in the event of an untimely death. Even when the insurer fulfils the claim, if it takes a very long time to fulfil the claim it is certainly not 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 pick an insurer, that can honour its obligation in fulfilling your claim in a timely manner, should such an unfortunate situation arise. Data on these metrics for all the insurance providers in India is available in the IRDA annual report (on the IRDA website). You should also check claim settlement online reviews and merely then pick a company that has a good track record of settling claims.
3. Treating life insurance being an investment and buying the incorrect plan: The normal misconception about life insurance is that, additionally it is as a good investment or retirement planning solution. This misconception is basically as a result of 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 sound right as an investment. If you are a young investor with quite a long time horizon, equity is the greatest wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus which is at least 3 or 4 times the maturity level of life insurance plan with a 20 year term, with the same investment. life insurance must always been seen as protection for your family, in case of an untimely death. Investment needs to be a totally separate consideration. Even though insurance providers 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. In the early many years of a ULIP policy, only a little bit goes to buying units.
A great financial planner will invariably advise you 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 far less than other types of insurance plans, plus it leaves the plan holders using a much bigger investible surplus that they can put money into investment items like mutual funds that offer higher returns eventually, when compared with endowment or cash back plans. In case you are a term insurance policy holder, under some specific situations, you might choose other kinds of insurance (e.g. ULIP, endowment or money-back plans), as well as 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 clientele into buying insurance wants to save tax under Section 80C in the Tax Act. Investors should understand that insurance is probably the worst tax saving investment. Return from insurance plans is incorporated in 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 much higher tax free returns in the long run. Further, returns from insurance plans will 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 essential to note about life insurance is the fact objective would be to provide life cover, not to generate the 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 your own family in the event of an unfortunate incident. life insurance really should not be touched up until the unfortunate death in the insured occurs. Some policy holders surrender their policy to fulfill an urgent financial need, with the hope of purchasing a whole new policy when their financial situation improves. Such policy holders have to remember 2 things. First, mortality is not really in anyone’s control. This is why we buy life insurance to begin with. Second, life insurance gets very expensive because the insurance buyer gets older. Your financial plan should 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 policies are a one-time exercise: I am just reminded of the old motorcycle advertisement on television, which 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 believe that their life insurance needs are looked after forever. This can be a mistake. Financial circumstances of insurance buyers change eventually. Compare your current income together with your income ten years back. Hasn’t your earnings grown several times? How you live would likewise have improved significantly. Should you bought ตัวแทนประกันชีวิต เอไอเอ a decade ago based upon your income in those days, the sum assured is definitely not enough to meet your family’s current lifestyle and requires, in the unfortunate ljnicn of your untimely death. Therefore you should get yet another term intend to cover that risk. life insurance needs must be re-evaluated at a regular frequency as well as any additional sum assured if neccessary, should be bought.
Conclusion – Investors should avoid these common mistakes when buying insurance policies. life insurance is probably the most essential elements of any individual’s financial plan. Therefore, thoughtful consideration should be focused on life insurance. Insurance buyers should exercise prudence against questionable selling practised in the life insurance industry. It will always be helpful to engage an economic planner who examines your complete portfolio of investments and insurance on a holistic basis, to enable you to go ahead and take best decision with regards to both life insurance and investments.