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 through 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 ตัวแทนประกันชีวิต เอไอเอ covers or sum assured, based on the plans their agents wish to sell and how much premium they could afford. This an inappropriate approach. Your insurance requirement is a function of your finances, and contains nothing do with what goods are available. Many insurance buyers use thumb rules like ten times annual income for cover. Some financial advisers state that a cover of 10 times your annual income is adequate since it gives your loved ones a decade worth of income, when you find yourself gone. But this may not be 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 the majority of the loan is still outstanding? Suppose you may have very young children. Your family will run out of income, whenever your children require it probably the most, e.g. for his or her higher education. Insurance buyers need to consider several factors in deciding just how much insurance cover is adequate on their behalf.
· Repayment of the entire outstanding debt (e.g. home loan, car loan etc.) of the policy holder
· After debt repayment, the cover or sum assured must have surplus funds to create enough monthly income to cover each of the living expenses in the dependents of the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured should also be adequate to fulfill future obligations in 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 can be another serious mistake. A cheap policy is not any good, if the insurer for whatever reason or another cannot fulfil the claim in 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 a desirable situation for family of the insured to be in. You should think about metrics like Claims Settlement Ratio and Duration wise settlement of death claims of various life insurance companies, to choose 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 the insurance firms in India can be found in the IRDA annual report (on the IRDA website). You should also check claim settlement online reviews and merely then choose a company which has a good history of settling claims.
3. Treating life insurance as being an investment and acquiring the wrong plan: The most popular misconception about life insurance is the fact, additionally it is as a wise investment or retirement planning solution. This misconception is essentially as a result of some insurance agents that like to promote expensive policies to earn high commissions. In the event you compare returns from life insurance to many other investment options, it simply fails to make sense being an investment. If you are a young investor with quite a long time horizon, equity is the greatest wealth creation instrument. More than 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 using a 20 year term, with the same investment. life insurance should been considered as protection to your family, in case of an untimely death. Investment needs to be a totally separate consideration. Despite the fact that insurance providers sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your evaluation you should separate the insurance policy component and investment component and pay careful awareness of what percentage of your premium actually gets allocated to investments. In early many years of a ULIP policy, just a little bit goes toward buying units.
A great financial planner will usually give you advice to get term insurance plan. A term plan is definitely the purest type of insurance and is a straightforward protection policy. The premium of term insurance plans is much less than other sorts of insurance plans, and it also leaves the insurance policy holders using a much bigger investible surplus that they can invest in investment items like mutual funds that offer greater returns eventually, compared to endowment or money back plans. Should you be an expression insurance policy holder, under some specific situations, you could choose other kinds of insurance (e.g. ULIP, endowment or money-back plans), in addition to your term policy, for your specific financial needs.
4. Buying insurance with regards to tax planning: For quite some time agents have inveigled their clientele into buying insurance wants to save tax under Section 80C of 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 greater tax free returns in the long run. Further, returns from insurance plans might not be entirely tax free. If the premiums exceed 20% of sum assured, then to that extent the maturity proceeds are taxable. As discussed earlier, the most important thing to note about life insurance is that objective would be to provide life cover, not to generate the most effective investment return.
5. Surrendering life insurance policy or withdrawing from it before maturity: This is a serious mistake and compromises the financial security of your own family in the case of an unfortunate incident. life insurance really should not be touched until the unfortunate death of the insured occurs. Some policy holders surrender their policy to fulfill an urgent financial need, with the expectation of getting a brand new policy when their financial circumstances improves. Such policy holders must remember 2 things. First, mortality is not really in anyone’s control. This is why we buy life insurance in the first place. Second, life insurance gets extremely expensive since the insurance buyer gets older. Your financial plan must provide for contingency funds to satisfy any unexpected urgent expense or provide liquidity for a time period of time in the case of a monetary distress.
6. Insurance is a 1-time exercise: I am just reminded of the old motorcycle advertisement on tv, that had the punch line, “Fill it up, shut it, forget it”. Some insurance buyers have the identical philosophy towards life insurance. When 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. It is a mistake. Financial circumstances of insurance buyers change as time passes. Compare your present income along with your income a decade back. Hasn’t your earnings grown many times? Your way of life would also have improved significantly. Should you bought ตัวแทนประกันชีวิต เอไอเอ 10 years ago based on your income back then, the sum assured is definitely not enough to meet your family’s current lifestyle and desires, within the unfortunate ljnicn of the untimely death. Therefore you should purchase an additional term plan to cover that risk. life insurance needs need to be re-evaluated with a regular frequency and then any additional sum assured if required, should be bought.
Conclusion – Investors should avoid these common mistakes when purchasing insurance coverage. life insurance is probably the most important components of any individual’s financial plan. Therefore, thoughtful consideration must be dedicated to life insurance. Insurance buyers should exercise prudence against questionable selling practised in the life insurance industry. It is always good for engage an economic planner who examines your entire portfolio of investments and insurance on the holistic basis, so that you can consider the best decision in terms of both life insurance and investments.