Life insurance is among the most significant aspects of any individual’s financial plan. However there is lot of misunderstanding about life insurance, mainly due to the way life insurance products have been sold over time in India. We have discussed some common mistakes insurance buyers should avoid when purchasing insurance policies.
1. Underestimating insurance requirement: Many life insurance buyers choose their ตัวแทนประกันชีวิต AIA covers or sum assured, based on the plans their agents desire to sell and how much premium they could afford. This a wrong approach. Your insurance requirement is really a purpose of your financial situation, and it has nothing do with what items are available. Many insurance buyers use thumb rules like ten times annual income for cover. Some financial advisers claim 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 is simply not always correct. Suppose, you may have 20 year mortgage or home mortgage. How can your loved ones pay the EMIs after ten years, when a lot of the loan continues to be outstanding? Suppose you may have very young kids. Your family will exhaust income, when your children need it by far the most, e.g. for his or her advanced schooling. Insurance buyers have 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 mortgage, car loan etc.) in the policy holder
· After debt repayment, the cover or sum assured must have surplus funds to produce enough monthly income to cover each of the cost of living in the dependents in the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured ought to be adequate to fulfill future obligations of the policy holder, like children’s education, marriage etc.
2. Choosing the cheapest policy: Many insurance buyers like to buy policies that are cheaper. This really is another serious mistake. An affordable policy is not any good, if the insurer for reasons unknown or some other cannot fulfil the claim in the event of an untimely death. Even when the insurer fulfils the claim, if it takes a long time to fulfil the claim it is not just a desirable situation for group of the insured to be in. You should think of 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 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 must also check claim settlement online reviews and just then select a company which has a good history of 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 great 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. If you compare returns from life insurance with other investment options, it really fails to seem sensible as an investment. In case you are a young investor with quite a while horizon, equity is the greatest 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 using a 20 year term, with the same investment. life insurance should been seen as protection to your family, in case of an untimely death. Investment ought to be a totally separate consideration. Although insurance firms sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you should separate the insurance coverage component and investment component and pay careful focus on what percentage of your premium actually gets allocated to investments. During the early many years of a ULIP policy, only a small amount goes to buying units.
An excellent financial planner will invariably give you advice to purchase term insurance policy. A term plan will be the purest form of insurance and is also a straightforward protection policy. The premium of term insurance plans is much less than other kinds of insurance plans, and it leaves the insurance policy holders having a larger investible surplus that they can spend money on investment products like mutual funds that offer greater returns eventually, in comparison to endowment or cash back plans. If you are an expression insurance coverage holder, under some specific situations, you could opt for other sorts of insurance (e.g. ULIP, endowment or cash back plans), along with your term policy, to 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 wants to save tax under Section 80C in the Income Tax Act. Investors should recognize that insurance is probably the worst tax saving investment. Return from insurance plans is in the selection of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives near to 9% risk-free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives greater tax free returns over time. 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 important to remember about life insurance is the fact objective would be to provide life cover, to not generate the best investment return.
5. Surrendering life insurance policy or withdrawing from it 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 must not be touched till the unfortunate death from the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of buying a brand new policy when their finances improves. Such policy holders need to remember a couple of things. First, mortality is not really in anyone’s control. That is why we buy life insurance to start with. Second, life insurance gets very expensive since the insurance buyer gets older. Your financial plan should provide for contingency funds to satisfy any unexpected urgent expense or provide liquidity for a period of time in the event of an economic distress.
6. Insurance policies are a 1-time exercise: I am reminded of the old motorcycle advertisement on television, that had the punch line, “Fill it, shut it, forget it”. Some insurance buyers have the identical philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan from the reputed company, they assume that their life insurance needs are cared for forever. This is a mistake. Financial situation of insurance buyers change eventually. Compare your present income together with your income a decade back. Hasn’t your earnings grown several times? Your way of life would likewise have improved significantly. Should you bought ตัวแทนประกันชีวิต a decade ago according to your income in the past, the sum assured will not 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 intend to cover that risk. life insurance needs must be re-evaluated at a regular frequency and then any additional sum assured if neccessary, ought to be bought.
Conclusion – Investors should avoid these common mistakes when purchasing insurance plans. life insurance is among the most essential aspects of any individual’s financial plan. Therefore, thoughtful consideration should be devoted to life insurance. Insurance buyers should exercise prudence against questionable selling practised within the life insurance industry. It is always helpful to engage an economic planner who examines your entire portfolio of investments and insurance on a holistic basis, so that you can consider the best decision with regards to both life insurance and investments.