What Are The 6 Most Common Life Insurance Mistakes: A person’s financial plan must include life insurance. The way life insurance products have been sold in India over the years has led to many misunderstandings about life insurance. When purchasing insurance policies, insurance buyers should avoid some common mistakes.
What Are The Six Most Common Life Insurance Mistakes
- Underestimating the need for insurance.
- Selecting the cheapest policy.
- Investing in life insurance and selecting the wrong plan.
- Planning your taxes by purchasing insurance.
- The surrender or withdrawal of a life insurance policy.
- The process of insuring is one-time.
Underestimating the need for insurance
A life insurance buyer’s choice of insurance covers or sum assured is often dictated by their agent’s sales pitch and their ability to pay. The approach is wrong. What products you can buy does not affect what insurance you need, which is a function of your financial situation. For example, many insurance buyers use the rule of thumb of 10 times annual income when determining their coverage. When you die, your family has 10 years of income, according to some financial advisers.
In some cases, it may not be the case. Let’s say you have a mortgage that lasts 20 years. When most of the loan is still outstanding after 10 years, how will your family pay the EMIs? Let’s say your children are very young. During a time of high need, like your children’s higher education, your family will run out of income. Determining how much coverage is appropriate for insurance buyers requires consideration of several factors.
- Full payment of all outstanding loans (e.g., mortgages, auto loans, etc.).
- Assuming that the policyholder’s dependents will continue to live at home after debt repayment, the surplus funds should generate sufficient income to cover all expenses, including inflation, for the policyholder’s dependents.
- In addition to meeting debt repayment obligations and generating monthly income, the sum assured should also be sufficient to cover future obligations, such as child education and marriage.
Selecting the cheapest policy
Many insurance buyers prefer cheaper insurance policies. It is possible to make similar mistakes here. It is no use to have a cheap policy if the insurer cannot fulfill the claim for some reason or another. The insured’s family does not want to be in such a situation, even if the insurer would honor the claim.
Choosing a life insurance company that will fulfill its obligation on time, if such an unfortunate circumstance arises, you should look at metrics such as Claims Settlement Ratios and Duration-wise settlements of death claims. You can find this information on the IRDA website under the annual report for all insurance companies in India. According to online reviews, the company should also have a good reputation for settling claims.
Investing in life insurance and selecting the wrong plan
Many people think that life insurance is a good investment or way to plan for retirement. Some insurance agents are primarily responsible for this misconception because they like to sell expensive policies for high commissions. It does not make sense to invest in life insurance if you compare its returns to other investment options.
An equity investment is the best way to create wealth if you are a young investor. With the same investment, a 20-year equity fund SIP will yield at least three or four times as much corpus as a life insurance policy with the same maturity date. If you die untimely, life insurance can protect you and your family. Separating investment from other considerations is essential.
Read More | How To Manage Your Money Better
A good financial planner always recommends term insurance. It is a specific protection policy that is the purest kind of insurance. With term insurance, policyholders have much more investable surpluses than they would with other types of insurance plans because the premium is much lower than those of other types of plans. Unlike endowment or money-back plans, mutual funds yield much higher long-term returns than endowments or money-back plans.
Planning your taxes by purchasing insurance
In the income tax code, Section 80C allows agents to entice clients into purchasing insurance policies for tax savings. The worst investment for tax savings is probably insurance. A risk-free and tax-free return can be expected from insurance plans of around 5 to 6%, while a risk-free and tax-free return can be expected from Public Provident Fund, another 80C investment.
One of the best 80C investments is equity-linked savings schemes, which provide long-term tax-free returns. Additionally, insurance plan returns may not be completely tax-free. There is a tax on maturity proceeds to the extent the premiums exceed 20% of the sum assured. A key aspect of life insurance is that it provides life insurance, not investment returns.
The surrender or withdrawal of a life insurance policy
If you make this mistake, your family is at risk if an unfortunate incident occurs. Insureds should not touch their life insurance policy until they pass away. When their financial situation improves, some policyholders hope to purchase a new policy after surrendering their current policy. Such policyholders should remember two things.
No one can control mortality. In the first place, life insurance serves that purpose. As the insurance buyer gets older, life insurance becomes more expensive. Suppose there is financial distress in your future. In that case, your financial plan should include contingency funds that can be used in the event of an unexpected expense or for a period of liquidity.
The process of insuring is one-time
Those words remind me of a television advertisement for an old motorcycle with the punchline, “Fill it, shut it, forget it.” Buying life insurance can be viewed in the same way by some insurance buyers. Life insurance is assumed to be taken care of for life once they have purchased adequate coverage from a reputable company. I regret doing this. Insurers’ financial situations change over time.
Consider how your income has changed since ten years ago. Aren’t you earning more than you used to? Aren’t you earning more than you used to? Your family’s needs and lifestyle today will not be met by a life insurance plan you bought ten years ago based on your income. Therefore, you should purchase a term plan with an additional benefit. A regular reassessment of life insurance needs is necessary, as well as any additional sum assured that might be required.
Investors should not buy insurance policies if they make these mistakes. A person’s financial plan should include life insurance. Therefore, it is important to consider life insurance carefully. Buyers must exercise caution in the life insurance industry to avoid questionable sales practices. A financial planner can assist you in making the best decisions for your investments and insurance by scrutinizing your entire portfolio holistically.