Life insurance coverage is one of the most important components of any lawsuit filer’s financial plan. However there is 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 talked about some common mistakes insurance buyers should avoid when buying insurance plans.
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1 . Underestimating insurance requirement: A lot of life insurance buyers choose their insurance plan covers or sum assured, based on the plans their agents want to market and how much premium they can pay for. This a wrong approach. Your insurance coverage requirement is a function of your financial situation, and has nothing do with what items are available. Many insurance buyers use thumb rules like 10 instances annual income for cover. Some economic advisers say that a cover of 10 times your annual income is adequate because it gives your family 10 years worth of income, when you are gone. Yet this is not always correct. Suppose, you have 20 year mortgage or mortgage loan. How will your family pay the EMIs after 10 years, when most of the mortgage is still outstanding? Suppose you have very young children. Your family will run out of revenue, when your children need it the most, e. g. for their higher education. Insurance buyers need to consider several factors within deciding how much insurance cover is adequate for them.
· 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 should have surplus funds to generate enough month-to-month income to cover all the living expenses of the dependents of the policy holder, factoring within inflation
· After debt repayment and generating monthly income, the particular sum assured should also be adequate to satisfy future obligations of the policy holder, such as children’s education, marriage etc .
second . Choosing the cheapest policy: Many insurance buyers like to buy policies which are cheaper. This is another serious mistake. A cheap policy is no good, if the insurance company for some reason or another cannot satisfy the claim in the event of an untimely passing away. Even if 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 be in. You should look at metrics like Claims Settlement Ratio and Duration wise settlement of dying claims of different life insurance companies, to select an insurer, that will honour its obligation in fulfilling your state in a timely manner, should such an unfortunate scenario arise. Data on these metrics for all the insurance companies in India comes in the IRDA annual report (on the IRDA website). You should also examine claim settlement reviews online and just then choose a company that has a good track record of settling claims.
3. Treating life insurance as an investment and buying the incorrect plan: The common misconception about life insurance coverage is that, it is also as a good investment or retirement planning solution. This misconception is largely due to some insurance coverage agents who like to sell costly policies to earn high commissions. If you compare returns from insurance coverage to other investment options, it simply does not make sense as an investment. In case you are a young investor with a long time horizon, equity is the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds via SIP will result in a corpus that is at least three or four times the maturation amount of life insurance plan with a 20 year term, with the same investment decision. Life insurance should always been seen as safety for your family, in the event of an unforeseen death. Investment should be a completely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as appealing investment products, for your own evaluation you should separate the insurance component and investment decision component and pay careful attention to what portion of your premium actually will get allocated to investments. In the early years of an ULIP policy, only a small amount goes to purchasing units.
A good financial planner will usually advise you to buy term insurance plan. A term plan is the purest kind of insurance and is a straightforward protection policy. The premium of term insurance policies is much less than other types of insurance plans, and it leaves the policy holders having a much larger investible surplus that they can invest in investment products like mutual funds that give much higher returns in the long term, when compared with endowment or money back plans. In case you are a term insurance policy holder, below some specific situations, you may choose other types of insurance (e. g. ULIP, endowment or money back plans), in addition to your term policy, for the specific financial needs.