Life insurance is probably 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 buying insurance plans.
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 exactly how much premium they can afford. This an incorrect approach. Your insurance requirement is actually a purpose of your financial situation, and contains nothing use what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers claim that a cover of 10 times your annual income is adequate since it gives your family ten years worth of income, when you are gone. But this is not always correct. Suppose, you have 20 year mortgage or home loan. How can your household spend the money for EMIs after ten years, when a lot of the loan remains outstanding? Suppose you have very young children. Your household will run out of income, when your children require it the most, e.g. for his or her higher education. Insurance buyers must consider several factors in deciding exactly how much insurance cover is adequate on their behalf.
· Repayment in the entire outstanding debt (e.g. home loan, car loan etc.) of the policy holder
· After debt repayment, the cover or sum assured needs to have surplus funds to produce enough monthly income to pay for all the cost of living in the dependents of 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 can be cheaper. This really is another serious mistake. A cheap policy is no good, if the insurance company for some reason or another cannot fulfil the claim in case of an untimely death. Even when the insurer fulfils the claim, if this takes a long time to fulfil the claim it is certainly not really a desirable situation for group of the insured to remain. You should think about metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to select 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 companies in India can be found in the IRDA annual report (on the IRDA website). You need to check claim settlement online reviews and only then select a company which has a good track record of settling claims.
3. Treating life insurance as an investment and purchasing the wrong plan: The most popular misconception about life insurance is the fact that, additionally it is as a great 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. In the event you compare returns from life insurance to other investment options, it just does not make sense as an investment. In case you are a young investor with quite a long time horizon, equity is the ideal wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is a minimum of three or four times the maturity amount of life insurance plan with a 20 year term, with the same investment. life insurance must always been viewed as protection for the family, in the case of an untimely death. Investment needs to be an entirely separate consideration. Even though insurance providers sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your evaluation you need to separate the insurance component and investment component and pay careful attention to what portion of your premium actually gets allocated to investments. During the early many years of a ULIP policy, merely a little bit goes toward buying units.
An excellent financial planner will always advise you to purchase term insurance policy. An expression plan is definitely the purest kind of insurance and is a straightforward protection policy. The premium of term insurance plans is far less than other types of insurance plans, and it leaves the insurance policy holders having a much bigger investible surplus that they can invest in investment items like mutual funds that give higher returns in the long term, in comparison to endowment or cash back plans. If you are a term insurance policy holder, under some specific situations, you might choose other sorts of insurance (e.g. ULIP, endowment or money-back plans), along with your term policy, to your specific financial needs.
4. Buying insurance with regards to tax planning: For several years agents have inveigled their clients into buying insurance wants to save tax under Section 80C of the Taxes Act. Investors should recognize that insurance is probably the worst tax saving investment. Return from insurance plans is in the variety of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives close to 9% risk-free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives much higher tax free returns over time. Further, returns from insurance plans may not be entirely tax free. When the premiums exceed 20% of sum assured, then to that particular extent the maturity proceeds are taxable. As discussed earlier, the most important thing to notice about life insurance is the fact that objective is always to provide life cover, never to generate the very best investment return.
5. Surrendering life insurance policy or withdrawing from it before maturity: It is a serious mistake and compromises the financial security of your family in case 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 satisfy an urgent financial need, with the hope of buying a brand new policy when their financial situation improves. Such policy holders have to remember two things. First, mortality is not really in anyone’s control. For this reason we buy life insurance to begin with. Second, life insurance gets very costly 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 case of a financial distress.
6. Insurance policies are a one-time exercise: I am just reminded of your old motorcycle advertisement on television, which had the punch line, “Fill it up, shut it, forget it”. Some insurance buyers have the same philosophy towards life insurance. When they buy adequate cover in a good life insurance plan from a reputed company, they think that their life insurance needs are taken care of forever. This is a mistake. Financial situation of insurance buyers change as time passes. Compare your present income along with your income 10 years back. Hasn’t your revenue grown several times? Your lifestyle would likewise have improved significantly. Should you bought ตัวแทนประกันชีวิต เอไอเอ 10 years ago based on your income in those days, the sum assured is definitely not enough to fulfill your family’s current lifestyle and desires, inside the unfortunate ljnicn of the untimely death. Therefore you should buy an extra term intend to cover that risk. life insurance needs need to be re-evaluated with a regular frequency and any additional sum assured if required, ought to be bought.
Conclusion – Investors should avoid these common mistakes when purchasing insurance policies. life insurance is probably the most significant elements of any individual’s financial plan. Therefore, thoughtful consideration must be focused on life insurance. Insurance buyers should exercise prudence against questionable selling practised within the life insurance industry. It is usually good for engage a monetary 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.