While Insurance is the most common investment option chosen by most Indians; a lot of us make mistakes when it comes to Life Insurance decisions. Let us have a look as to how to avoid common life insurance mistakes in India.
A lot of you must be aware of the fact that Insurance is in itself a big decision one has to take in their life and it is also very important one, be it for insuring their health or properties. Life insurance is among these and also the most important of it all. Whatever you choose as your Life Insurance policy will ultimately decide how well one can support their family even when they are gone. A wrong product of wrong decision can prove catastrophic to your financial health and the financial security your family would get.
So how should you choose your Life Insurance in India? What mistakes should you avoid while choosing a Life Insurance Policy? Let us see the 9 Common Life Insurance Mistakes to avoid in India:
1. Treating Insurance as Investment:
Life Insurance like any other insurance is an investment only for the purpose of making good any loss that may occur due to the absence or malfunction of the thing it is taken for. So in case of Life Insurance, it is to safeguard your family in your absence when you are no longer around to take care of their financial needs. Hence, it is an investment to face any difficulties or otherwise, financially that may arise from your demise. Monetary returns should not be expected from it while you are alive. It should not be treated as a Financial Investment, instead as an investment for the security of your loved ones when you are gone. You can get clearer picture on this by going through the post here.
2. Withdrawing prematurely from Insurance to meet your needs:
As mentioned above, since insurance should not be treated as investment, expecting monetary gains from the policy while you are alive is a BIG NO-NO. This insurance mistake should be avoided, of expecting to withdraw funds by prematurely surrendering your policy either fully or partly. Life Insurance should not be touched until the actual need, that is the demise of the insured, arises. Just like you can’t and wouldn’t surrender and withdraw cash from your car or health insurance, same should be with life insurance. Don’t ever think of surrendering a policy prematurely. If you need funds look for other investments you can withdraw from or opt for some cheap loans from various options you can find here.
3. Choosing the cheapest policy:
Choosing your Life cover based on the premium you need to pay is another mistake you should avoid while buying Life insurance in India. Don’t buy a life cover just by comparing the premiums of various policies from various insurance providers. Instead check the other factors as to why is the company offering such low premiums when most others aren’t. Chances are at times these companies have low premiums but can also be ‘bad claim settlers’. Check claim settlement reviews online and only then opt for a company that has a good track record of settling claims. You do not want your family to be grieving from your loss at the same time they have to fight with the insurance company to get the sum assured.
4. Choosing the wrong product:
As any financial planner or a true insurance advisor will say, opting for a pure term plan is the way to go. The premium is affordable, sum assured is high, and it is straight forward contract. However often people opt for returns over sum assured and go for various fancy plans such as Endowment, Money-Back, ULIPs, etc. While these can be opted in certain cases, like if you already have a term plan and are looking for some safe and assured returns at regular intervals, then Money Back can be opted for, however the returns are too low, and the money you get back regularly should be re-invested in some other asset class to actually be useful as worthy investment option. However if you do not have adequate life cover or a primary life insurance policy, DO NOT go for any such plans. Your primary insurance cover should be your Term Plan. ULIPs should be avoided on all costs; some even consider ULIPs as worst investment/insurance products.
5. Under insuring yourself:
Under insuring one-self is as good as not being insured at all. Even if you have a term plan, make sure you are insured for a sufficient amount. Although there should not be any fixed rule for insurance, most say, that insuring yourself for 10 times your annual income makes sense as it gives your family or people you leave behind 10 years worth of money when you are gone. This huge amount can be invested by them and hence can grow over the years to an extent, so as to balance itself against the ever increasing inflation. Make sure the amount you opt for is actually sufficient. One should asses their total outflows and goals that would be affected in their absence and then choose an appropriate sum assured.
6. Treating Insurance as one time thing:
Once you have had a good sum assured and opted for some good insurance plan, it does not end there. Life Insurance needs have to be periodically re-evaluated and any additional sum assured if required, should be added. This is because your needs change, income increases and if you have taken a Life cover 5 years ago for X amount, it is not necessary that 5 years down the line you need that same amount. If your lifestyle has improved chances are the money required will also increase. It will be good to buy an additional term plan in that case to cover that risk.
7. Having faith in the words of your agent/advisor for your policy:
Very often people take the word of the insurance agent at face value. Do not do that. While they may not intend to fool you, they will rarely tell you every pros and cons of the policy you take. At times they prefer you go for endowment or ULIPs or some other policy that may be expensive or not needed by you. Do your own research, and read the clauses and fine print. You do not want to be in for a shock later on. Use the internet for this purpose, Google is here to the rescue.
8. Assuming you won’t die:
Death and mortality is not in anyone’s control. Choose an insurance plan with that in mind. Don’t opt for a policy that will be insignificant in case something were to happen to you during the tenure of the policy. Take a plan on the “what if something happened to me during this time…” factor. So you can be well insured and have a peace of mind.
9. Not considering the value of a non-working family member:
This is often the case with a lot of people. While it is true that the earning member or members of the family should always be insured with a Life Insurance policy; non-earning members too, in certain cases should be insured. This is a Life Insurance mistake that people often make. For instance, if there is a wife who is a full-time homemaker, her loss is invaluable. While you cannot replace her skills, the fact that she was responsible for a lot of things you never needed to take care of, should be kept in mind. She was the one budgeting and saving for you, those costs will rise in her absence. Also you may very well need someone to manage your home, cook etc. In this case the monetary outflow can increase. Also if someone from your family was managing your business affairs, though not generating any income directly, was actually of some value to you. In their absence the personnel replacement can result in increased monetary outflow. While family member’s contribution is invaluable, from financial point of view you need to arrive at an estimated value and insure them for that amount.
Well, these were the common mistakes one must avoid while taking Life Insurance. Being greedy for returns while opting for returns over insurance should be avoided at all costs, also the above points should be all thoroughly considered and only then an insurance cover should be selected.