Avoid These Six Common life assurance Mistakes
Life insurance is one among the foremost important components of any individual's budget . However there's lot of confusion about life assurance , mainly thanks to the way life assurance products are sold over the years in India. we've discussed some common mistakes insurance buyers should avoid when buying insurance policies.
1. Underestimating insurance requirement: Many life assurance buyers choose their insurance covers or sum assured, supported the plans their agents want to sell and the way much premium they will afford. This a wrong approach. Your insurance requirement may be a function of your financial situation, and has nothing do with what products are available. Many insurance buyers use thumb rules like 10 times annual income for canopy . Some financial advisers say that a canopy of 10 times your annual income is adequate because it gives your family 10 years worth of income, once you are gone. But this is often not always correct. Suppose, you've got 20 year mortgage or home equity credit . How will your family pay the EMIs after 10 years, when most of the loan remains outstanding? Suppose you've got very young children. Your family will run out of income, when your children need it the foremost , e.g. for his or her education . Insurance buyers got to consider several factors choose what proportion insurance cover is adequate for them.
· Repayment of the whole outstanding debt (e.g. home loan, automobile loan etc.) of the policy holder
· After debt repayment, the duvet or sum assured should have surplus funds to get enough monthly income to hide all the living expenses of the dependents of the policy holder, factoring in inflation
· After debt repayment and generating monthly income, the sum assured should even be capable meet future obligations of the policy holder, like children's education, marriage etc.
2. Choosing the most cost effective policy: Many insurance buyers wish to buy policies that are cheaper. this is often another serious mistake. an inexpensive policy is not any good, if the insurance firm for a few reason or another cannot fulfil the claim within the event of an untimely death. albeit the insurer fulfils the claim, if it takes a really while to fulfil the claim it's never a desirable situation for family of the insured to be in. you ought to check out metrics like Claims Settlement Ratio and Duration wise settlement of death claims of various life assurance companies, to pick an insurer, which will honour its obligation in fulfilling your claim during a timely manner, should such an unfortunate situation arise. Data on these metrics for all the insurance companies in India is out there within the IRDA annual report (on the IRDA website). you ought to also check claim settlement reviews online and only then choose a corporation that features a good diary of settling claims.
3. Treating life assurance as an investment and buying the incorrect plan: The common misconception about life assurance is that, it's also as an honest investment or retirement planning solution. This misconception is essentially thanks to some insurance agents who wish to sell expensive policies to earn high commissions. If you compare returns from life assurance to other investment options, it simply doesn't add up as an investment. If you're a young investor with an extended time horizon, equity is that the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will end in a corpus that's a minimum of three or fourfold the maturity amount of life assurance plan with a 20 year term, with an equivalent investment. life assurance should been seen as protection for your family, within the event of an untimely death. Investment should be a totally separate consideration. albeit insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you ought to separate the insurance component and investment component and pay careful attention to what portion of your premium actually gets allocated to investments. within the early years of a ULIP policy, only alittle amount goes to purchasing units.
A good financial planner will always advise you to shop for insurance plan. A term plan is that the purest sort of insurance and may be a straightforward protection policy. The premium of insurance plans is far but other sorts of insurance plans, and it leaves the policy holders with a way larger investible surplus that they will invest in investment products like mutual funds that give much higher returns within the future , compared to endowment or a refund plans. If you're a insurance policy holder, under some specific situations, you'll choose other sorts of insurance (e.g. ULIP, endowment or a refund plans), additionally to your term policy, for your specific financial needs.
4. Buying insurance for the aim of tax planning: for several years agents have inveigled their clients into buying insurance plans to save lots of tax under Section 80C of the tax Act. Investors should realize that insurance is perhaps the worst tax saving investment. Return from insurance plans is within the range of 5 - 6%, whereas Public Provident Fund, another 80C investment, gives on the brink of 9% harmless and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives much higher tax free returns over the future . Further, returns from insurance plans might not be entirely tax free. If the premiums exceed 20% of sum assured, then thereto extent the maturity proceeds are taxable. As discussed earlier, the foremost important thing to notice about life assurance is that objective is to supply life cover, to not generate the simplest investment return.
5. Surrendering life assurance policy or withdrawing from it before maturity: this is often a significant mistake and compromises the financial security of your family within the event of an unfortunate incident. life assurance shouldn't be touched until the unfortunate death of the insured occurs. Some policy holders surrender their policy to satisfy an urgent financial need, with the hope of shopping for a replacement policy when their financial situation improves. Such policy holders got to remember two things. First, mortality isn't in anyone's control. that's why we buy life assurance within the first place. Second, life assurance gets very expensive because the insurance buyer gets older. Your budget should provide for contingency funds to satisfy any unexpected urgent expense or provide liquidity for a period of your time within the event of a financial distress.
6. Insurance may be a one-time exercise: i'm reminded of an old motorcycle advertisement on television, which had the laugh line , "Fill it, shut it, forget it". Some insurance buyers have an equivalent philosophy towards life assurance . Once they buy adequate cover during a good life assurance plan from a reputed company, they assume that their life assurance needs are taken care of forever. this is often an error . Financial situation of insurance buyers change with time. Compare your current income together with your income ten years back. Hasn't your income grown several times? Your lifestyle would even have improved significantly. If you purchased a life assurance plan ten years ago supported your income some time past , the sum assured won't be enough to satisfy your family's current lifestyle and wishes , within the unfortunate event of your untimely death. Therefore you ought to buy a further term decide to cover that risk. life assurance needs need to be re-evaluated at a daily frequency and any additional sum assured if required, should be bought.
Investors should avoid these common mistakes when buying insurance policies. life assurance is one among the foremost important components of any individual's budget . Therefore, thoughtful consideration must be dedicated to life assurance . Insurance buyers should exercise prudence against questionable selling practised within the life assurance industry. it's always beneficial to interact a financial planner who looks at your entire portfolio of investments and insurance on a holistic basis, in order that you'll take the simplest decision with regards to both life assurance and investments.