Avoid These 6 Common Life Insurance Mistakes

Avoid These 6 Common Life Insurance Mistakes
Avoid These 6 Common Life Insurance Mistakes

Avoid These 6 Common Life Insurance Mistakes

Avoid These 6 Common Life Insurance Mistakes, Life insurance is one of the most important components of any person’s financial plan. However, there are many misconceptions about life insurance, mainly due to the way life insurance products have been sold over the years in India. We have discussed some common mistakes that insurance buyers should avoid when buying insurance.

1. Underestimation of Insurance Claims: Many life insurance buyers choose their insurance coverage or sum insured based on the plans their agents want to sell and how much premium they can afford. This is the wrong approach. Your insurance claim is a function of your financial situation and has nothing to do with what products are available. Many insurance buyers use rules of thumb like 10 times annual income for coverage. Avoid These 6 Common Life Insurance Mistakes.

Some financial advisors say that coverage of 10 times your annual income is sufficient because it gives your family 10 years of income when you are away. But that is not always correct. Suppose you have a 20-year mortgage or home loan. How will your family pay the EMIs after 10 years when most of the loan is still outstanding? Suppose you have very young children. Your family runs out of income when your children need it most, e.g. for their higher education. Insurance buyers need to consider several factors when deciding how much insurance coverage is adequate for them.

Repayment of the entire policyholder’s outstanding debt (eg home loans, car loans, etc.)

· After debt repayment, the coverage or sum insured should have excess funds to generate enough monthly income to cover all living expenses for the policyholder’s relatives, including inflation. Avoid These 6 Common Life Insurance Mistakes.

· After repayment of debt and generation of monthly income, the sum insured should also be sufficient to meet future obligations of the policyholder, such as children’s education, marriage, etc.

2. Choosing the cheapest policy: Many insurance buyers like to buy policies that are cheaper. This is another serious mistake. A cheap policy is of no use if the insurance company for some reason can not meet the requirement in case of an untimely death. Even if the insurance company meets the requirement, if it takes a very long time to meet the requirement, it is certainly not a desirable situation for the insured’s family to be in. Avoid These 6 Common Life Insurance Mistakes.

An insurance company that will honor its obligation to meet your claim in a timely manner should such an unfortunate situation arise. Data on these measurements for all insurance companies in India are available in IRDA’s annual report (on the IRDA website). You should also check claims settlement reviews online and only then choose a company that has a good track record of settling claims. Avoid These 6 Common Life Insurance Mistakes.

Life Insurance Basics

Treating life insurance as an investment and buying the wrong plan: The common misconception about life insurance is that it is also a good investment or retirement planning solution. This misconception is largely due to some insurance agents who like to sell expensive policies to earn high commissions. If you compare life insurance returns with other investment options, it simply does not make sense as an investment.

Avoid These 6 Common Life Insurance Mistakes,  If you are a young investor with a long time horizon, equity is the best wealth creation tool. Over a time horizon of 20 years, investing in equity funds through SIP will result in a corpus that is at least three or four times the maturity of life insurance plans with a 20-year maturity of the same investment. Life insurance should always be seen as a protection for your family, in case of premature death. Investment should be a completely separate consideration.

Avoid These 6 Common Life Insurance Mistakes,  Although insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own assessment, you should separate the insurance component and the investment component and pay close attention to what portion of your premium is actually allocated to investments. In the first years of a ULIP policy, only a small amount goes to buying units.

A good financial planner will always advise you to buy a period insurance policy. A maturity plan is the purest form of insurance and is a straightforward protection policy. The premium for time insurance schemes is much smaller than other types of insurance schemes and it leaves policyholders with a much larger investable profit that they can invest in investment products like mutual funds that provide much higher returns in the long run, compared to endowment or money-back plans.

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