The need to have life insurance arises the moment one has financial dependents. Students and unmarried individuals with parents who are financially dependant on them may also need a life insurance policy. As one age and financial liabilities rise, the need to get life insurance also rises. While buying there are some life insurance mistakes that one may commit. Knowing them helps to avoid them while ignoring them could cost you a lot.
Remember, at every life stage of an individual, the requirement may vary but having a life cover is a must. There are different life insurance companies but life insurance types is largely similar among them. What is important is to get the life insurance policy with the right amount of life cover or sum assured and at the right price i.e. by paying the right premium amount. To achieve this, there are certain life insurance mistakes to avoid so as to make the right purchase decision.
Let us look at some of the important life insurance mistakes to avoid while evaluating life insurance policies:
1. Do not treat insurance as investment
Life insurance acts as an income replacement tool. To consider life insurance as an investment is one last mistake you will want to commit. The purpose of making an investment is to seek high returns commensurate with risk while the objective of life insurance is to protect your savings and investments. Ideally, they should complement each other and not be treated equal. To compare life insurance and investment pros and cons is not the right approach and neither should one look at life insurance investment advantages and disadvantages. Investment can be for short-medium or long term while life insurance products are by nature long term products. Also, investments are cost-effective compared to life insurance as they are meant to provide for administration expenses, mortality and other charges.
2. Not estimating life cover requirement
‘How much life insurance do I really need’ is what most of us want to know. The amount of life insurance in terms of sum assured is important to be determined before buying a cover. Estimate the need after a proper need-based analysis after taking your long term goals such as children education, marriage etc into account. One may decide to arrive at
life insurance requirement based either on one’s annual income or annual expenses. There are several life insurance calculator to help you get the right sum assured. As a thumb rule, one should keep sum assured of at least ten times of annual income. Avoid the mistake of buying life insurance on ad-hoc basis or merely for tax savings.
3. Choosing wrong policy
There are various types of life insurance policies – Term insurance, Return of Premium Term plans, Traditional plans including money-back and endowment, Ulips etc. Buying any one without understand how it works is a big mistake that one may have to repent later on. Knowing life insurance as to how it works is important before you buy. Also, within each category, do not merely consider life insurance quotes pr premium to decide. See, if it helps you meet your long term goals. Buying a wrong life insurance policy costs a lot later on.
4. Making early surrenders
Life insurance being long term in nature, the cost of early exit before maturity can cost a lot. One can opt for life insurance surrender before maturity but in some life insurance surrender value is very low. Premium needs to be paid till end of policy term and surrendering before maturity incurs surrender charge. Even after making the policy paid-up, the advantage of life insurance gets lost. In ulips, surrender charges are generally nil after five years of policy. Still, as costs in Ulips are front-loaded, the returns hamper in case of early exit. Choose the right policy initially to avoid the mistake of surrendering it later on.
5. Guarantees at a cost
The life insurance guaranteed plans are quite popular in the industry. The guaranteed life insurance plans including the guaranteed income plan have an additional in-built cost to take care of guarantees. Even the premium in such plans are high compared to a bonus-based non-guaranteed insurance plan. Guaranteed life insurance plans may suit some but not and hence understand the cost-benefit of them before buying to avoid any mistake in locking funds over long term not in-line with your need and goals.