Whether it is in choosing a plan or managing a life insurance policy, an error, could have a grave impact on our financial health. Here are 10 common mistakes one should avoid in a life insurance policy.
- The thinking- “I don’t need insurance”
We live in a world of uncertainties. We may not be able to avoid or control their occurrence; however, we could prepare ourselves to handle the aftermath. The purpose of insurance is to replace your income for your dependent if anything were to happen to you. The need stems from your individual financial goals and family commitments in your present and future days to come. An honest assessment of your position would show that insurance is indeed a necessity, to give you and your family a sense of financial security.
- Inaccurate estimation of insurance
Making an inaccurate estimation of insurance needs could bring about significant financial concerns. Your insurance cover should aim to provide your family with the same lifestyle as it was before, along with factoring in goals such as retirement, children’s education, buying a house etc… The best way to estimate is to follow the Human Life Value calculation or needs based approach. These are objective methods to arrive at an indicative value, in deciding the insurance amount for your family’s secure financial future. So you neither are over-insured buying unnecessary insurance products or under-insured by failing to get required risk cover.
- Using insurance solely for saving tax
The primary motive of insurance is to give financial protection to your family in case of your untimely death. An added advantage that you get from a plan is saving tax. The premiums that you pay are eligible for a tax deduction under Section 80C. However buying insurance solely for saving tax is not advisable. You may just end up buying a couple of insurance products- some may actually not suit your need. Focus on protection first, and then utilise the tax benefit it comes along with.
- Insurance as an investment product
It is very common practise amongst many to expect a return back from the premium paid towards life insurance. Though the market is flooded with insurance and investment in one product, what one must understand is that the two are separate financial entities. Where insurance is for protection, investment is to build wealth towards long term goals. Thus treat insurance as a contingency product where the benefits are applicable in case an event actually occurs. Make sure you have a financial plan in place, for your insurance requirement as well as wealth creation.
- Forgetting about insurance once it has been bought
Most of us feel buying insurance is a onetime exercise. Once it has been bought, we could probably forget about it until an eventuality strikes. This is not however true. As important as it is to be adequately insured, it is equally important to do a periodic review of your insurance portfolio. With every life stage, priorities and preferences change. You should thus assess and adjust your insurance portfolio in accordance with your changing needs. At any point in time be well prepared to face the unexpected, without having to take a major financial blow. Life Insurance needs have to be re-evaluated on a regular basis, keeping in tune your changes in income and lifestyle.
- Beginning your insurance planning late
Starting an insurance plan early in life comes with a great advantage. When you are younger and in pink of health, premium are much lower. So you could get a larger cover at almost 3/4th the cost, if you were to take it after 40 years of age.
- Relying on your agent too much
Insurance agents are often the first point of contact when buying life insurance. From briefing on policy features to helping you choose the most suitable plan, they are supposed to provide assistance in every possible way. But very often, we end up over relying on agents. We end up buying the wrong policy, or the one that is not actually meant for us. It is ok to seek advice from the agent, but do your own research. Know your options. Do a comparative study of what’s available before making a choice. Do remember to complete the insurance application form yourself. Agents often fill in wrong information, which could later lead to issues at the time of claim filing.
- Buying a policy by word of mouth
Insurance needs vary from person to person. What may be suitable to someone else may actually not be the right kind for you. The right policy depends on your age, number of dependents, lifestyle expenses and annual income. For example, a single unmarried youngster with minimal financial responsibilities may have a different insurance requirement in comparison to a mid-career individual with additional responsibilities towards children, loans, etc… Avoid buying a policy by hearsay. Have a financial plan in place, prioritising your needs. Catering to diverse need of investors, insurance companies offer a range of products to choose from.