However, buying life insurance as just a quick fix solution just to save tax can end up defeating the very purpose for which you are doing the exercise which is to provide financial protection to your family. Here is a list of those common mistakes that you can make while buying life insurance and how you can avoid them.
Believing your advisers at face value
Many a times, those offering advice on buying life insurance like relationship managers at banks, insurance agents etc., do so with their own interests in mind which is to the maximum amount of commission. Hence, there is a good chance that the offered advice may not be in your best interest. Rather than trusting them blindly, you should devote some time to enquire about the merits and demerits of the policy they are advising you to buy.
Thinking all life insurance policies are same
Many people assume that all types of life insurance covers offer similar tax benefits. And due to this misconception, many end up buying the wrong insurance policy which does not suit their purpose.
There are basically three types of life insurance policies: term plan, endowment plan and unit linked insurance plan (ULIP).
A term plan pays the beneficiary the sum assured upon the demise of the insured person. The policy holder gets nothing if he survives the term of the policy. Term plan is a pure life insurance product where a high amount of insurance cover is offered at the lowest premium and hence gives highest protection at the lowest cost.
Endowment plan and ULIP are hybrid products which offer a mixture of investment and life insurance. The insurance cover offered on these products are low compared to term plans. These plans give the policyholder the maturity value in case he/she survives, else pays the sum assured or investment value, whichever is higher.
So, if you need only pure life insurance, then buying an endowment plan or ULIP does not make sense.
When it comes to tax saving, all types of life insurance policies offer section 80C deduction on the premium amount and tax-free maturity or death benefit under section 10(10D) of the Income-tax Act, 1961.
Being over or under insured
Another common mistake which many people make is to buy multiple life insurance policies without calculating their real insurance need. If you buy too much life cover you will end up wasting your hard earned money on something which you may not need if you survive. Higher premium will also reduce your savings, which could otherwise be used for a more useful investment. However, if you keep the cover amount low, it may not be sufficient to support your family after your demise.
Therefore, knowing the right insurance amount is important. A thumb rule is to have an insurance cover between 10 times and 20 times of your annual income. The more the number of dependents you have, higher should be the insurance cover. In case you have a big liability like a home loan you, will need additional cover for that.
No clarity on tenure of the insurance cover
Not many people can have an accurate estimate about the term till which they will need the support of a life insurance cover. Hence, some end up buying policies unnecessarily for the long term, while many others end up with an insurance cover with too short a tenure. A longer term will increase the premium amount, while shorter term may leave you financially vulnerable in the case of unforeseeable circumstances.
The ideal way to arrive at the right tenure for your life insurance policy is to plan for it till your retirement. Retirement is a stage when people would have fulfilled their life obligations and created enough savings to help them during their sunset years and hence, they will not need the insurance protection any longer.
Not knowing if you need to upgrade your insurance cover
Lifestyles of people depend on their income and a life insurance policy is expected to make sure that the same is maintained even up on the demise of the breadwinner of the family. Over the period if your income has grown substantially and your lifestyle has followed a similar trend, then you would need a higher insurance cover to make sure that your family can maintain the current lifestyle even after your death.
Typically, the life insurance cover needs an upgrade when a new family member is added. People should upgrade their life insurance policies on important life events like marriage and birth of a child.
Missing on additional protection
What happens if you survive a major accident but develop a disability which prevents you from earning? If you only have a simple life cover, then you would not be paid by the insurer as you survived the accident. This is a common mistake which many people make while buying a term plan. You should make it a point to buy suitable additional protection against critical illnesses and disabilities by adding riders like Critical Illness or Accidental Disability while buying your term plan.
Not saving on premium through online purchase
Most of the life insurance companies offer their lowest cost policies online. If you are buying it offline then you may end up paying higher premium. Besides being fully involved in the process, buying the policy online helps you save good amount of premium.
Not disclosing material information
At the time of issuing the policy, the insurance company accepts all the information given by you in good faith. However, if any of the information given in your application is proved to be wrong later on the company may decline to honor the claim. It mostly happens in case of a major illness and consumption of tobacco and alcohol where people often tend to hide information. If your loved ones do not get the intended benefit, then the purpose of buying the policy fails. Therefore, make sure you give correct information even if the premium is higher.
Not picking your insurer correctly
When you buy a life insurance policy your primary objective remains that your family gets the financial support without any hassle. However, while some insurance companies offer good products, they score poorly when it comes to customer service and the claim process. Therefore, you should not be complacent about the insurance company selection. Make sure the insurance company has a high claim settlement ratio both in terms of number of policies and amount, has good reputation for customer service and has a good digital platform to access services.
Also Read:
Latest life insurance claim settlement ratio of companies in 2021
