5 Insurance Policy Buying Mistakes You Are Probably Making

5 Insurance Policy Buying Mistakes You Are Probably Making

People who have just started earning may have dependent parents or siblings. The basic purpose of having a life insurance policy is to ensure that your family members do not have to suffer a financial crisis after your death. Life insurance policy acts like an income replacement tool. Estimate your financial liabilities like education or marriage of your sibling or meeting with your parents’ monthly expenditures in case if there is no or less pension inflow. Estimate the shortfall from your savings in meeting with your needs and then get an adequate life cover. It is best to get a pure term insurance plan that provides high cover at a low cost. If your parents are financially sufficient or independent, you do not need to get a life insurance policy. Prepare an investment plan by allocating funds in equity and debt assets through proper diversification.

Benefits of Life Insurance Policy

  • Life insurance provides an infusion of cash for dealing with the financial consequences of the insured’s death.
  • Life insurance policies are extremely flexible in terms of adjusting to the needs of the policyholder. The death benefit can get decreased at any time, and the premiums can be easily reduced, increased or even skipped.
  • A cash value life insurance policy may be misunderstood as a tax- favored storehouse of readily accessible funds if the need arises, yet the assets which are backing these funds are held in long-term investments, thereby earning a higher return.

Buying a life insurance policy is helpful, but there are some mistakes people make while buying a life insurance plan.

1.   Treating Insurance as an Investment

Life insurance policies could be traditional plans like the endowment and money-back. They could even be market-linked like Unit Linked Insurance Plans (ULIPs). There is a cost involved in both the policies through mortality charges as both of them have an element of insurance. While the endowment and money-back are a debt product entirely, with the potential to generate around 5% return, the ULIPs are an equity market-linked product, with the potential to generate returns as per equity market conditions. Even though the ULIPs have the potential to deliver a higher inflation-adjusted return as compared to the traditional plans, the former is not a pure investment product because many charges are associated with them. After all, charges eat into the returns. Therefore, if your goal is to generate high return, do not treat any insurance product like an investment.

2.   Buying Too Many Policies

Whether it is a traditional life insurance plan or ULIPs, buying too many is incurring a lot of costs. Every life insurance policy has several costs to pay, including an administration charge. So every time you buy a new policy, you have to pay this cost. This is true in the case of the ULIPs. If you are planning to buy a ULIP, check out which one is flexible enough to meet with the different goals at different stages of life. And buy several policies only when you are sure that you will be able to pay for them. If you cannot afford an insurance policy for the rest of your life, avoid taking too many of them.

3.   Buying in the Name of Minor

Many people buy the policies in the name of their children as the mortality charges and the premium is low. But children do not have any earning capacity, so it does not make sense to buy an insurance policy in the name of your children. An insurance policy should always be bought in the name of the earning member of the family. You can always buy several policies under your or your spouse’s name if you want to invest a larger sum.

4.   Buying Guaranteed Insurance Plans

ULIPs that guarantee the principal or the returns have to make the provision for delivering that guarantee to the customer. There is an additional cost for this which the customer has to bear. Most guarantee plans are mandatory to get invested between 0 to 100% in equity markets, and the customers do not have the choice to choose the funds. To provide a guaranteed return, insurers invest more in debt than in equities. This flexibility helps insurers to manage and deliver returns, which may not be potentially high as an equity high class. The high cost accompanied by the return of the debt asset makes the guaranteed plans a bad choice for wealth accumulation over the long term. The same holds for traditional plans. Any insurance plan with a guaranteed addition has higher premiums, and therefore, the returns get lowered.

5.   Surrendering Policy at the Wrong Time

Whether it is a traditional life insurance plan or the ULIPs, the policyholder may want to leave any time before maturity for many reasons. Leaving a traditional plan before maturity may not be the right decision as the surrender costs are still there, albeit lower as compared to leaving in the initial years. Similarly, in ULIPs, an early leave may not be the right move as the charges are front- loaded and are spread over the first five years. One of the main reasons for leaving a ULIP is when the fund performance is low. However, in ULIPs, the performance has to be compared to the market index or the scheme’s own benchmark. Once a policy is bought, it should be continued till the maturity to utilize the cost- benefit of the plan. The benefits of a life insurance policy are structured in a way that they work only when a contract runs its full course.

There is nothing wrong about buying a life insurance policy, but these are the mistakes a person makes while purchasing it. Make sure you avoid all of these mistakes in order to avoid wasting money and ending up with a wrong insurance plan.

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