Mistakes to avoid when purchasing life insurance!

By | June 4, 2014
Term life insurance cover policy

Life Insurance

Life Insurance must be understood in the right perspective if an individual has a dependant/s who will be severely hampered if an unfortunate incident would befall him. Suresh understood this and set out to eliminate and avoid most pitfalls encountered when buying a life insurance. After all, he has a wife who is a homemaker and two school going children that solely depend on him and he realised the severe hardship they would undergo in case an untoward mishap were to affect him.

Primarily, the most obvious mistakes are made by people who completely overlook the need to acquire a life insurance. They may continue to invest in a car which is a depreciating asset and other similar investments. There are other people who consider a life insurance to be a kind of investment and look for suitable returns in the long run.

Common Mistakes

  • There is a misconception among people at large who buy an endowment or a money back life insurance policy. The inherent importance of investing in a standalone life insurance is to adequately provide for the dependents when the insurer is no more. No monetary gains should be expected in this case. It must be a one-way investment with no returns to the person who has initiated the whole life insurance procedure.
  • There are some people who surrender their policy either partly or fully prematurely to utilise the funds for other purposes. This practice must be avoided as far as possible. In case the need arises for urgent money, opt for other sources or maybe a personal loan.
  • It is not recommended to indulge in buying a life cover just for the sake of it or choosing one with the lowest premium. Chances are that the insurers offering these low rates have dubious record of honouring claims. It also makes sense to check the reliability of an insurance company by referring to the online review site.
  • It is a common practice among individuals to under insure themselves. This is an erroneous option. Although, there are no benchmarks to the amount of insurance amount, but generally it is advisable to opt for an amount that equals 10 times of your annual salary.
  • Many people consider buying a long term insurance policy to gain tax benefits. This is valid only for a limit of Rs. I Lakh approved by the RBI under section 80C. This includes your payments towards a home loan and provident fund. Just in case both these are present, then the amount left to claim a benefit with the life cover policy remains negligible.
  • After suitably engaging in some whole term life insurance policy, people feel they have done enough and think they have achieved their goal. Nothing can be further from the truth as there is time value erosion occurring on a year to year basis. The amount you had covered a few years ago will not hold the same value 5 years later. Besides, lifestyles and needs change from time to time. It requires that additional life insurance policies are obtained over the years and this must be an ongoing process.
  • There are people who treat the advice of their investment experts as the gospel truth. This is a huge mistake. Many of these advisors are ill informed or may have a vested interest and consequently lead one astray. They confuse ULIP’s with pure long term life insurance and include them in the same bracket. Making a personal assessment of one’s long term goals and needs is essential. After all, everyone has different requirements. However, if one still considers insurance as a medium of investment, here are some top options that might be the best pick.
Bank/Insurance Company Insurance Plan/Features
HDFC Life Insurance HDFC Life Invest Wise Plan

  • Single Premium Unit Linked Plan
  • Fixed Policy Term of 15 years
  • Fund Selection Flexibility
  • 110% of Single Premium as Sum Assured
  • No Limit on Maximum Amount of Single Premium
Kotak Life Insurance Kotak Single Invest Advantage

  • Unit Linked Life Insurance
  • Onetime payment
  • Loyalty Addition for long-term investment
  • Customised fund portfolio
Birla Sun Life Insurance BSLI Wealth Max Plan

  • Onetime Unit Linked Insurance Plan
  • Guaranteed Additions for long term investors
  • Death/Surrender/Maturity Benefits
  • Self-Managed Fund Portfolio
  • Sum assured based on policy term and age
Bajaj Allianz Life Insurance iGain III Investment Plan

  • 98% allocation in initial years and 100% from sixth year
  • Inbuilt accidental death cover
  • Automatic increase in sum assured from 6th year of the policy
SBI Life Insurance SBI Life Smart Wealth Assure

  • Bond and Equity Linked Investment
  • Customised selection of funds
  • One time premium
  • Can be combined with accidental death benefit plan
  • Partial Withdrawal Liquidity
  • Generally, death is the furthest from an individual’s mind, resulting in not making adequate provisions for the dependents they will leave behind, especially if they are the sole earning members of their family. Remember, death comes unannounced.
  • There is another misconception among several people that only earning members must be insured. There are instances where it may be important to insure non earning members as well. The wife of an earning member who manages several other duties is also indispensible. Her loss could mean a substantial increase in running the household and a suitable life insurance for her may cover these additional costs. Similarly, there may be another family member who may not be a direct earning member, but significantly assists in running a business which contributes to the household income. The loss of this member would increase the operating costs of the business and again, a life insurance for this member makes for a good case.

It is obvious that the value of a good whole life term insurance policy cannot be stressed upon enough. However, it is equally critical to avoid all the pitfalls along the way and to make a personal assessment of one’s personal long term requirement for the beneficiary or nominee.

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