Life insurance should be part of everyone’s financial plan. How life insurance products have been sold over the years has resulted in numerous misconceptions about life insurance. Insurance buyers should avoid making some common mistakes when purchasing insurance policies. Some of the mistakes are noted below. 1. Not looking for the best rate and policy Life insurance costs vary greatly between companies, so don’t limit your search for a life insurance policy to just one. For example, one company’s term insurance product may cost twice as much as a competitor’s. Request price quotes for various levels of coverage from at least three different companies. Allow an independent insurance broker to do the comparison shopping for you. Brokers can compare various life insurance products to find the best rate because they work with multiple companies rather than just one. 2. Underestimating the importance of insurance A life insurance buyer’s choice of insurance covers or sum assured is frequently influenced by their agent’s sales pitch and ability to pay. The approach is incorrect. What products you buy have no bearing on the type of insurance you require, which is determined by your financial situation. Many insurance buyers, for example, base their coverage on a rule of thumb of ten times annual income. Financial advisors say your family will have ten years of income when you die. It may not be the case in some cases. Assume you have a mortgage with a term of 20 years. How will your family pay the EMIs if most of the loan is still outstanding after ten years? Assume your children are very young. Your family will run out of money during a time of great need, such as your children’s higher education. Insurance buyers need to consider several factors when deciding how much coverage they need. They include;
- Complete repayment of all outstanding loans (e.g., mortgages, auto loans).
- Assuming that the policyholder’s dependents will continue to live at home after debt repayment, the surplus funds should generate enough income to cover all expenses for the policyholder’s dependents, including inflation.
- The assured sum should be significant enough to pay off debt, provide a regular income stream, and for long-term expenses like college tuition and a wedding.
3. Choosing the least expensive policy Many insurance buyers prefer lower-cost policies. The possibility of such errors exists in this context. It is pointless to have a low-cost policy if the insurer cannot pay the claim for whatever reason. Even if the insurer would honor the claim, the insured’s family does not want to be in this situation. 4. Getting life insurance but choosing the wrong plan Many believe life insurance is a good investment or method of retirement planning. Some insurance agents are primarily to blame for this misconception because they prefer to sell expensive policies for high commissions. When compared to other investment options, investing in life insurance makes no sense. An equity investment is the best way to build wealth if you are a young investor. A 20-year equity fund SIP will yield at least three or four times the corpus as a life insurance policy with the same maturity date. If you pass away suddenly, life insurance can safeguard your loved ones. It is critical to separate investment from other considerations. A good financial planner always recommends term insurance. It is the purest form of insurance because it is a specific protection policy. Because term insurance premiums are much lower than other insurance plans, policyholders have much more investable surpluses than they would with other types of insurance plans. Unlike endowments or money-back plans, mutual funds produce significantly higher long-term returns. 5. Surrender or withdrawal In the event of an emergency, the financial safety of your loved ones may be compromised if you make this mistake. Insureds must keep their life insurance policy in force until they pass away. Some policyholders intend to buy a new policy after giving up their old one when their financial situation improves. Nobody has control over death. Life insurance, first and foremost, serves that purpose. As the insurance buyer ages, the cost of life insurance rises. Assume you will face financial difficulties in the future. In that case, your financial plan should include contingency funds that can be used in the event of an unexpected expense or during a liquidity period.
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