Making mistakes when you buy a financial product is very common for investors. So, in this article we’ll be discussing life insurance mistakes to avoid when buying a policy.
It’s gruesome when the product is life insurance. Imagine you think you are efficiently insured when actually you are not and your family ends up with a small pay out from the insurance company when in reality they needed much more. You don’t want to be in that situation.
To make it more complex for investors, there are many types of life insurance policies available. So while you do your homework on which life insurance policy is best for you, make sure you take note of these –
7 life insurance mistakes to avoid when buying a policy.
Avoiding mortality and life insurance discussions
Life insurance deals with mortality. You are talking about your death here. That is not very good to read, leave alone hear. So most people don’t talk about it. My parents swing into spasms of wails as soon as I mention life insurance and wills. (I’d like to believe the same case is with my wife though I’d need to check).
Not talking about life insurance is the first mistake investors should avoid making. They step far away from the eventuality that one day they will die and that death could even happen sooner. The faster investors embrace this discussion, the better it will be for them and their loved ones.
Buying life insurance once is enough !
Life insurance is not a one time activity. With increasing liabilities in your life, the amount of life insurance that you need keeps on increasing. So when you get married, you might need a life insurance policy of say Rs 30 lakhs but when you have a child, the amount will obviously increase.
Then as you age and your children are no longer dependant on you, your liabilities come down and obviously you do not need as much insurance now as you needed earlier.
Most investors fail to recognize the fact that the need for life insurance changes with time – they take life insurance once and forget about revisiting it.
Going by what your life insurance agent says
The life insurance agent of our industry comes in various names – some call themselves life advisors while some use the term relationship managers. Whatever title is being used, remember that a person selling you a product might not be doing so for you – he might be targeting his sales figures for the month and/or maybe his commissions are going to come through your premium payout.
Don’t trust your advisor completely. Make sure you understand the product yourself. If you cannot, check with a fee based financial planner and go with what he says. You could zero down on the best financial product in life insurance in flat 30 minutes with a payout of less than Rs 500/- with a certified financial planner. Remember that is money well spent !
Using life insurance to save money for your future
I know, I know. Even you could write a book on this. So I will make it brief.
Life insurance has been historically used as an investment avenue by Indian investors. However, insurance is meant to compensate you for a loss you suffer – so insurance should always be used to leave behind money for your loved ones in case something were to happen to you. Using it as an investment vehicle is not the efficient use of your money and not the right way to buy insurance on your life.
Doing that is like buying a tooth brush to brush your teeth and using your fingers instead. There are better uses of tooth brushes and fingers too.
So forget endowment plans, moneyback plans, whole life plans and ULIPs – buy a life insurance term plan instead.
The premium is very expensive
If the price of insuring your brand new car or two wheeler is jacked up, will you take the insurance simply because it is being mandated by law ? Yes you would. However, if the same case were applicable to your life insurance policy, you would not take one saying the premium is very expensive.
Now, how fair is that ? The right premium for the right product to cover your life, however steep it is, is something which you will have to bear. You cannot leave behind your loved ones with no money, right ? And let me hastily add that it is not impossible to find a term insurance policy that suits every budget of a person. Thinking that the premium is very steep is another mistake to avoid when buying a life insurance policy.
Rules of thumb suck !
Thumbs world over are useful for 2 purposes – one to show agreement/victory and another for your child to suck.
Applying it to take life insurance is a fatal mistake investors should avoid. You can definitely use thumb rules to get a ball park figure of how much insurance you need but buying insurance based on thumb rules should be strict NO NO. You could either end up under insuring or over insuring yourself.
Financial planners generally follow the needs based approach when planning for life insurance. Use that.
Buying the wrong product
Using ULIPs to cover your life is easily the most common mistake made in the last 5 years in India. Though ULIPs have now undergone a sea of changes. It is still a very dirty atmosphere with insurance agents still pushing them as the basic life insurance product for investors.
With the tax season round the corner, investors need to be more careful. Remember that the months of January, February and March are when you want to avoid insurance products. These include endowment plans, moneyback plans, whole life plans and ULIPs. The other months, of course are April, May, June, July, August, September, October, November, December.
If you are stuck with a wrong product which you cannot sell very quickly, your entire financial planning could be jeopardized because of this.
Life insurance mistakes to avoid by using these 7 rules and be a wise life insurance purchaser.
Rajeev says
Hilarious one !
I agree with all your points. Especially the last one.
One shoudl never buy into such policies. Term plan is the best. Which company is the best one to buy a term plan from ?
TheWealthWisher says
@Rajeev, You can try Kotak, they seem to have the cheapest term plans around. So does the online version of ICICI Pru and Aegon Religaire
Suresh says
Hi Radhey,
I have recently bought Aviva iLife Term insurance. I am aged 28years and married for one year now.
Aviva iLife Term Insurance, Sum assured = Rs. 50Lacs and the term is for 35years.
I have not added any raiders like Accidental death benefit or disability raider.
Let me know whether Aviva iLife is a good one to be insured under and also, should any raiders to be added to it?
Radhey Sharma says
@Suresh, There is no term insurance that is good or bad. So don’t worry.
Take personal accident cover separately please, not as a rider.
Manickkam says
@Radhey Sharma, Don’t you think we need to check for the claims ratio while going for the term insurance with the insurance provider.
Radhey Sharma says
@Manickkam, We should check that, it is important. However, read this –
https://www.thewealthwisher.com/2011/10/10/life-insurance-death-claim/
I believe that claim ratio cannot be a guarantee of sorts. What are your thoughts ?
Chirag says
@Suresh, I guess currently there are no riders with Aviva i-Life
Jaswinder Singh says
@Chirag, Thanks for the information Chirag! For gaining information on their product, I tried calling Aviva at the toll free number listed on their site – but it seems they were too busy with other callers…