25 Pitfalls to Securing Your Life Insurance Policy
Introduction: How I came across this idea? While been selling life and general insurance for over a decade and continuing in the field of financial planning, I came across numerous individuals and families asking me these types of questions. Hence they became relevant and I thought of listing all the essential criteria, one must look for, while planning to buy any kind of life insurance. My ideas below can be called bench marking tools to assess how much, where to buy, what to buy and whether to buy- life insurance policies queries. These tools shall equip you with a checklist and shall save you not only money but save you the embarrassment arising out of unavoidable circumstances. It also helps you to ensure well being of your loved ones, for whom you are building the security net.
Some good 25 ideas to look out for while planning to buy a life insurance policy, some pointers no one will ever tell you.
- The Cover: Have you actually calculated how much life insurance do you really need, Have you done an analysis of your current and future needs based on your loans, household/ lifestyle expenses and children’s future expenses etc.
- Who Needs: Are you the only earning member of the family? Insure and secure well all those earning members only and not insure non-earning members.
- Tenure: Do you know till what age would you need life insurance? Do you know your age of retirement?
- Disclosures: Are you aware of the necessary and relevant disclosures while taking a life insurance policy and how they can be used to reject your claim?
- Exclusions: Are you aware of the first or the second year exclusions like suicide clause.
- Riders: Hope you are not taking the riders available as optional?
- Not Investment: Life insurance policy should only be treated as a replacement financial support plan and not as an investment plan.
- Child Plan: Don’t look at “children’s insurance” i.e. child plan wherein the life of the child is insured!
- Disclose: Be aware! Do not hide the facts. Disclose all the facts related to current & past illness, medical facts about your parents and your smoking, drinking habits etc.
- Myth: “Term insurance gives you nothing at the end…” kind of miss-selling propositions are only myths as it is a feature, a fundamental purpose of looking at life insurance and not are treated as an investment, for you have many other options for investments.
- Returns: Combining PPF or ELSS with term gets you a much better “returns” while ensuring safety, security and long term investments objective
- Save tax and “invest” in life insurance policy is a myth as investing and insurance are two separate incongruent goals and should not be mixed. Investing is a deferred spending while insurance is spending now in hope of avoiding future losses; investing and insurance are hence, opposites.
- Investment: “Insurance policy is an investment vehicle…” is a myth as it is not an option or objective of maximizing yields while minimizing peril.
- Comparison: Do consider important factors while trying to compare term policies: Terms, coverage, features, cost
- Factors to be considered before selecting a life insurance company are: claim settlement ratios, premiums, brand you trust, and financial strength of the service provider.
- Check agents background and tenure to see his credibility, trust, reliability and experience
- Obligation: Don’t just try to oblige an agent by favoring him or her, rather just give some one time donation or gift and avoid getting into false commitments or features that you never wanted or may not help you at all.
- Tax saving is important but life insurance, by now you would have understood, is perhaps not an investment or return, instead look at 3 great options: PPF, ELSS and if still not happy, (if employed), increase your commitment to EPF, where you can accumulate tax free investment and save taxes.
- Guaranteed return life insurance policies have their own downside also, as they would necessarily be investing their funds in very safe instruments, to get you finally very conservative and perhaps less than inflation returns. Avoid them!
- What to buy: Now, once you are sure of the above information, and clear about the life insurance company, My suggestion would be to go for term insurance plan as it is the simplest.
- Buying online term insurance is the cheapest, is true. About 40 % cheaper than buying from an agent. But look out for convenience and support.
- Don’t sign till you are convinced and get everything in documented format, checking brochures for features, and consider cancellation clause within 30 days if you feel deceived, for features missing in what your agent told you and you found absent in the main policy document.
- No health checkup is a trap for low sum assured plans. They should be avoided because all health related material facts must be disclosed to the service provider.
- Keep Informed: Have you informed your family members and nominee about the policy being taken and are they aware of the claim procedure etc.
- Does your family have an action plan, that after you, what and how to manage the claim amount? Do they know how to prepay the loans and manage the future expenses?
Conclusion: Insurance is a means securing financially future unseen circumstances so that your family members can be provided for a big amount in case of an eventuality. Be mindful of all the 25 points mentioned above and be happy. Consult your financial planner for understanding your insurance needs and keep updating and re evaluating the needs. Buying life insurance is not a one-time event, various events in your life may change your insurance needs. Consult your financial advisor for varying needs of insurance as your life progresses.