Mistakes To Avoid While Buying Life Insurance Plans

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Mistakes To Avoid While Buying Life Insurance Plans 

Basic purpose of life insurance is to ensure that your family members do not have to grapple with a financial crisis in the event of death of the earning member.
I am young and don't need insurance
Youngsters who have just started earning may have dependent parents or siblings. The basic purpose of life insurance is to ensure that your family members do not have to grapple with a financial crisis in the event of death of the earning member. Life insurance, therefore, acts as an income replacement tool.
Estimate the size of your financial liabilities (which have not been provided for otherwise), like the education or marriage of your sibling, or meeting parents' monthly needs in case there is no or less pension inflow. Estimate the shortfall in savings in meeting these needs and accordingly get adequate life cover. It is best to for a pure term insurance plan that provides high cover at low cost.
If the parents are financially independent and able to take care of their future household liabilities, there is no need to buy a cover. Prepare an investment plan by allocating funds in equity and debt assets through proper diversification.

Treating insurance as an investment
Life insurance plans could be traditional plans such as endowment and money-back, or market-linked such as Unit Linked Insurance Plans (ULIPs). Since both types have an element of insurance, hence there's a cost involved through mortality charges. While the former is entirely a debt product, with the potential to generate around 5 per cent return, the latter is an equity market-linked product, with the potential to deliver returns as per equity market conditions.
Even though ULIPs have the potential to deliver a higher inflation-adjusted return as compared to traditional plans, the former are not a pure investment product because of the many charges associated with them. Charges, after all, eat into the returns.
Therefore, if your sole objective is to generate high returns, do not treat insurance products of any kind as an investment.
Buy ULIPs only if you don't have the financial discipline to keep investment and protection separate and are ready to settle for reasonable returns. However, if you are one of those investors who can efficiently identify the right mutual fund (MF) schemes (across asset classes) based on your goals and simultaneously get a suitable life cover through a pure term insurance plan, ULIPs may not be of much help.

Exiting the policy at the wrong time

Whether it's a traditional life insurance plan or a ULIP, the policyholder may want to exit anytime before the maturity for various reasons. Exiting a traditional plan when only a few years are left to maturity may not be the right decision as a surrender cost still exists, albeit lower as compared to exiting in the initial years.
Similarly, in ULIPs, any early exit may not be the right move as charges are front-loaded and are mainly spread over the initial five years. One of the primary reasons for exiting 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 bought, the policies should be continued till maturity to optimise the cost-benefit of the plan. The benefits in any life insurance plan are structured in such a way that they work only when the contract runs its full course.

Buying too many policies

Whether it's a traditional life insurance plan or a ULIP, buying more than one is incurring a lot of cost. Every life insurance policy has several cost-heads, including an administration charge (agency commission). So every time a new policy is bought, the policyholder incurs this cost. This is especially true in the case of ULIPs. If one needs to buy a ULIP, find out the one which is flexible enough to meet the different goals at different life stages.

Buying guaranteed insurance plans

ULIPs that guarantee either the principal or the returns have to make the provision for delivering that guarantee to the customer. For this, there's an additional cost which the customer has to bear. Also, most guaranteed plans have a mandate of being invested between 0 and 100 per cent in equity markets and the customer does not have the choice of fund options. In order to provide guaranteed return, insurers invest more in debt rather than in equities. This flexibility helps the insurers to manage and deliver returns which might not be potentially as high as an equity asset class. Equities have the potential to generate high inflation adjusted return as compared to other asset classes over the long-term.
The high cost accompanied with returns of a debt asset makes the guaranteed plans not a good choice for wealth accumulation over the long-term. The same holds true for traditional plans. Any insurance plan with guaranteed additions generally has higher premiums and hence the returns get lowered. Guarantees give psychological rather than a real benefit.

Locking-in a long-term, inflexible plan

Just in case you wish to buy a traditional life insurance plan because its returns are less volatile and the maturity value is largely 'predictable', consider this. Such plans require higher premium payout corresponding to the sum assured (life cover) they carry as compared to a pure term insurance plan.
Further, they are largely inflexible in nature. Once the term is chosen, the premiums have to be paid regularly till the end and any early exit is costly. There are limited premium payment plans as well but the amount of premium is higher than normal plans. Many people buy them and then realise the mistake later on after paying 3-5-7 years' premium.

Not accepting the 'loading' by insurer

In case the insurer, after making the buyers undergo medical tests, revises the premium upwards, many won't accept the same and will start looking for another insurer. The revision in premium is through loading, i.e., asking extra premium on medical grounds. It is called for because the underwriting process of the insurer suggests that the specific life, if insured, will bring in an additional amount of risk to the pool as a whole. If you accept the loading, if any, by the insurer you can at least be sure that the insurer has accepted the risk on medical grounds and the claims process will not be impacted because of it.

Buying in the name of minor

Many people buy policies in the name of minor children as the mortality charges would be low and hence the premium. But as children don't have any earning capacity, it doesn't make sense to buy insurance in their name. Instead, it should be bought in the name of the earning member of the family.

Cheapest one is the best

Pure term insurance plans provides high life cover at low cost. They cover the risk of dying too early and provide protection for the term chosen. Such plans do not have any survival benefits. Most buyers, therefore, search for the cheapest term insurance plan and even consider online term plans as they are nearly 25 per cent cheaper than their offline counterparts.
Nothing wrong, but in doing so one should be careful of a few things. Plans offered online may be restrictive in terms of features. Unless you know what the insurer's offline version offers, the online version, which could be a trimmed version, wouldn't be of much help. The cheapest plan based on your age and desired sum assured may not offer a longer tenure. Do not compromise on the features for the sake of the cheapest plan.

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