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6 common life insurance mistakes you should avoid

 6  common life insurance mistakes you should avoid

6  common life insurance mistakes you should avoid

Life insurance is one of the most important components of anyone's financial plan. Be that as it may, there is a ton of misconception about disaster protection, chiefly because of the manner by which extra security items have been sold over the course of the years in India. We have discussed some of the common mistakes that insurance buyers should avoid when purchasing insurance policies.

1. Reducing insurance requirements 

Many life insurance buyers choose their insurance covers or the amount guaranteed, based on the plans their agents want to sell and how much premium they can afford. This is the wrong approach. 

Your insurance requirements are a function of your financial condition and have nothing to do with the products available. Many insurance buyers use rules of thumb such as 10 times the annual coverage income. 

Some financial advisors say that covering 10 times your annual income is sufficient because it gives your family 10 years of income when you go. 

But this is not always true. Let's say you have a mortgage or loan of 20 years. How will your family pay the monthly loan payments after 10 years when most of the loan is still outstanding? 

Assume you have very young children. Your family will run out of income when your children most need it, for example for their higher education. Insurance buyers need to consider several factors to determine how much insurance coverage is right for them.

Pay off the entire outstanding debt (such as home loan, car loan, etc.) to the policyholder

After the debts are paid, the cover or the guaranteed amount must have surplus funds to generate sufficient monthly income to cover all living expenses of the policyholder's dependents, subject to inflation

After paying off debts and generating monthly income, the amount secured should also be sufficient to fulfill future obligations of the policyholder, such as education of children, marriage, etc.

2. Choosing the cheapest insurance policy 

Many insurance buyers like to buy the cheapest insurance policies. This is another fatal mistake. The cheap policy is not good if for one reason or another the insurance company cannot fulfill the claim in the event of an untimely death.

Even if the insurance company fulfills the claim, if it takes a very long time to fulfill the claim, then it is certainly not a desirable situation for the family of the insured.

You should consider metrics such as Claims Settlement Ratio and Term Prudent Settlement for Death Claims of various life insurance companies, to choose an insurance company that will fulfill its obligations to fulfill your claim in a timely manner, should such an unfortunate situation arise.

You should also check claims settlement reviews online and after that just choose a company that has a good claim settlement history.

3. Regarding life coverage as a venture and purchasing some unacceptable arrangement

A common misconception about life insurance is that it is also a good solution for investing or retirement planning. This misguided judgment is generally because of some protection specialists who need to offer costly approaches to procure high commissions.

If you compare the returns on life insurance to other investment options, it simply doesn't make sense as an investment. If you are a young investor with a long horizon, stocks are the best tool for creating wealth. 

Over a 20-year time horizon, investing in equity funds through a SIP will result in a combination of at least three or four times the maturity amount of a 20-year life insurance plan, with the same investment.

Life insurance should always be seen as a protection for your family, in the event of a sudden death. The investment should be an entirely separate consideration.

Although insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation, you should separate the insurance component and the investment component and pay careful attention to a portion of your premium that is already earmarked for investments. 

In the early years of ULIP, only a small amount goes to the purchase of units.

A good financial planner will always advise you to purchase a term insurance plan. The term plan is the purest form of insurance and it is a straightforward protection policy. 

The premiums of term insurance plans are much lower than other types of insurance plans, and they leave policyholders with a much larger surplus that can be invested so that they can invest in investment products such as mutual funds that provide much higher returns in the long run, compared to endowment or refund plans.

If you are a holder of a term insurance policy, in some specific cases, you can choose other types of insurance (such as ULIP, endowment plans, or refunds), in addition to your insurance policy, for your specific financial needs.

4. Purchase of insurance for the purpose of tax planning

For many years, agents have urged their clients to purchase insurance plans to save taxes under Section 80C of the Income Tax Act. Investors should realize that insurance is perhaps the worst investment in saving taxes.

The return from insurance plans ranges between 5-6%, while the Public Provident Fund, another 80C investment, gives nearly 9% of the risk-free and tax-free returns Equity-related savings schemes, another 80C investment, provide returns Much higher tax-deductible in the long run.

Moreover, proceeds from insurance plans may not be completely tax-deductible. If the installments exceed 20% of the amount guaranteed, the accrual proceeds to this extent are taxed. As we discussed earlier, the most important thing to note about life insurance is that the goal is to provide life coverage, not to generate the best return on investment.

5. Waiver of the life insurance policy or withdrawal from it before maturity

This is a serious mistake and harms the financial security of your family in the unfortunate event of an accident. Life insurance shall not be effected until the unfortunate death of the insured. 

Some policyholders abandon their policy to meet an urgent financial need, hoping to purchase a new policy when their financial situation improves.

These policymakers need to remember two things. First, the deaths are not under anyone's control. This is the reason we purchase life coverage in any case. Second, life insurance becomes very expensive, as insurance buyers get older. 

Your financial plan should provide for emergency funds to cover any unforeseen urgent expenses or provide liquidity for a period in the event of financial distress.

6. Insurance is a one-time exercise

Your lifestyle may also improve significantly. If you purchased a life insurance plan ten years ago based on your income at that time, the sum assured would not be sufficient to meet your family's current needs and lifestyle, in the event of a sudden death. 

So you should buy the extra range plan to cover this risk. Life insurance needs must be re-evaluated frequently and any additional guaranteed amount should be purchased if required.


Investors should avoid these common mistakes when purchasing insurance policies. Life insurance is one of the most important components of anyone's financial plan. Therefore, thoughtful attention must be devoted to life insurance.

Insurance buyers should be wary of questionable selling practiced in the life insurance industry. It is always a good idea to involve a financial planner who looks at your entire portfolio of investments and insurance on a comprehensive basis, so you can make the best decision regarding both life insurance and investments.