Traditionally, individuals have often considered life insurance a priority while structuring a financial portfolio. While having life insurance is very essential, it is also important that insurance be bought for the right reasons.
This article deals with four wrong reasons for which life insurance products are being bought today:
1. Treating life insurance as a savings avenue
Over the years, life insurance has been bought primarily for two reasons- tax saving and investments. Unfortunately, providing for life cover usually takes a back seat. While the 'tax saving reason' does hold good for individuals, conventional endowment type life insurance policies don't quite make for an attractive 'investment' avenue.
With a lower interest rate regime in place, the heady days of attractive and assured returns on life insurance policies are behind us. Going forward, the returns on insurance policies will depend on how well the insurance company manages its finances.
Our view is that life insurance should 'strictly' be bought for what it was always intended to do - indemnify the nominees in case of an eventuality. It is precisely for this reason that we believe that all individuals should have a term plan in their insurance portfolio, irrespective of their profile.
To take care of the investments and the 'tax-saving' element, individuals can consider investing in tax-saving mutual funds and NSC/PPF. Unit linked insurance plans (ULIPs), which can invest up to 100% of the premium in market linked instruments, is also an option, which individuals can opt for.
2. Trusting your life insurance agent/advisor completely
Before insuring yourself, ensure that you have done your homework well. Nowadays, it is 'normal' for sales pitches to be aggressive. Insurance agents many a times, sell life insurance products without adequately understanding or paying heed to the individual's profile and his actual needs.
For instance, how can one explain the absence of term plans in most individuals' life insurance portfolios in spite of the same being the cheapest form of insurance? Or for that matter, why have individuals with a low risk appetite invested in high risk ULIPs?
Remember, life insurance isn't so complicated that you should feel the need to leave the entire life insurance solution on your agent. Get involved. Probe. Enquire. Ask questions. And here's some food for thought: the IRDA stipulates that individuals wanting to become life insurance agents only need to have passed their 12th standard examinations for them to get accredited as agents.
If your financial portfolio is being structured 'entirely' by such individuals, you can well imagine where your finances are headed.
3. Considering life insurance as a one time activity
Individuals perceive life insurance as a one-time activity. Evaluating life insurance needs is an activity that must be conducted on an ongoing basis.
For example, while an individual may have bought say, a term plan while he was young and had just begun his career, his insurance cover certainly needs to increase after marriage or after a change in lifestyle. Another example- the need for child insurance plans will be felt only after marriage.
4. Buying the wrong product
This is one of those 'mistakes', which individuals seldom realise. A classic example is that of individuals buying the accidental death cover as a rider alongwith their regular policy like say, a term policy.
While buying this cover, individuals need to ask themselves one question: Am I going to need any 'extra insurance cover' due to 'death by accident'?
Another example is that of individuals buying high-risk ULIP policies while what they really need is a term plan or regular endowment type plans. Many individuals have 'bought' ULIPs without really understanding the product's risk-return proposition or how ULIP expenses pan out.
Individuals need to understand that ULIPs are unlike conventional life insurance products. ULIPs need to be understood well before they can form a part of any financial portfolio.
