Has your life insurance consultant ever told you about how much
life insurance you need to secure your family’s standard of living (SOL)? Were
you worried when you heard that your neighbor had to settle for lesser return
on his Unit Linked Insurance Plan (ULIP) for surrendering early? It is your
responsibility to ask the consultant as many questions until you actually
understand the pros and cons of investing in life insurance, otherwise the
risks could trip you.
Buying an Incorrect Plan
The very first risk is buying an incorrect plan. The primary
objective of buying any life insurance policy has been as a risk mitigating
tool to protect a person’s family and its standard of living, not merely as an
investment for the sake of returns. While a pure term insurance plan provides a
lump sum payout in the unfortunate death of the policyholder, it does not pay
anything if the policyholder survives the policy term. On other hand, a person
who wishes to get maturity benefits of the policy if the policyholder survives
the policy term along with the comfort of protection of the family otherwise,
can opt for a traditional or a market-linked endowment plan.
For instance, the new ULIPs (after September 2010) have become
very low-cost as compared to those plans offered before this period. However,
the lock-in period for new ULIPs has been raised from three years to five
years. Therefore, one cannot withdraw money from unit-linked insurance plan
before five years or use this investment vehicle for immediate liquidity, but
for future fulfilling financial goals. Notwithstanding the benefits of new and
low-cost ULIPs, one should remember that since these plans invest in the equity
market, the returns will be in line with the volatility of the stock market. People
with low risk appetite should stay away from investing in equity funds as they
may panic due to short term volatility and exit at loss.
A policy holder should go through detailed checks and balances
when buying an insurance plan. After deciding the type of plan to be bought,
the decision on the premium paying ability of the policy holder will influence
the quantum of premium and thereby, the insurance cover. It is advisable to
agree on a premium that will not adversely affect the policy holder’s ability to
pay, should there be adverse financial conditions in any particular period
during the term of the policy. The policy holder should read and understand all
policy terms and conditions thoroughly as well as reveal all pertinent
information about medical and family history, before signing the dotted line.
Not cross-checking the
credentials of insurance agent/consultant
Another risk could be that of not cross-checking the credentials
of your insurance agents. Often, a few insurance agents insist on buying a new
policy with the renewal premium amount for an existing policy looking at their
short-term gains or uses other ways and means to misguide a policyholder or a
prospective insurance buyer. Such practices have resulted in customers being
skeptical towards all insurance agents and insurers. It is better to conduct
due diligence about the insurance agents and the suggested plans from other
sources, before buying a plan.
Buying insurance as a tool to
save tax
The next risk arises from the fact that life insurance is still
majorly considered as a tool to save tax in India. Though a life insurance
policy, purchased in any particular year to avoid higher tax payment will
provide a financial protection in an unfortunate event, the sum may not be
adequate for your family to maintain the same standard of living. A general
thumb rule of buying life insurance to provide adequate financial security to
your family and protect your future financial goals is that you buy life
insurance worth 8-10 times of your current annual income, not just the amount
of the premium that covers the gap to meet the limit in Section 80C of the
Income Tax Act.
Not considering the brand
One more important risk is that when you buy life insurance,
you’re counting on the insurer to keep its commitment years or decades from
now. Therefore, it is important to consider the brand and the companies backing
this promise. It’s better to pay a slightly higher premium to a trustworthy
insurance company and be sure of a payout in case of the unfortunate demise of
the policy holder or after the policy term, instead of paying a lower premium
to a new, untested industry player.
Once you are mindful of these risks, deciding to buy the right investment Insurance Policy will be a piece of cake.
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