Performing a trapeze act without a safety net on your life’s journey to attain your financial objectives is analogous to not having enough coverage. Unfortunately, many only realize this when it’s too late.
Many individuals begin their own financial journey by considering where to invest their money. However, the cornerstone of a secure financial future is protection—protecting one’s future potential to produce an income. As a result, when we meet new clients, one of the first things we strive to do is determine how effectively their future earnings and present wealth are secured. Insurance of different types is the perfect approach to get essential and enough protection, and life insurance is one of the most important but underutilized weapons in an investor’s financial arsenal.
The irony is that even when it is available, it is often underutilized. We have observed numerous important blunders that consumers make in their life insurance choices during the past many years of encounters. We’ve listed seven of the most prevalent ones below.
7 Common Mistakes People Make When Buying Life Insurance
A large number of policies is insufficient insurance.
When we ask individuals whether they have life insurance, one of the most typical responses is “Yes, I have multiple policies.” Unfortunately, many insurance do not necessarily provide appropriate protection. The amount of life insurance you need (i.e., the sum guaranteed) is equal to the sum of your future financial aspirations and current obligations. Unfortunately, there is an abundance of small-ticket plans being pushed (and purchased) that, although they seem impressive, do not amount up to anything near to what is truly required in terms of life insurance.
Mixing investments and insurance
While the quantity of protection is far from enough, the premiums paid end up putting a significant hole in your income for one simple reason: you are purchasing items marketed as insurance but are really investment products with a negligible level of insurance. Another issue is that the investment product itself is highly inefficient, since most of these “endowment” products have low single-digit internal rates of return—simply stated, your bank fixed deposit will most certainly provide you a higher return. While there are somewhat better unit-linked insurance plans or ULIPs, they suffer from opacity as well as high prices (most of them), at least in the early years.
Insurance in the child’s name
Purchasing an insurance coverage in the name of the kid is a fairly typical error, particularly among grandparents (or grandchild). Again, these are financial products presented as insurance but with considerable extra downsides, such as extended lock-in periods. A recent example was a grandmother who had a whole-life insurance on her six-year-old granddaughter, which was set to mature when the kid was 99. And this is not an isolated incident; we had another example where the grandparents contacted us a year after the purchase and informed us that they had invested in a ULIP in the name of the grandson. When they realized the product was unsuitable, they were discouraged from discontinuing it due to lock-ins (five years) and punitive losses in surrender values.
Life insurance is only required to protect a family against the loss of future income or present obligations. A youngster has neither and hence does not need insurance. Think carefully the next time someone attempts to sell you a kid coverage.
It’s a waste since I don’t receive my money back—return of premium
Another nonsensical explanation we hear is that “the premiums go to waste—I don’t receive any money back.” The same individual has no issue getting insurance for his or her automobile or motorcycle. And product vendors have capitalized on this illogical behavior by launching “return of premium” insurance products.
People fail to realize that when the premium is refunded 20 or 25 years later, it has lost practically all of its value owing to inflation. For example, someone who pays Rs 25,000 per year in insurance premiums for 20 years receives Rs 5 lakh at the end of the 20 years. The current worth of it is just roughly Rs 1.25 lakh, assuming an annual inflation rate of 7%. And in order to recover this modest sum, we must pay inflated premiums for the next 20 years.
While the first four are mostly “product blunders,” the three following are mainly “behavioral mistakes” that consumers make while purchasing life insurance.
Not purchasing it immediately now because ‘there is nothing wrong with me right now, can purchase later’
Many people put off purchasing term insurance because they believe, “I don’t need it right now, nothing is going to happen to me.” What individuals don’t realize is that term insurance rates are inexpensive at younger ages and are locked in, but the later you purchase, the higher the price. Second, the term is only accessible when one has future income visibility, i.e., work, and in the event of illness, the insurance may be refused or come with high premiums. As a result, it is better to purchase while one is young and healthy.
Another serious error individuals make is misrepresenting policy information, such as health or habit information. However, if such a problem is discovered later, the policy is rendered null and invalid. And the money may not be accessible when your family really needs it.
Term of insurance shorter than term of liability to reduce premium
Last but not least, a severe difficulty that we have encountered (this occurred to someone we know through COVID) is house loan cover insurance, which is required (though the quantity or term is not examined, I believe). Most loan firms market this as a single-premium insurance as a top-up loan to the base house loan, which is then paid in separate equivalent monthly instalments (EMIs) during the loan lifetime, in conjunction with the home loan.
In one unusual situation, the loan cover was obtained for just five years (ostensibly to minimize the single-premium amount), despite the fact that the loan was for twenty years. Unfortunately, the client died during COVID, and when the family inquired, they were informed that the insurance coverage had lapsed three years before and had not been renewed. Ironically, the family is still paying the EMI for the five-year insurance since it is linked to the 20-year loan.
It’s like doing a trapeze act without a safety net if you don’t have enough life insurance to cover hazards along the way to reaching your financial objectives. Unfortunately, many only realize this when it is too late. Check through the following errors to see whether you’ve done any of them, and if you have, address them right now before your financial path is derailed.