Mistakes to Avoid While Buying Life Insurance Policy
After the advent of Covid-19, buying life insurance has become a priority for many people. This epidemic has killed lakhs of people in the country. Financial strain has made people understand the value of life insurance. However, people often make common mistakes in buying it. Today, we will be discussing this mistakes and how to avoid them.
It is good for people to be aware about life insurance and taking steps to protect themselves and their loved ones from any financial worry. Given below are some of the most common mistakes people make.
- Delay in decision making-People postpone the decision to buy life insurance for many reasons. People of 30-35 years do not understand the need to spend on this. The reason is that they do not see any threat to life. Experts say that the longer you do not buy life insurance, the longer the risk remains.
- Not taking term plan- In a regular term plan, the sum assured is paid to the nominee if the policyholder dies during the policy term. However, no maturity benefit is available if the policyholder survives the policy term. Most of the people do not take a term plan because of this. Most of the life insurance policies are taken by looking at the investment aspect with insurance.
- Hiding important information- Many people hide important information while buying a policy. These include pre-existing diseases, medical history in the family, smoking, etc. Concealment of such information or providing forged documents at the time of purchase of the policy may result in rejection of the claim.
- Taking a long term policy- Some insurance companies offer policies of 100 years or more. Experts say to avoid such policies. In this, a higher premium has to be paid for the increased cover.
- Buy short term policy-Buying a policy for too short a term is also a mistake. Buying life insurance for 45-50 years of age can be cheap. But, after the term of the policy is over, the risk comes on the family.
- Opting for return of premium- In such policies, if the policyholder survives the policy term, the entire premium is returned. This might sound like a good deal. But, this is nothing but bait to trap the fish. In this you pay more premium.
- Not reviewing life insurance- There are many such phases in life when the responsibility of the people increases. Marriage or the birth of a child in the family are such stages. At that time the need for life insurance increases.
- Choosing the wrong payment option- Most life insurance policies come with different payment options. On the death of the policyholder, the payment is made to the nominee based on the option chosen. It is important to choose the right payment option.
- Selecting limited pay mode- In the regular payment option, the premium has to be paid annually for the entire term of the policy. But, you can also choose the ‘Limited Pay’ option. In this, you have to pay only for a few years. However, experts will ask you to be wary of its benefits.
- Family not knowing about the policy- This is the biggest mistake made in buying life insurance. When many people buy policies, they do not inform their family members about it. They are not able to get its benefit when needed. Therefore, not only should family members should be informed about the policy, they should also be made aware of its features.
Choose Your Life Insurance Company Based on this Criteria
- Persistency Ratio-This number reflects the number of people who renew their policies with the insurance company every year. It reflects the company’s retention capability and trustworthiness. The higher the persistency ratio, the more the customers trust the brand. When looking at persistency ratio, look for two numbers-people who have renewed their policy after one year and after five years. Ideally, both should be high.
- Premium Rates- Today, you can compare rates for term plans on various life insurance-related websites. While a lower premium rate is always welcome, since you would be paying it for a long time, let that not be the sole criteria. The company offering the lowest premium may have a lot of exclusions. Ideally, you should choose a company whose rate is around the industry average. Also, check the amount of commission that you pay for your insurance — the lower the commission, the lower the premium.
- Claims Settlement Ratio (CSR)– This indicates the percentage of claims settled by the company. The CSR is one of the most important numbers that you should look at before you buy insurance. The higher the CSR, the higher the number of claims settled. According to experts, in the life insurance business, any CSR less than 95% should be a red flag. Again, do not look at just the current year’s figures. Look at data for the last five years at least.
- Percentage of Grievances Solved– This is the number of grievances solved as against the number of complaints received by the insurance company. The higher the percentage of grievances solved, the better it is. You can also check the number of pending claims at the end of each year. It shows how responsive the company is towards customer complaints. Hence, it is an important metric, especially since life insurance is a long-term product.
- Company Size and Solvency Ratio– A life insurance contract is a long-term commitment. Therefore you want to be sure that the company you buy the cover from will be around, say, 25-30 years down the line when a claim on your policy is likely to be made. There are two ways to check this. First is the size of a company, in terms of its total assets, profitability, market share and growth. The second is the Solvency Ratio. This is an assessment of an insurance company’s financial capabilities. IRDAI (Insurance Regulatory and Development Authority of India) norms dictate that each company should maintain a solvency ratio of 150% to minimize risk and avoid bankruptcy. The higher the solvency ratio, the greater the chances of your insurance claims being honoured. When you look at a company’s solvency ratio, don’t just go by the current number. Check out for at least the last five years.
Keep These Things in Mind While Buying Life Insurance Policy
If you are looking to buy life insurance, are you doing so without having a clear financial or life goal in mind? Sure, it is vital to look at external features such as the life insurance coverage amount offered or the premiums required. But these are not the only factors to consider when buying life insurance. Take a look at what you must consider before you decide on a life insurance plan.
- Assess the amount of life insurance coverage needed
The first step before scouting for life insurance plans is to assess the amount of life insurance coverage you and your family members will need in your presence and absence. For this, you will need to calculate the actual monthly and annual expenses of your family. Consider:
- Monthly day-to-day expenses (household groceries, utilities, bills)
- Any pending loans or investments (and the money that goes towards them)
- Any future goals and liabilities (such as a child’s higher education or marriage costs)
- A rainy-day fund (for unforeseen events such as illness, accident, early retirement)
Add the approximate costs of all these needs and multiply it by the inflation rate 10 to 20 years from now. Factoring in the inflation rate is essential as the price of goods and services goes up every year, but the value of money stays the same. Based on this sum value, you should select the life insurance coverage amount.
- Understand the type of risk involved in the life insurance plan
Life insurance plans fall into two broad categories. One kind is a non-linked plan whose benefits/returns are not associated with the equity and debt market performance. Such plans give guaranteed returns and benefits to the buyer and carry very low risk. The other kind is the market-linked insurance plan. In such plans, a portion of the premiums paid by the buyer goes towards making investments in the equity, debt or hybrid market products. The remaining part goes into guaranteeing the life insurance coverage to the policyholder. These plans and the returns accrued under them depend on the performance of the invested premiums and carry a mid-level to a high-level risk. Depending on your appetite for risk (profit and loss), you can choose a suitable life insurance plan.
- Check the type of life insurance plan and extra riders offered with it
Life insurance plans are of various types. There are:
- Term Insurance Plansthat offer a base death benefit to your loved ones on your demise
- Unit-Linked Insurance Plansthat give the dual advantage of a guaranteed death benefit and income growth
- Child education plansthat give the death benefit and the option to save and grow your income at the same time for fulfilling your child’s life needs
- Retirement plansthat give a guaranteed death benefit and the choice to receive monthly income payouts post-retirement
- Group insurance plansthat give life and health insurance coverage to corporate employees
Selecting the type of life insurance plan should be second on your checklist as the wrong plan can give you only inadequate financial protection. Furthermore, life insurance plans offer extra riders (additional coverage) for an added layer of protection against unforeseen events. These include:
- A critical illness riderthat gives a fixed lump-sum amount on the diagnosis of a critical illness
- A waiver of premium riderthat waives off the payment of premiums on the diagnosis of a critical illness
- An accidental death benefit riderthat pays a fixed lump-sum amount in case the insured dies due to an accident
- An accident disability riderthat waives off the payment of future premiums or gives a fixed benefit amount in case the insured develops a permanent injury due to an accident
So, before you settle on a life insurance plan, be sure to see the riders offered and the premiums charged for them.
- Check the insurers claim settlement ratio and record
This is a step that can be easy to miss before buying a life insurance policy. The hallmark of a reliable and exceptional insurance company is not only its claim settlement ratio but also its claim history. The claim settlement ratio is the number of insurance claims settled by an insurer during a given financial year. While it is crucial to account for that, you should also see the insurer’s performance in the industry, the consistency of their claim settlement ratio, financial strength, persistency and their turnaround time for settling claims. Buying a life insurance plan without receiving assurance that you will get the benefits promised under it on time nullifies the entire purchase.
- Read the life insurance plan in its entirety before buying it
Life insurance plans cover several scenarios but not every single one of them. Each life insurance plan has a specific set of exclusions (events that they do not cover) that you can find mentioned in detail in the policy wordings or plan brochures. Moreover, irrespective of the life insurance coverage and benefits the insurance company claims to provide – always check the policy wordings to see whether there are any limitations on the benefits provided. Some of the general policy exclusions include:
- Death due to engaging in an adventure sports activity
- Death under the influence of alcohol/drugs/narcotics
- Death due to a terrorist attack/riot activity
- Death due to suicide within 12 months of purchasing the life insurance policy
- Death due to engaging in harmful activities/self-harm
Points to Remember
- Before searching for a life insurance plan, it is essential to know what you are looking for and do the necessary research.
- You are also advised to consult your financial advisor before investing to know if the plan is suitable or not.
Keeping these factors in mind will not only help you save your hard-earned money but also lead you to the right life insurance plan.