Wealth Guide: 7 common insurance planning mistakes to avoid

Life insurance is one of the most important products an individual purchases to protect oneself and one’s family members from various uncertainties of life.

Like any other important long-term purchase, one must be extremely prudent while purchasing a life insurance policy and avoid some of the most common mistakes listed below.

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Anil Kumar Singh, Chief Actuarial Officer, Aditya Birla Sun Life Insurance Company Limited highlights 7 common mistakes that individuals should avoid doing while insurance planning:

1. Waiting too long to be insured:

One of the worst mistakes an individual can make while devising a financial plan is delaying buying a life insurance policy. One’s life is always prone to various risks and uncertainties and so safeguarding them at the right time is extremely crucial.

Also, life insurance rates increase as you age and develop health conditions. Hence, it’s better to buy sooner rather than later.

2. Relying solely on group life insurance:

Basic group life insurance is typically one of the many benefits an individual receives while working in the organized sector.

However, the sum assured is usually not enough and the coverage ends when one leaves the company - placing one’s family without a financial safety net.

Hence, it is advisable that an individual compliments his/her group life insurance policy with a personal life insurance policy that will continue to provide an adequate cover in times of uncertainty.

3. Life Insurance is not just Term Insurance:

A common myth individuals have about life insurance is that it financially protects one’s family only in their absence. Life insurance policies are not only about income replacement in case of death or disability of the breadwinner of the family.

It can be a powerful tool for long-term survival. These financial instruments enable one to invest regularly and build a fund for various future needs including but not limited to one’s retirement.

Many Life Insurance policies also offer full or partial return guarantees on investments. Some are designed to provide financial protection against the risk of various critical illnesses and provide access to much-needed finances in the early and later stages of detection.

Child insurance policies secure the future of one’s child and protect his/her education against skyrocketing education costs.

4. Not doing due-diligent comparison shopping:

With the advent of technology, comparing insurance policies of varied companies has become extremely easy. One can check and compare online the right insurance policy, map it with one’s individual profile and various parameters like benefits, claim settlement ratio, company brand reputation, price, etc.

Above all it is essential that one chooses an insurer that is financially sound and provides good service. Many policies can further be customized and bought online as well, removing the hassle of physical branches, or setting up sales visits.

5. Purchasing too little life insurance:

The main purpose of a life insurance solutions is to protect and replace lost or stopped income. If the amount received is too small, it might not suffice the requirements of your loved ones.

Therefore, it is wise to consider various factors such as current liabilities and expenses as well as future goals and milestones before arriving at the adequate sum insured value.

For example, a non-earning younger individual may not need a large amount of sum insured because he/she does not have much income to lose.

However, at a later age, when one starts earning and is financially stable and established, one must consider higher insurance cover to protect the family from the loss of income for a longer period. As a thumb rule, it is advised that one must opt for a sum insured of at least 10 times one’s income.

6. Not covering a non-working spouse:

It is important to evaluate all the uncertainties around you and your family members’ lives before opting for protection solutions.

The sudden absence of your spouse, even if non-working, can seriously impact your family and your ability to earn, as you need to spare time for responsibilities such as childcare.

A well-planned life insurance policy for the spouse is vital in this regard. It can be a standalone policy for the spouse or could be a joint cover with your policy.

7. Not Knowing Your Policy:

One of the most common mistakes that individuals commit while purchasing a life insurance policy is not understanding the policy well enough.

Each policy comes with a number of options, riders, and unique benefits. You can avail of all the benefits and utilize the policy to the fullest only if you understand it completely.  

We all know it but somehow most of us still commit the same mistakes. By avoiding these all-too-common pitfalls, you can make sure your life insurance does what it is supposed to do — provide adequate protection to you and your family’s needs.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)