Taking out term life insurance is an essential part of financial planning. Since no one can predict future financial obligations and responsibilities, it is imperative to have a policy that protects your best interests. For this reason, term life insurance is becoming mandatory for the safety of your family in the unfortunate event of your death.
In this article, we’re going to look at some common mistakes to avoid when purchasing term life insurance.
1. Insufficient sum insured
Term life insurance usually protects the family of the insured in the event of their premature death. It is intended to provide financial comfort to the relatives of the deceased after their death. However, if the sum insured is not sufficient for the insured’s relatives, they are helpless and fail to achieve the purpose of the policy. This is a common mistake policyholders make when purchasing a policy. Insufficient risk provision protection cannot cover the financial needs of the family and usually results from incorrectly calculated future insurance requirements. Such situations can arise when the insured amount is not properly estimated without considering dependent factors such as inflation rate, liabilities, credit, children’s education, etc.
2. Cost controlled
More often than not, the cost of the policy, rather than its relevance and usefulness, is the deciding factor when choosing a term plan for clients. Experts believe that the key factors people should consider when purchasing a term life insurance plan are the plan’s suitability for the needs of the buyer, the claims handling ratio, the financial capacity of the insurer, and its reputation. These factors are important because they affect the buyer’s purchase over the long term. Therefore, it is not advisable to go for any plan because it is available at a lower price and has long-term effects.
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3. Late purchase
Getting a schedule means getting protection from the possibility of death. Therefore, the greater the risk, the greater the premium amount to cover such a risk. So the more you delay the purchase, the closer you are to risking keeping your family in check should you die. If you buy Rs 50 lakh term plan at the age of 25, the premium amount is only Rs 5000 for one year. However, if you get the same plan at the age of 35, the premium amount is almost Rs 9000. Furthermore, since you have to pay the premium annually, setting a higher price can prove to be an expensive mistake. Therefore, the late purchase of a term plan has implications that affect the policyholder and their family financially.
4. False information
One of the most basic mistakes people make is hiding information or providing false information. Details of your medical history, financial status, etc. are valuable information for your insurer to help them evaluate your case. Information about previous illnesses, lifestyle habits, etc. is usually hidden in order to reduce the premium amount. However, not reporting such data while obtaining a policy is a bigger mistake than not obtaining a term schedule. So if a policyholder dies from a pre-existing medical condition that was not disclosed to the insurer at the time of purchase, the insurer will likely deny the claim.
5. Buy to save on taxes
While it’s true that life insurance is a great way to take advantage of tax benefits, that shouldn’t be the sole purpose of life insurance. Section 80C of the Income Tax Act stipulates that life insurance policies can provide savings of up to Rs 1.5 lakh. In addition, Section 10(10D) of the Income Tax Act provides that any premium or policy proceeds received at maturity or on the death of the policyholder are exempt from tax. Purchasing a fixed-term plan to save on income tax is a mistake because it drives the buyer with a primary goal that overshadows the true purpose of a fixed-term plan.
Being careful not to make the above mistakes can save you time and effort while purchasing term life insurance. The idea is to ensure that you and your family actually benefit from a fixed-term plan in the long run, rather than being a ceremonial formality. So carefully weigh your priorities against the benefits of your chosen policy before making a purchase.
(By Sanjiv Bajaj, Jt. Chairman & MD, Bajaj Capital Ltd)