MISTAKES IN BUYING LIFE INSURANCE

Life insurance is the shield of protection for every family. If an unfortunate natural or unnatural death of the bread earner occurs, then the household can comfortably carry on for the next 15 – 20 years with claim proceeds of the mishap. Thereafter, surviving children would be able to start earning.

Although the concept may be called life insurance, in reality it is a financial insurance, i.e. a family is protected with resources in case of an untimely demise of the earning member.

So here we will discuss factors that should be weighed for buying a life insurance policy.

INSURANCE IS NOT SAVINGS

But unfortunately the concept of life insurance and its benefits are not properly understood my most people. The product is perceived as a savings by many, who invest in such policies with an aim of growth, a forced savings and security. But if forced savings is one’s objective, then the same can be accumulated through recurring deposits which offer higher returns at par with bank term deposits. The returns on such policies in case of no claim are far lower than standard term deposits with banks.

In short, if wealth accumulation is your goal, then life insurance is a wrong investment.

DO YOU NEED LIFE COVER?

Does everybody require a life insurance cover? This is a crucial question for each person before they buy a policy. No, the necessity is not for all.

If a family has 180 months or more of average monthly expenses in savings, i.e. 15 years, then putting money in very low yielding financial instrument is not recommended.

Our assumption here is, in case of an unfortunate demise of a bread earner, in the next one and half decades children would be in a position to earn after completing their studies.

Even if the family has alternate sources of income like house rent or a running business accruing regular cash flows, then also a life insurance can be avoided.

Or if both of the spouses are earning sufficiently enough, then a short term policy can be availed of till they build 180 months of average monthly expenses. While normal wisdom would say if both spouses are working the insurance is not required, but there are rare possibilities of both parents dying in quick succession or both of them meeting death while travelling together.

INSURING THE WRONG PERSON

In actuarial sciences, the ‘bread earner’ is called ‘human capital’ or the value of a human life. In terms of revenue generation, a non-working housewife or children are not of the same worth as the earning member in the family. A sudden death of non-working members would in no way effect the sustenance of the family. Thus, the maximum life cover should always be availed of the bread earner, after which other household members’ life risks can be insured.

Thus another crucial mistake is choosing the wrong person for insurance. Considering this more of an investment than a protection, life covers are often taken for non-earning members such as spouse and children. While there is nothing wrong in insuring any family member’s life, the first priority is to insure the earning member of the family.

THE LEARNING

Never buy life insurance policy as savings or investment but as a protection, and only if you need that safety net.