Things you tend to overlook when purchasing life insurance

Life insurance is a very significant purchase, as it offers financial protection to the policyholder and his/her dependants as well. However, many people overlook the need for a life insurance cover. Even if they buy a policy, in most cases, they would incorrectly estimate the level of protection required. This could result in them being grossly under-insured.

Listed below are some factors that people overlook when buying a life insurance policy:

• Buying an insurance product not suited to your needs - Life insurance products are of different types, varying in terms of the structure, coverage, and functioning. While buying a life insurance policy, you should be aware of certain specifics, such as the funds in which the premiums will be invested, flexibilities offered by the plan, returns expected from the policy, and maturity/death benefits associated with the insurance.

If you are looking for flexibility and higher returns, a traditional life insurance plan works well for you. If investment is your primary necessity, then you should opt for Unit Linked Insurance Plans (ULIPs). If you are keen on financially protecting your dependants, you should look to buy pure term insurance plans.

Life insurance is a long-term agreement between the insurer and the policyholder. Hence, there could be significant costs involved in breaking the contract mid-way. So, you should spend a good amount of time in understanding the terms and conditions of the policy before you sign on the dotted line.

• Insurance without a goal - Many policyholders buy life insurance in order to save tax or even start their savings process. So, they do not pay much attention to the protection offered by the policy. Hence, there would be several cases in which the sum assured is highly inadequate for their needs.

It is important to buy a life insurance policy after you have a clear idea on what it will be linked to. So, for instance, if you buy a term plan you can link it (as a source of additional funds) to the education needs of your child. Based on this calculation, you should decide on the tenure of the policy. Along the same lines, if you want to build a corpus for your post-retirement years, you should buy a ULIP that invests in an equity fund. Unless you chalk out the purpose of the insurance, you are highly prone to making a costly exit mid-way through the plan.

• Not updating the application form personally - Many insurance buyers allow agents to complete the application forms. This is a crucial mistake, as there could be certain facts related to finances, health, and dependants that the policyholder would be better off updating. If the policyholder fills in the form, he/she would be able to better understand the processes followed by the insurer. You should note that disclosing wrong information at the time of policy purchase would result in issues at the time of a claim.

• Not buying insurance for the stay-at-home spouse - Many policyholders do not buy insurance for their spouses who stay at home and do not earn. This is because they think that there are no family members who are financially dependent on the stay-at-home spouse. However, you should ideally consider the cost of managing the household in his/her absence, and buy adequate insurance for the same.

• Not buying insurance for the working spouse - Working couples are usually not financially dependent on each other. However, in the case of an unpleasant event such as a death, the surviving member would be burdened with the responsibility of the household. The loss of income from one channel could completely disrupt the financial goals of the entire family. Hence, working couples who contribute towards the finances of the house should both be insured adequately. Moreover, if there are any pending loans or financial dependents like children involved, life insurance for both members is a must.

• Not updating the nominee - Some policyholders do not update a nominee at the time of policy purchase. They leave this information to be updated at a later date. In order to avoid any legal issues between the surviving members of the family, it is wise to update the nomination at the time of buying the insurance. With the Insurance Amendment Act 2015, a new ‘beneficial nominee’ category has been introduced for the close relatives of the policyholders. This clause also simplifies the process of specifying multiple nominees who would be sharing the payout.

• Not buying the policy under MWP - If the deceased policyholder has creditors to whom he/she owes money, they can recover the entire proceeds of the policy, superseding the designated beneficiaries. To avoid this situation, you can purchase the policy under Section 6 of MWP (Married Women’s Property Act), which protects the wife and children of the policyholder. You can avail this benefit by updating an MWP addendum at the time of policy purchase.

When you buy a policy under the MWP Act, the proceeds from the policy will be the right of the wife and children of the policyholder. None of the creditors, or even the husband’s parents, will have any rights to the benefits. If the husband survives till the end of the policy term, he will have no rights on the survival benefits, either. This facility is very useful if you stay as a joint family with multiple claimants to the policy proceeds at death.

• Not reviewing the coverage later on - As the policyholder ages, he/she should ideally review the insurance coverage and make necessary amendments to the policy. With age, financial liabilities may increase, necessitating increased protection. The increase in the number of family members also calls for added coverage. Therefore, it is critical to review your life insurance cover at regular intervals and update it as required.

• Not opting for adequate coverage - Most insurance buyers make the purchase either to save on tax or to save some money for their future needs. They do not pay much attention to the fact that a life insurance is bought to replace the policyholder’s income in the event of his/her death. If needed, you can approach an insurance consultant to evaluate your requirements and identify a policy that avoids under-insurance.

With the above points in mind, you will be well-equipped to buy a life insurance policy that provides you effective coverage throughout life.