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Common Mistakes That People Make When It Comes to Buying Life Insurance

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The fate of the insurance companies has grown post-covid. After the pandemic, you can see a different new world. Many breadwinners of the family succumbed to the virus, leaving their families in dismay. However, COVID-19 was successful in creating awareness about the life insurance industry. According to the Economic Times, during the pandemic, 51% of respondents bought life insurance out of which 30% were first-time buyers. This rate is rising, but most people buy the product in haste so that it costs them wrongly. Before this happens to you, catch some common mistakes that people make when it comes to buying life insurance:

1. Not buying early

A common belief is that “I’m perfectly fit today, so why spend money on getting life insurance?” Secondly, many people end up procrastinating on buying early. The fact that these people miss on is “Low premiums”. Yes! The younger you are the premiums on a term insurance plan are low & locking it, when the rates are low, is a sensible thing to do. However, the pandemic has somehow dispelled such misconceived notions.

2. Hiding critical details

When it comes to buying life insurance or health insurance, many people end up not disclosing their critical information at the time of buying the policy. Critical information could be anything from hiding pre-existing illnesses to habits of engaging in smoking, drinking, etc. All this information should be expressed at the time of purchasing the policy. At that time, you might become successful in hiding critical information, but unfortunately, during the claim process, you will end up facing rejection.

Insurance companies are very particular when it comes to the process of claim. They cross-check every minor detail present in your policy and compare them with your claim details. So, if you wish to have a smooth claim process then make sure you don’t hide any important information.

3. Buying the policy for a very short-term

Leaving a good financial cushion for the family after them is what every breadwinner wishes for. For instance, buying the cover for the age of 45-50 years will leave no major financial assistance for your family. Ideally, you should have enough coverage that cover all your obligations & pay off debts. In the 40s & 50s for most individuals expenses like a child’s higher education or marriage-related expenses are at the peak.

Thus, the sudden demise of the breadwinner in this critical period may leave the family exposed. Therefore it is highly unlikely that within a 4-5 years span, you would have accumulated enough assets for your family to lean on by this time. Thus, don’t purchase the policy for a very short tenure!

4. Going for return of premium

One irrational thought that people arrive at is ‘Why should I go for it when I don’t get the premiums back? Thus, to clear this thought, insurance providers came with a ‘return of premium’. Under this, if you survived the entire term, your premium will be returned to you. Now, this seems like a wonderful deal, but unfortunately, it is NOT! Now consider you have term cover of 1 crore that costs you somewhere around 13,448* annually but if you opt for the same policy with ‘return of premium’ then it will cost you 28590* per year. The premium amount goes higher as per the normal policy without the ‘return of premium’. Secondly, people also fail to understand that when the premium is returned after say 20 years, the amount nearly loses its value due to inflation.

If you are someone paying 25,000 annually then you get up to 5 lakhs by the end of the 20th year assuming 7% inflation every year. Thus, to this small amount back, you might end up paying inflated premiums for the 20 years.

5. Getting insurance in the name of the child

This mistake is majorly made by the grandparents when they buy/purchase the policy for their grandchild. A recent example to explain this was there was a grandmother who had her whole life insurance under the name of her 6-year-old & it started to mature when the grandchild turned 99.

Many insurance companies might suggest you this option but think twice before making this mistake. This is because life insurance is only a cover that secures the family, financially after you. Therefore, a child doesn’t need insurance here, so be wise enough to make a decision.

6. Not informing your family about the policy

Many people believe that informing anyone in the family might not be a good idea. However, if you are not anymore then who will be a responsible person to take care of this? No one! You wouldn’t such a situation to arise, right? Well, an extremely trustworthy & responsible person should be made aware of this. Sometimes in life, the right decisions are the toughest to make, but again, you have to, for your family’s financial security.

7. Not choosing the right insurance company

Bottom Line

We all wish to leave something behind for our family in our absence. Life insurance is a product that will help them cope with the least financial obstacles. Make sure you consider the above-mentioned mistakes before purchasing a life insurance policy. You can always get professional help from finance advisors.