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News & Views

Monday, Aug 1, 2016

Life insurance myths that can hurt buyers

   [Source : The Economic Times]
[Source: The Economic Times]

You must start early: Getting insured early in life means your family's financial future is secured. You also get the benefit of a lower premium because insurance is cheap when you are young and healthy. But this does not mean that life insurance should not be bought if a person is no longer young. There are many milestones in life at which time it is critical to buy more insurance. For instance, when you become a parent or when you take a big-ticket loan. For most people, financial commitments are at their peak when they are 35-50. As soon as one realises the need for additional financial protection for his family, he should buy life insurance.

Separate investment from protection: Many planners insist that one should not mix wealth accumulation with protection, however, it is possible to combine wealth creation and protection in a single product that serves both needs. A Ulip (unit-linked insurance plan) allows a policyholder to accumulate a corpus over the long term to meet one's financial goals and also gives life insurance cover.

Ulips are high-cost products: This argument was correct till a few years ago. In the long-term (12-15 years), the intermediation cost of a Ulip is not any higher than that of a mutual fund. Besides, Ulip policyholders can use the switching facility to alter their investment mix anytime without tax implications. Ulips offer various fund options to policyholders. The fund performance of insurance companies is publicly available and can be analysed before choosing the company and the particular fund. Like mutual funds, Ulips allow customers to invest systematically via monthly or quarterly instalments, without adding to the cost.

Hide health facts to lower premium: Disclosing your correct state of health is essential when buying insurance. A correct declaration of health may result in additional premium, and many buyers think this additional premium is a waste of money. But hiding critical information or submitting incorrect details may result in the insurance claim being denied. In the attempt to avoid paying a slightly higher premium, the entire money paid during the term of the policy goes waste, defeating the purpose of insurance. The policyholder's family needs the claim amount at the time of distress. The denial of the claim can add financial stress to the emotional trauma the family faces.

Insurance is a tax saving instrument: Yes, tax deduction under Section 80C is an important benefit that accompanies life insurance. But this benefit is not the core benefit of a life insurance policy. The life cover provided by the policy is the primary benefit and should be the only reason to buy it. This is followed by savings and wealth accumulation. The tax deduction is just a small component of the decision making process of buying life insurance. Buying life insurance primarily for tax savings may result in buying multiple policies with small-ticket sizes that may not necessarily help meet the complete insurance needs of an individual.

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