Here are 9 things people often tend to overlook while buying a policy.
Not buying a suitable insurance product
Individuals looking for flexibility and relatively higher return may end up buying a plan that inherently does not offer them such as a traditional plan. Similarly, someone who doesn't look to life insurance products for returns may end up buying a Unit Linked Insurance Plan (ULIP). If you are looking for protection for your financial dependents, pure term insurance plans fit the bill as they are low-cost, high cover plans.
Remember, life insurance is a long-term contract between the insurer and the insured and hence there are costs involved in breaking the contract mid-way, just in case you realise that the purchase is wrong. So spend some quality time in understanding things before you sign on the dotted line.
Not linked to any goal
If you wish to buy a term plan, you should ideally link it to financial safety net required for long-term goals such as children's education, marriage needs, etc. Accordingly, the tenure of the term plan should be decided. Similarly, if someone wants to build a retirement corpus through insurance products, buying a ULIP and investing in an equity fund (out of the funds under the ULIP) are good options. Unless the goal is clearly identified and linked, the probability of one ending up making a costly exit from the policy increases.
Not filling application form yourself
Most buyers allow insurance agents to fill in the application form. This could make a critical difference at the time of claim. You should ideally fill the form yourself. As part of the underwriting process, there are many facets related to health, finances, dependents which the insurer needs you to disclose while applying. Filling in the form yourself helps you to understand the insurer's processes better. Remember, any partial, wrong information shared with the insurer may pose problems at the time of claim.
Not buying policy in wife's name
If one thinks that wives who stay at home do not require life insurance as they do not earn and hence there are no family members financially dependent on them, consider this. Even if she is not contributing any income towards the household, the opportunity cost of her absence in managing the house and children is quite high. Although not a norm, insurers provide cover to them only if the spouse is insured and cap the maximum sum assured to that of the spouse.
Even if both husband and wife are working, insurance is still required
Working couples may not realise the need for insurance as both earn and are not financially dependent on each other. But in case of an eventuality, the surviving member gets burdened with the responsibility of maintaining the same standard of living. The loss of income from one member could disrupt any financial goals of the family members. Therefore, as both are contributing, they need to be adequately insured.
If both are working and earning enough so that each individual's salary is equal to about 75 per cent of the monthly household expenses then there is no need for life insurance as long as there are no loans outstanding and no financial dependents (e.g children/aged parents). If loans are outstanding, adequate insurance cover must be taken to cover the loan amount. This is to make sure that in case one of them dies, the survivor should not be burdened with paying off the loan alone. Both can buy life protection covers, preferably those plans that come with joint life option.
Not updating nomination
At times, some policyholders don't make a nomination while applying for a plan, leaving it to be filled up at a later date. To avoid any legal hassles amongst the surviving family members and relatives, one should ensure that nomination is proper and updated. For an unmarried individual, if the nomination is in favour of parent, it needs to be updated post marriage. If overlooked, it may lead to unnecessary hassles.
Nomination ensures that the insurer hands over the death claim proceeds to the nominees. Till now, the nominees in life insurance policies were not beneficiaries. They acted as receivers of the insurance proceeds on behalf of the legal heirs of the policyholder. The revised Insurance (Amendment) Act 2015 has created a 'beneficial nominee' category, which includes only close relatives of policyholders. If a person nominates someone as a 'beneficial nominee' then the nominee becomes both the receiver and the final beneficiary as per this new clause. The new clause also makes it simpler for the policyholders to specify multiple nominees and their share in the proceeds.
Not endorsing MWP in the policy
The proceeds of a life insurance policy may be recovered by one's creditors if some money is due to them. Their rights supersede that of beneficial nominees. To avoid such a situation, one can buy the policy under Section 6 of the Married Women's Property Act (MWP), which gives special protection to one's wife and children, and prevents creditors from attaching a life insurance policy taken under this Act. This can be done by simply filling in a MWP addendum while applying for insurance. This benefit can only be obtained while taking the policy. Endorsement of the policy under the MWP Act is not allowed later on.
Once the policy is bought under the MWP Act, it simply means that any insurance policy taken by the husband and endorsed under the MWPA in favour of his wife or children or any of them, will always be their property. None of the husband's creditors will have any right over the policy. Even the husband's parents won't have any right to the benefits. In fact, the husband will also have no rights over the survival benefits of the policy, if any. As per the Act, as long the beneficiaries named in the policy are alive, no one else will have any right to the benefits.
This is particularly relevant in case of a joint family as there can be other claimants to the policy proceeds if the insured dies. Therefore, do not overlook it to avoid any legal hassles for surviving family members.
Not reviewing life cover
One needs to change/update/review life insurance as one ages. With age, as financial liabilities pile up the need to get higher protection rises. The amount of life insurance required by an unmarried individual with elderly parents, may not be much, but as one gets married, has kids, takes loans, the amount of life cover needs to be reviewed. Therefore, do not overlook the need to review one's life insurance requirement to avoid any underinsurance.
Not having adequate life cover
Buying a life insurance cover should be based on the actual need. At times, many policyholders buy policies to either save tax or to save 'some' money for long-term needs. They overlook the right purpose for which life insurance is bought, which is to replace one's income in the event of an eventuality and help the family maintain the same standard of living. Under-insurance doesn't help in meeting the objective of insurance. Ask the insurance agent to help you calculate the 'human life value' based on your specific life circumstances and then go ahead and provide for it through proper policies.
From India, Ahmadabad
34Not buying a suitable insurance product
Individuals looking for flexibility and relatively higher return may end up buying a plan that inherently does not offer them such as a traditional plan. Similarly, someone who doesn't look to life insurance products for returns may end up buying a Unit Linked Insurance Plan (ULIP). If you are looking for protection for your financial dependents, pure term insurance plans fit the bill as they are low-cost, high cover plans.
Remember, life insurance is a long-term contract between the insurer and the insured and hence there are costs involved in breaking the contract mid-way, just in case you realise that the purchase is wrong. So spend some quality time in understanding things before you sign on the dotted line.
Not linked to any goal
If you wish to buy a term plan, you should ideally link it to financial safety net required for long-term goals such as children's education, marriage needs, etc. Accordingly, the tenure of the term plan should be decided. Similarly, if someone wants to build a retirement corpus through insurance products, buying a ULIP and investing in an equity fund (out of the funds under the ULIP) are good options. Unless the goal is clearly identified and linked, the probability of one ending up making a costly exit from the policy increases.
Not filling application form yourself
Most buyers allow insurance agents to fill in the application form. This could make a critical difference at the time of claim. You should ideally fill the form yourself. As part of the underwriting process, there are many facets related to health, finances, dependents which the insurer needs you to disclose while applying. Filling in the form yourself helps you to understand the insurer's processes better. Remember, any partial, wrong information shared with the insurer may pose problems at the time of claim.
Not buying policy in wife's name
If one thinks that wives who stay at home do not require life insurance as they do not earn and hence there are no family members financially dependent on them, consider this. Even if she is not contributing any income towards the household, the opportunity cost of her absence in managing the house and children is quite high. Although not a norm, insurers provide cover to them only if the spouse is insured and cap the maximum sum assured to that of the spouse.
Even if both husband and wife are working, insurance is still required
Working couples may not realise the need for insurance as both earn and are not financially dependent on each other. But in case of an eventuality, the surviving member gets burdened with the responsibility of maintaining the same standard of living. The loss of income from one member could disrupt any financial goals of the family members. Therefore, as both are contributing, they need to be adequately insured.
If both are working and earning enough so that each individual's salary is equal to about 75 per cent of the monthly household expenses then there is no need for life insurance as long as there are no loans outstanding and no financial dependents (e.g children/aged parents). If loans are outstanding, adequate insurance cover must be taken to cover the loan amount. This is to make sure that in case one of them dies, the survivor should not be burdened with paying off the loan alone. Both can buy life protection covers, preferably those plans that come with joint life option.
Not updating nomination
At times, some policyholders don't make a nomination while applying for a plan, leaving it to be filled up at a later date. To avoid any legal hassles amongst the surviving family members and relatives, one should ensure that nomination is proper and updated. For an unmarried individual, if the nomination is in favour of parent, it needs to be updated post marriage. If overlooked, it may lead to unnecessary hassles.
Nomination ensures that the insurer hands over the death claim proceeds to the nominees. Till now, the nominees in life insurance policies were not beneficiaries. They acted as receivers of the insurance proceeds on behalf of the legal heirs of the policyholder. The revised Insurance (Amendment) Act 2015 has created a 'beneficial nominee' category, which includes only close relatives of policyholders. If a person nominates someone as a 'beneficial nominee' then the nominee becomes both the receiver and the final beneficiary as per this new clause. The new clause also makes it simpler for the policyholders to specify multiple nominees and their share in the proceeds.
Not endorsing MWP in the policy
The proceeds of a life insurance policy may be recovered by one's creditors if some money is due to them. Their rights supersede that of beneficial nominees. To avoid such a situation, one can buy the policy under Section 6 of the Married Women's Property Act (MWP), which gives special protection to one's wife and children, and prevents creditors from attaching a life insurance policy taken under this Act. This can be done by simply filling in a MWP addendum while applying for insurance. This benefit can only be obtained while taking the policy. Endorsement of the policy under the MWP Act is not allowed later on.
Once the policy is bought under the MWP Act, it simply means that any insurance policy taken by the husband and endorsed under the MWPA in favour of his wife or children or any of them, will always be their property. None of the husband's creditors will have any right over the policy. Even the husband's parents won't have any right to the benefits. In fact, the husband will also have no rights over the survival benefits of the policy, if any. As per the Act, as long the beneficiaries named in the policy are alive, no one else will have any right to the benefits.
This is particularly relevant in case of a joint family as there can be other claimants to the policy proceeds if the insured dies. Therefore, do not overlook it to avoid any legal hassles for surviving family members.
Not reviewing life cover
One needs to change/update/review life insurance as one ages. With age, as financial liabilities pile up the need to get higher protection rises. The amount of life insurance required by an unmarried individual with elderly parents, may not be much, but as one gets married, has kids, takes loans, the amount of life cover needs to be reviewed. Therefore, do not overlook the need to review one's life insurance requirement to avoid any underinsurance.
Not having adequate life cover
Buying a life insurance cover should be based on the actual need. At times, many policyholders buy policies to either save tax or to save 'some' money for long-term needs. They overlook the right purpose for which life insurance is bought, which is to replace one's income in the event of an eventuality and help the family maintain the same standard of living. Under-insurance doesn't help in meeting the objective of insurance. Ask the insurance agent to help you calculate the 'human life value' based on your specific life circumstances and then go ahead and provide for it through proper policies.
From India, Ahmadabad
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Stupid Things People Do.pdf