Insurance is still not a topic of our drawing room conversations. It is still widely considered to be more or less the last minute income tax saving investment decision to be taken in a hurry or by relying on peers’ or friends’ suggestions. That’s why we all tend to commit a lot of mistakes while buying term insurance plans and they fail to be of any benefit to us.
It is advisable to be careful while taking the decision to buy a term plan and avoid the following mistakes:
1. Buying Less Cover/Sum Assured
We tend to look at the payable premiums instead of the sum assured. A term plan is supposed to replace your income if something happens to you so that your family can continue to maintain the same lifestyle. If sum assured is not large enough, the funds won’t last long and getting term insurance will be of no use. Therefore, if your income is say Rs. 10 lakh per annum, the sum assured should be at least 10 times of that i.e. Rs. 1 crore. This may not solve all financial issues of your family, but can buy enough time for them to decide their next course of action in your absence.
2. Buying Late
Procrastination, especially when it comes to matters of insurance, is a typical human trait. When we’re young, we feel we are safe and healthy and don’t need any insurance cover. However the best time to buy a term plan is when you are young. Not only the premiums are lower, but you also get cover for any unforeseen risks as you grow old without having to scramble for an insurance cover at the time of an emergency. The ideal time to buy a plan is as soon as you start earning.
3. Short Term Investment
Many of us try to save on premiums by buying term insurance plans for a shorter duration of time. This could prove to be one of the biggest mistakes. For example, you bought a policy for a term of 10 years when you were 25 years old. Once you cross 35 years of age, you will have to buy a new plan and at that time your premiums were higher and also you have a family to take care of. May be depending on your health condition at that age, you may even be denied the insurance cover. In other words, your short term insurance coverage will be of no use when you’ll actually need the coverage with children’s education and parents’ health requiring major financial attention from you. The ideal way is, to get covered for the maximum term available under the plan.
4. Too Many Riders
Most insurance companies offer basic term policies, but to earn more money on them a lot of riders are pitched into the simple policy. A decision taken in haste or without studying the riders in detail can make even the best term plan very expensive for you without providing adequate benefits in returns. You have to analyse if you actually need all those extra riders or not. Add-ons like critical illness cover, income replacement, etc. can look attractive, but there are better and economical ways to incorporate them in your insurance folio to derive maximum benefits out of them.
5. Shifting Between Policies
Sometimes we do buy a plan and then realize that it is not something that will work out for us. The first instinct is to cancel it and then buy a new one. However, the period between letting go of old one and acquiring a new one is the riskiest of all. What if something happens during this period when you have no coverage? Ideally, buy a new one before closing the tap on the previous one to remain covered.
Term policies can prove to be real assets and to make them work as per your requirements. Let even the most basic term policy turn out to be the best term plan for you and your family by making a smart decision without any mistakes.