Life insurance is essential for our financial security. However, life insurance as a financial product, popular as it may be, is still widely misunderstood due to the general lack of financial literacy and widespread misselling of life insurance products in India. A lot of great work has been done by unbiased financial planners and investment advisers in educating investors and insurance buyers about life insurance. But misconceptions sustained and grown over decades, will take more time and effort to be changed. In this article, we will try to address some myths with regards to life insurance plans.
Myth 1: Everybody needs life insurance.
Reality: If you have no dependants and do not plan to have any in the foreseeable future, you do not need life insurance. If you are working and your spouse does not work, she does not need life insurance. The premiums that you will pay for her life insurance, is better invested in products that give much better returns. If you are debt free and you have assets that generate enough income to meet all the financial needs of your family, then you do not need life insurance. You are better off growing your assets by investing in products that give better returns. However, if your family depends on the income from your profession or business, then you definitely need life insurance.
Myth 2: More life insurance policies you have, the better off you are
Reality: How many life insurance policies you have, really does not matter. What matters is your total life cover or sum assured. Is it sufficient to meet the needs of your dependents in the event of an unfortunate death? You need to consider several factors in deciding how much insurance cover is adequate for you. These are:-
- How much debt do you have
- Income needs of your family, based on your current lifestyle
- Your future obligations
You may have five endowment plans with a total sum assured of Rs 10 lacs. But if your family’s need in the event of an unfortunate death, based on the factors discussed above is Rs 50 lacs, then your 5 insurance policies are woefully inadequate. Instead of those 5 insurance policies, you will be better off with a single term plan with a sum assured of Rs 50 lacs. It is important that you determine how much life insurance is adequate for you (you can refer to our article, How much life insurance is adequate) and buy the adequate life cover.
Myth 3: We are living longer nowadays. So you should have life insurance even after retirement.
Reality: What is the purpose of life insurance? It protects the future of our dependents from loss of income in the event of an unfortunate death. If you have no income from your profession, why do you need life insurance? As we grow older and suffer from medical conditions, which are a natural part of the ageing process, premiums become very expensive. Isn’t the money spent on life insurance premium after retirement better utilized in investments, from which you and your dependents can earn higher returns, even after your death. However, if you have income from your profession or business even after retirement, then you should definitely get life insurance.
Myth 4: Protect your child’s future with a child policy
Reality: Any investment made for children has an emotional aspect. But leave aside emotions for a minute. Do you really need life cover for your minor child? Life insurance has a simple purpose. It protects the future of our dependents from loss of income in the event of an unfortunate death. You should buy adequate risk cover for your own life and invest systematically in child plan mutual fund or a diversified equity fund, to secure the future of your child.
Myth 5: Buy insurance plans only from the largest insurance companies. The smaller companies are not to be trusted.
Reality: All life insurance companies are regulated by IRDA. IRDA ensures that the Indian life insurance companies have adequate solvency and risk management processes. Solvency measures the ability of the insurance companies to pay the death claims. It is calculated as a ratio of assets to liabilities of the insurance company. As far as the financial capacity of the insurance company of servicing your claim is concerned, IRDA regulations ensure that your policy is safe, irrespective of which company you bought it from. What matters is the track record of the insurance company in servicing death claims (please refer to our article, How to choose a Life Insurance provider). When selecting a life insurance policy, you need to look at the claims settlement ratio and duration wise claims settlement of the insurer relative to other insurers. The IRDA annual report has exhaustive data on these two metrics for all life insurance companies in India. If a company with good claim servicing track record is offering you a term plan at a low premium, there is no reason why you should not consider it seriously.
Myth 6: Your trusted insurance agent always offers you the best advice.
Reality: Your trusted insurance agent may have your best interest in mind, but he or she may not be offering the best possible advice. Commissions earned on your policies are a source of income for your insurance agent. It is quite natural that they will be biased towards products that give them the highest commissions. Misselling of insurance cum investment products is quite common. You can rely on your insurance agent for service, but do your own research or consult with an unbiased financial adviser with regards to which life insurance product is most suitable for you.
In this blog we have discussed some common life insurance myths. Life insurance is a critical financial need. You should educate yourself on life insurance and always take an informed decision, so that you can protect your family and achieve your financial objectives.