Be Smart Buy Smart

When it comes to meeting the needs of those who are financially dependent on you, a life insurance cover comes in handy. Many policyholders, however, either overlook insurance entirely or even if they buy it, tend to incorrectly estimate the quantum of protection required, and as a result, could be grossly under-insured. Here are nine things people often tend to overlook while buying a policy. 

Not buying a suitable insurance product 
There are different kinds of life insurance products, which can vary in terms of features, structure and working. While buying, one should get a brief understanding of the plan covering topics such as: How and where are the premiums going to be invested, expected returns, flexibility in the plan, death and maturity values, etc. 

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 realize 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 
Many policyholders buy life insurance to either start their savings process or save tax. So not much thought is given to the protection level in the policy. This can be validated by the fact that the sum assured is grossly inadequate in most cases and much of the buying happens in the last three months of the financial year. Whichever life insurance product one buys, it's better to link it to a 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 realize 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 among the surviving family members and relatives, one should ensure that nomination is proper and updated. For an unmarried individual, if the nomination is in favor of parent, it needs to be updated post marriage. If overlooked, it may lead to unnecessary hassles. 

The revised Insurance (Amendment) Act 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. 

Once the policy is bought, it simply means that any insurance policy taken by the husband and endorsed in favor 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.