Life Insurance - Protection Over Investment

As much as we are careful about having life insurance, most often we are not mindful of the products we are buying. Though these factors don't affect much when all is well, the same becomes critical in case the policyholder dies an untimely death.

Here are the two things you should be careful about while buying life insurance:

Mixing insurance with investment: Investments are made to create wealth in the long term and insurance covers financial risk. However, people often buy products that are sold as a mix of both. These are neither good as investments or insurance.

The coverage amount for a life insurance policy with maturity benefit is usually 10 times its yearly premium. At the same time, they provide a return of 3% to 4%. Now, if you buy a ₹25 lakh insurance policy for 20 years, the annual premium amounts to ₹25,000, while the returns would be around ₹7 lakh.

On the other hand, yearly premium for a ₹25 lakh term plan is roughly ₹5,000. Now, if you would buy a term plan instead of a policy with maturity benefit and decide to save the rest (suppose 8% interest rate), then after 20 years, its value would be close to 10 lakhs.

Taking more or lesser cover than one needs: Without putting much thought in it, people often buy life insurance based on factors like what they are suggested, what others are buying, what is enough to get tax benefit etc.

These are very wrong ways to decide on how much cover you would need. Rather while calculating the amount of life insurance, the policyholder should consider factors like future expenses, liabilities, future goals and pension for your spouse.

Also, it is important to ensure that the insurance is not taken for a too long period but, approximately till the time the policyholder will be working.