You might be financially savvy, but chances are you are still making bad decisions. From budgeting missteps and impulse purchases to inadequate contingency planning and much more, nobody is immune to financial faux pas.
It is not wrong to make mistakes. A process of self-discovery and learning is often the best way to learn financial management that best suits you.
However, life insurance is one instrument that leaves little room for mistakes, as the brunt of it is often felt by your dependents. As a risk management tool, life insurance seeks to secure the financial interests of your loved ones in your absence and therefore, it is absolutely critical to avoid any mistakes, big or small.
So, what are the common mistakes and how can you avoid them to make a fool-proof purchase? Let’s take a look:
Not buying a term insurance
People lay a higher emphasis on multiplying their money and often end up buying life insurance solutions for wealth accumulation and investments. They avoid buying a term plan, equipped with excuses like the existing investment-linked insurance products offer a life cover or that they have created enough corpus through other instruments.
However, what most people don’t realise is that the fundamental objective of a term plan is to facilitate economic continuity for your family without disrupting their financial stability. Your investments are often linked to certain goals like child’s education, retirement, etc. One rarely creates a corpus with the objective of economic continuity for their family. So, if you have dependents, a term plan is not optional.
Not an all-in-one solution:
Life insurance is a long-term solution, wherein the policyholder rarely sees its tangible benefits as it is bought for your dependents. This absence of immediate gratification leads to people seeking ‘more’ when buying life insurance. A recurring mistake that people make is linking several goals in one solution, leading to inadequate financial provisioning. It is critical to remember that life insurance protects critical life stage-linked financial needs. So, resist the temptation to treat a single purchase as an all-in-one solution for it can derail your quality of life in the future.
Lack of full disclosure
Making incomplete disclosures is perhaps the silliest, yet the biggest mistake smart people make. They tend to believe they know what should and shouldn’t be disclosed when buying a life insurance policy. A critical part of the buying process is thorough underwriting (financial and medical) to assess the individual’s risk profile and needs. In the quest to prevent an increase in premium, people don’t make complete disclosures. Such mistakes can lead to claims being declined by the insurer, defeating the purpose of the purchase altogether.
An uninformed family
The biggest blunder of all is not keeping your dependents informed regarding your financial decisions. The core purpose of buying life insurance cannot be fulfilled if your dependents aren’t aware regarding the details of your policy.
Reviewing cover regularly
Considering life insurance is a long-term solution, people often believe that once purchased, your objective has been fulfilled. However, as you progress through your life stages, the financial compulsions of your life change. So, it is critical to review your life cover at least once every year.
Comparing instruments
Among the chief mistakes smart people make is drawing comparisons between insurance and other financial products. For instance, a Fixed Deposit is often compared with a guaranteed insurance plan. However, FDs and guaranteed plans serve a different purpose – one is a savings product and the other offers a wealth accumulation solution. Similarly, a Ulip is often compared with an SIP. Not only are those two not comparable, they serve different purposes and have their pros and cons.
Every financial decision has a purpose and in case of a life insurance, the objective is simple – securing the dreams and aspirations of your family. To avoid any silly mistakes, ask yourself one question – how can I facilitate financial continuity for my family in a hassle-free manner? When you answer that question, everything else will fall into place.
