Life insurance is one of the highly misunderstood products in the Indian financial industry. While some people buy insurance for all the wrong reasons, some do not believe in the concept at all considering it a waste of money. It is like saying ‘I do not believe in the concept of gravity’! Let us bust some bizarre myths & some common misconceptions about life insurance.
- Do not require life insurance as I am going to live longer: This may appear strange but there are few instances where people think they do not require life insurance because they have a very healthy lifestyle and their ancestors had a high life expectancy. But they miss out on the fact that death is uncertain and can also occur due to accidents or medical negligence. Life insurance covers not only natural death but also any death caused by accidents. Life Insurance is not a wasteful expenditure. In the broader frame of financial planning, life insurance comes first before investment planning. It is a must to cover for the risk of loss of life of an earning member in the family.
- Do not require insurance as I already have 2-3 life policies & I pay huge premium: This is another common misconception among the insured people. Having multiple policies and paying huge premiums does not make one fully insured. In fact, it only implies that one has bought an expensive product and is still grossly under covered. It is not only essential to have life insurance but also the right amount of coverage. In the event of any unfortunate incident, life insurance should cover for
(i) Household expenses up to the spouse’s lifetime
(ii) Outstanding liabilities, if any
(iii) Children’s education & marriage expenses
- Do not require life insurance because my spouse works too: Double income earning couple certainly enhances the lifestyle of a family. With better repayment capacity also comes higher expenses and more liabilities. However, the loss of an earning member does put some pressure on finances, especially if the deceased spouse’s contribution to total family income is significant. The burden of household expenses and child responsibilities then have to be borne solely by the working spouse. Life insurance thus provides relief to the working spouse helping to recover from the loss of income.
- Life insurance is a good investment & tax saving vehicle: Since the development of Indian economy in the 1990s, insurance needs have not only increased but changed for the people. Due to lack of choice of investment options earlier, people used to largely invest in traditional endowment policies. They were viewed as a compulsory saving tool and with tax benefits. Sadly, this approach of buying life insurance is still prevalent in these modern inflationary times. Traditional endowment and money back policies yield sub-optimal returns and with expensive premiums, one is left grossly underinsured. It is important to understand that the basic purpose of life insurance is to cover for the risk of loss of income of the bread earner in the family. It should not be mixed with investment and tax planning.
- Investment in a child insurance plan is the best option to secure my kid’s future: One of the most important goals for any parent is to fund their educational goal. They do not want any hindrances to meet this important goal even in their absence. This insecurity and poor knowledge of financial products results in parents falling into the trap of buying child plans. These are nothing but modified endowment and money back plans which yield pathetic returns. Mutual funds can be a preferred option to invest for funding a child’s educational goal. Investing via a systematic investment plan (SIP) in a diversified equity fund would ensure financial discipline and allow the investments to grow and yield better returns for a child’s education funds.
It is important to understand that life insurance is a basic necessity & needs to be provided for just like we pay for our regular house hold expenses. The right amount of coverage also matters and sum insured should be arrived at after considering the financial implications in the event of loss of life of an income earning member. Term insurance is the cheapest form of insurance offering the best combination of coverage & cost. Term insurance does not pay any money against the premiums paid and is thus cheaper compared to the traditional insurance plans. It is also crucial to review life insurance needs at regular intervals and upgrade coverage as financial responsibilities increase at a later stage in the future.