Life Insurance: Times when you should not buy insurance

By Sunil Kadyan

The Indian insurance industry reports a huge surge in business in the January-March quarter as salaried taxpayers rush into the tax-saving mode. More than 35% of the annual sales of life insurers are achieved in this short span of time. With hardly any time left for taking a judicious decision, people are more prone to choosing an unsuitable plan or paying higher premium for saving tax under Section 80C where the maximum limit is Rs 1.5 lakh a year.

It is advisable not to buy life insurance only to save taxes as there are many better instruments available to save tax under Section 80C such as Equity-Linked Savings Scheme (ELSS), Public Provident Fund (PPF), Sukanya Samridhi Yojana (for girl child) which offer higher tax free returns.

Here are some of the common mistakes individuals make while purchasing a life insurance plan.

Insurance as investment option
Individuals should never mix their insurance needs with investment. Generally, agents promote purchase of life insurance products such as ULIP, endowment plans and money back plans citing insurance with high returns and lucrative investment options. But in reality, these products offer returns of 4.5-6% which will not beat inflation in the long run. The second disadvantage is the low insurance cover in the form of low death sum insured. This amount will not be enough for the family in case of untimely death of the insured. Even the premium of these plans is high with low returns and inadequate cover. An individual can think of purchasing a term insurance plan for his insurance needs and go for other investment options for earning high returns.

Insurance as guaranteed returns option
Some individuals like to buy specific life insurance plans which offer guaranteed returns. But the premium for these types of plans are very high. Such people can think of other investment avenues where they can earn high returns with less investment as compared to traditional life insurance policies.

Insurance with non-medical case
Some life insurance plans with low sum insured are issued without pre issuance medical checkup. Plans such as endowment plan, money back policy, ULIPs are issued without medical underwriting. The sum insured for these plans is low and ask for comparatively higher premium. Individuals just have to give a declaration of their good health condition.

It is advisable to go for an adequate sum insured with need-based suitable life insurance plan even if medical checkup is required. If the medical checkups are done before the issue of life insurance policy, then the insurer cannot claim that the individual had hidden some major facts regarding his health conditions (for which the medical tests were conducted) in case of the insured’s death. In this case, the onus of proof shifts to the insurer.

Agent known to the insured
Generally, a new insurance agent tries to sell life insurance policies to his family members, relatives, friends and other known people. Sometimes the insured takes a very fast and forced decision to take a life insurance policy which he does not need at all. As agents are known to policyholders, they continuously insist or force them to purchase the life insurance policy. The individual doesn’t want to ruin his relationship with the agent so reluctantly he purchases the plan. In this type of situation, the individual should not take any kind of pressure and must make an informed decision to buy a need-based life insurance plan.

As purchasing the life insurance plan is a long-term commitment where the policy term will be up to 15-20 years, it is better to think twice before taking any forced decision. An individual should buy a pure term insurance plan first from a protection point of view. This plan should be purchased online where he can have an adequate sum insured at a very low premium. For example, a 25-year nonsmoker can purchase Rs 1 crore term insurance plan up to 70 years of age for Rs 8, 000 only (yearly premium). Being a level premium, one should purchase this plan at a younger age.

(The writer is assistant professor, Amity School of Insurance Banking & Actuarial Science, Amity University)