Common Life Insurance Mistakes that Can Prove Costly
Written on Saturday, April 1, 2017
By Vishwajeet Parashar - Sr. VP & Group Marketing Head
Life insurance is more than just buying an insurance policy. It is the protection shield of your family. Thus. it's important to pick an insurance plan only after proper research and analysis. However, while buying a life insurance, many people end up committing certain very common mistakes. So, if you are also planning to buy a life insurance, then here are a few common mistakes that you must avoid.
Not Having Adequate Life Cover
Buying of 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 to be 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 to provide for it through proper policies.
Not Buying in Housewife’s Name
It is usually said that housewives or homemakers do not require any life insurance as they do not earn and hence there is no family member dependent financially on them. But, consider this. Even if she is not contributing any income to the household, the opportunity cost of her absence in managing the house and children is quite high. Although not a norm, but life insurers provide cover to them only if the spouse is insured and cap the maximum sum assured to that of the spouse.
If Both are Working Still Insurance is Required
Working couples may not realize the need of life insurance as both of them earn and do not feel financially dependent on each other. But, in the case of an eventuality, the surviving member gets burdened with the responsibility to maintain the same standard of living. Loss of income from one member could disrupt any financial goals of the family members. Therefore, as both are contributing, both of them need to be adequately insured.
If both are working and are earning enough so that each individual salary is equal to about 75 percent of the monthly household expenses then there is no need for life insurance as long as there are no loans outstanding. If loans are outstanding, adequate insurance cover must be taken to cover the loan amount. This is to make sure that in the case of the demise of any one of the individuals the survivor should have no loans remaining.
Both members can buy protection covers preferably those plans that come with joint life option.
Not Updating Nomination
At times, some policyholders overlook making a nomination while applying for a life insurance policy leaving it to be filled up at a later date. In order to avoid any legal hassles amongst the surviving family members and relatives, one should ensure that the nomination is proper and updated. For an unmarried individual, if the nomination is in favor of the parent, it needs updating after marriage. If overlooked, it may lead to unnecessary hassles.
Nomination makes the insurer hand over the death claim proceeds to the nominees. Till now, nominees in life insurance policies were not beneficiaries. They acted as receivers of the insurance proceeds on behalf of the legal heirs of the policyholder. The revised Insurance (Amendment) Act 2015 has created a "beneficial nominee" category, which includes only close relatives of policyholders. "Now, if the policyholder nominates his father, mother, spouse or children in an insurance policy, they become beneficial owners of the claim proceeds," The new clause also makes it simpler for policyholders to specify multiple nominees and their share in the proceeds.
Not Endorsing MWP in the Policy
The proceeds of a life insurance policy may be recovered by one’s creditors if some money is due to them. Their rights supersede that of beneficial nominees. In order to avoid such a situation, one can buy the policy under Section 6 of the Married Women's Property Act (MWP), which gives special protection to his wife and children and prevents creditors from attaching a life insurance policy taken under this Act. This can be done by simply filling in an MWP addendum while applying for insurance. This benefit can only be obtained while taking the policy. No changes are allowed later on.
Once the policy is under the MWP Act, it simply means that any insurance policy taken by the husband on his own life and endorsed under the MWPA 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 will not have any right to the benefits. In fact, the husband himself will also not have any rights to survival benefits of the policy if any. As per the Act, as long as any of the beneficiaries named in the policy are alive, no one else will have any right to the benefits.
This is particularly relevant in a joint family as there can be other claimants to the policy proceeds in case of demise of the insured. Therefore do not overlook it to avoid any legal hassles for surviving family members.