Life Insurance Six Common Mistakes To Avoid
3. Treating Life Insurance As An Investment And Buying The Wrong Plan
A Good Life Insurance Protect Your Family!
The common misconception about life insurance is that it is also a good investment or retirement planning solution. This misconception is largely due to some insurance agents who like to sell expensive policies to earn high commissions.
If you compare returns from life insurance to other investment options, it simply does not make sense as an investment. If you are a young investor with a long time horizon, equity is the best wealth creation instrument.
Over a 20-year time horizon, investment in equity funds through SIP will result in a corpus that is at least three or four times the maturity amount of life insurance plan with a 20-year term, with the same investment.
Life insurance should always be seen as protection for your family, in the event of an untimely death. Investment should be a completely separate consideration.
Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you should separate the insurance component and investment component and pay careful attention to what portion of your premium actually gets allocated to investments.
In the early years of a ULIP policy, only a small amount goes to buying units.
A good financial planner will always advise you to buy a term life insurance plan. A term plan is the purest form of insurance and is a straightforward protection policy.
The premium of term insurance plans is much less than other types of insurance plans, and it leaves the policyholders with a much larger investible surplus that they can invest in investment products like mutual funds that give much higher returns in the long term, compared to endowment or money back plans.
If you are a term insurance policyholder, under some specific situations, you may opt for other types of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, for your specific financial needs.