2 things to watch out for when buying life insurance

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As much as we are careful about purchasing life insurance, we are also not paying attention to the products we buy. While these factors do not affect much when things are going well, the same is true of the premature death of the insured.

Here are the two things you need to watch out for when purchasing life insurance:

Mix insurance and investment:

Investments are made to build long term wealth and insurance covers financial risk. However, people often buy products that are sold as a mixture of the two. They are neither investments nor insurance.

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The amount of coverage for a guaranteed maturity life insurance policy is typically 10 times its annual premium. At the same time, they offer a yield of 3-4%. Now if you buy a ??25 lakh insurance policy for 20 years, the annual premium is ??25,000, while the returns would be around ??7 lakh.

On the other hand, the annual premium for a ??The 25 lakh plan is roughly ??5,000.

Now, if you bought a term plan instead of a guaranteed maturity policy and decided to save the rest (assume an 8% interest rate), then after 20 years its value would be close to 10 lakhs.

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Take more or less coverage than you need:

Without giving it much thought, people often buy life insurance based on factors like what is suggested to them, what others are buying, what is enough to get a tax benefit, etc.

These are really bad ways to decide how much coverage you need. Instead of calculating the amount of life insurance, the policyholder should consider factors such as future expenses, liabilities, future goals, and your spouse’s pension.

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Also, it is important to ensure that the insurance is not taken out for too long a period, but approximately until the time when the policyholder will be working.

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