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Best Term Insurance Plan - Insurance policies risks that could trip you

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Term insurance is a life insurance which provides coverage for the policy term decided between the policy holder and insurer at the onset of the policy.\n

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Buying an Incorrect Plan

  • The very first risk is buying an incorrect plan. The primary objective of buying any life insurance policy has been as a risk mitigating tool to protect a person’s family and its standard of living, not merely as an investment for the sake of returns.
  • While a pure term insurance plan provides a lump sum payout in the unfortunate death of the policyholder, it does not pay anything if the policyholder survives the policy term.
  • On other hand, a person who wishes to get maturity benefits of the policy if the policyholder survives the policy term along with the comfort of protection of the family otherwise, can opt for a traditional or a market-linked endowment plan.
  • For instance, the new ULIPs (after September 2010) have become very low-cost as compared to those plans offered before this period. However, the lock-in period for new ULIPs has been raised from three years to five years.

Notwithstanding the benefits of new and low-cost ULIPs, one should remember that since these plans invest in the equity market, the returns will be in line with the volatility of the stock market.

  • People with low risk appetite should stay away from investing in equity funds as they may panic due to short term volatility and exit at loss.
  • A policy holder should go through detailed checks and balances when buying an insurance plan. After deciding the type of plan to be bought, the decision on the premium paying ability of the policy holder will influence the quantum of premium and thereby, the insurance cover.
  • It is advisable to agree on a premium that will not adversely affect the policy holder’s ability to pay, should there be adverse financial conditions in any particular period during the Best Term Insurance Plan.

Not cross-checking the credentials of insurance agent/consultant

  • Another risk could be that of not cross-checking the credentials of your insurance agents. Often, a few insurance agents insist on buying a new policy with the renewal premium amount for an existing policy looking at their short-term gains or uses other ways and means to misguide a policyholder or a prospective insurance buyer. Such practices have resulted in customers being sceptical towards all insurance agents and insurers. It is better to conduct due diligence about the insurance agents and the suggested plans from other sources, before buying a plan.
  • Buying insurance as a tool to save tax
  • The next risk arises from the fact that life insurance is still majorly considered as a tool to save tax in India. Though a life insurance policy, purchased in any particular year to avoid higher tax payment will provide a financial protection in an unfortunate event, the sum may not be adequate for your family to maintain the same standard of living.
  • [Source:]

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