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Three Life Insurance Planning Mistakes To Avoid

Most Life Insurance plans, barring some low-cost ULIP's, make for lousy retirement planning solutions

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Like most Indians, Life Insurance was the mainstay of Rahul's portfolio. A thirty-seven-year-old software engineer at a top multinational, he never missed out on the opportunity to subscribe to new Insurance Plans. In fact, his parents had encouraged him to be responsible with his money right from the day he earned his first pay check - he bought his first policy at the age of just 24. Tragically, Rahul met with a cardiac arrest one morning after a particularly stressful meeting, and suddenly died. When his distraught spouse finally managed to get a chance to dig out Rahul's Life Insurance policy documents, she was shocked to find out that the cumulative death benefit accrued across all of his Life Insurance policies was just Rs. 35 Lakhs - barely enough to fund his family's expenses for four years or so, as Rahul's wife was a home maker who had never worked.

Jagan, aged fifty-nine, is due to retire next year. He is optimistic, as he's been saving Rs. 10,000 per month religiously into traditional insurance plans for nearly two decades. Jagan is quite confident that he's accumulated enough to safely tide him through his retirement years. Sitting down with his Financial Planner to reconcile all his post retirement assets, he's shocked to find out that the total accumulated maturity value of his traditional policy is a relatively paltry Rs. 46 Lakhs. As it turns out, his friend Vipul who diverted the same sum of Rs. 10,000 per month into Equity Mutual Fund SIP's has accumulated nearly three times as much!

The above two stories are not uncommon in our country. Life Insurance is, in fact, a poorly understood product that is most often neither well bought not well sold. Having said that, it remains a fact that Life Insurance is a critical aspect of one's Financial Plan. Here are three key mistakes you need to avoid in order to make sure that your Life Insurance portfolio serves its purpose.

Mistake #1: Not understanding its true purpose
What do you buy Life Insurance for? For saving taxes under Section 80C? As an investment? Or to save for goals, such as your child's higher studies? They're all wrong reasons to be buying the product. The one and only purpose of Life Insurance is to transfer the financial risk associated with the loss of your life. Buy only pure term insurance plans, and aim for a death benefit that's between ten and fifteen times your current income.

Mistake #2: Using it as a Retirement Planning tool
Most Life Insurance plans, barring some low-cost ULIP's, make for lousy retirement planning solutions. They provide you with a return that barely beats inflation, with very low liquidity and a very long-term investment horizon. Do your finances a favour and stick with aggressive Mutual Fund SIP's, or even NPS (National Pension Scheme) investments to accumulate your retirement corpus.

Mistake #3: Failing to review things periodically
Most people tend to view Life Insurance planning as a one-time, transactional affair. However, the truth is that one should review their Life Insurance portfolio periodically. Events such as the addition of dependents, or other material changes (such as a spouse leaving the workforce to take care of the kids) could influence your Life Insurance requirements. Sit down with your Financial Planner at least once every two years to re-evaluate your Life Insurance portfolio.


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