Everyone recognizes the importance of preparing for life’s inevitable events, such as funding their children’s education or marriage, ensuring their own retirement, or securing their family against the loss of income due to the death, illness, or disability of the main earner. However, the full benefits of using life insurance products to address these needs are not widely understood.
A major reason for this confusion is the prevalence of myths about life insurance. There are many misconceptions and inaccurate information about it. This article aims to clarify some of the most common myths about life insurance, so you can make well-informed decisions. Contrary to popular belief, insurance is not an emotional choice but a strategic risk management decision that protects against:
– Mortality: Death or disability (term insurance)
– Morbidity: Illness (critical illness coverage)
– Longevity: Outliving your income (annuities and long-term guaranteed returns)
– Market volatility: Providing guaranteed returns (through participating or non-participating products)
– Financial indiscipline: Guarding funds from impulsive spending and lack of financial control
Moreover, life insurance provides the convenience and flexibility to be structured for lifelong needs. With a “set it and forget it” approach, insurance becomes the best tool for managing long-term financial certainties. It is the only product that guarantees long-term returns without a call option. The ability to manage future market and interest rate volatility is a unique skill of life insurers.
Let’s address some common myths:
Myth 1: Life Insurance is Only Useful After My Death
Fact: Life insurance is a risk management tool that addresses risks associated with both dying and living too long. With medical advancements extending life expectancy, planning for a long life is crucial. If you live until 90 but retire at 60, life insurance can help manage your expenses. It also addresses risks related to investments, such as market fluctuations, poor financial planning, and lack of discipline.
Life insurance can secure your financial future by offering options to build a retirement corpus, cover high medical costs, and grow your wealth. Investing in the right insurance product at the right time can provide substantial benefits.
Myth 2: My Company Covers Me, So I Don’t Need Another Policy
Fact: Employer-provided insurance only covers you while you are employed. This coverage ends when you leave or retire. If your employer faces financial issues, they might cancel or reduce your benefits, leaving you vulnerable when you need coverage the most.
Myth 3: Why Do I Need Insurance If I am Young, Single, and Healthy
Fact: Life insurance is a product that must be purchased before it’s needed, as it cannot be obtained during a crisis. It’s like the saying, “you can’t insure a burning building.” The best time to buy life insurance is when you are young because premiums are lower, allowing you to get high coverage at a minimal cost.
If you have student or personal loans, insurance can prevent these debts from becoming a burden on your parents in the event of your death, illness, or disability. As you age, your policy can also cover family commitments and health and retirement expenses.
Myth 4: Life Insurance is Expensive
Fact: Life insurance premiums are highly flexible and can be adjusted to fit your budget, gradually increasing as your financial capacity grows. The younger you are, the lower the premium rates, whether it’s a term policy or a savings-linked product.
Term insurance, in particular, offers a substantial coverage amount for a very low premium. You can start with a small investment and expand your coverage as your income and responsibilities increase through different stages of life.
Myth 5: Term Insurance is the Only Form of Life Insurance
Fact: Term insurance is just one type of life insurance that covers the risk of dying early. Life insurance companies offer a variety of products, including traditional savings plans, unit-linked plans, and pension plans, to meet the diverse risk management needs of different customers.
It’s essential to assess your current and future financial needs when choosing a policy.
Myth 6: I am Not Eligible for Insurance Because I am Too Old or Have a Pre-existing Condition Fact: Eligibility should be evaluated based on the specific needs for which the policy is intended. Higher age can result in attractive annuities, making it a benefit for such products.
For pure risk policies like term insurance, pricing is based on average health assumptions. If your age or medical condition falls outside the average range, the policy may be priced higher to account for increased risk. In rare cases, some conditions might make insurance unfeasible.
Term policies are designed to protect against the loss of future earning potential.
Myth 7: I Will Get Better Returns From Investments Other Than Life Insurance
Fact: Comparisons should be made on a like-for-like basis. Just as you wouldn’t break down a smartphone into its individual components (phone, camera, browser), life insurance products offer multiple features. They can cover mortality risks, morbidity risks, longevity risks, guaranteed and market-linked returns, and whole life cover, among others.
A key benefit of life insurance is that most policy proceeds are tax-free. Typically, life insurance policies are long-term financial instruments that offer competitive risk-adjusted returns compared to other asset classes.
Myth 8: ULIP is Not a Good Investment as the Costs are High
Fact: Unit Linked Insurance Plans (ULIPs) provide both protection and wealth creation over the long term. Modern ULIPs have lower charges, and some even refund certain charges at maturity.
ULIPs offer flexibility and customization, allowing you to adjust your policy as your needs change. You can switch between debt and equity funds within the same policy, adapting to your evolving needs without tax implications. ULIPs also permit tax-free partial withdrawals for emergencies after the lock-in period, providing liquidity during the policy term.
Myth 9: The Policy Can Only Be In the Name of the Person Who Buys It
Fact: Anyone with a regular income who is not a minor can purchase a policy in their own name or for their spouse or children. Some insurers offer joint policies covering both spouses under a single plan.
Parents can invest in child plans to secure their children’s future needs. Once the child reaches 18, the policy transfers to their name.
Myth 10: Claim Settlement is a Hassle and the Insurance Company Can Deny the Payout or Hold a Portion Back
Fact: Insurance companies are committed to paying claims, as this is their primary function. An insurance policy is a contract based on utmost good faith, meaning its validity depends on accurate information provided by the customer. Premiums must be paid regularly to keep the policy active.
Policies typically cover all types of death, including illness, accidents, old age, war, riots, and natural disasters, with the exception of suicide within the first policy year. Insurers are increasingly digitizing their processes, including claims, to make them hassle-free.
Every individual and family has unique financial needs. It’s advisable to consult an insurance advisor to find a plan that best suits you, or compare policies online from different providers. Insurance is a significant investment, and finding the right plan ensures it’s money well spent. Understanding its long-term value is crucial, and don’t let these common myths mislead you.
when you’re young, healthy, and without dependents. However, it often falls short in covering future needs like your children’s education, marriage, medical emergencies of aging parents, and rising living costs. Additionally, employer insurance typically includes only death benefits, leaving you unprotected in retirement if you don’t have a financial plan for post-retirement expenses.
It’s wise to supplement your employer-provided coverage with a personal policy tailored to your future needs. Choose a policy that provides financial support throughout your life and ensures your loved ones are financially secure if something happens to you.