Buying a life insurance policy? Although, a good idea, but, before getting a suitable life insurance, remember, there are some mistakes to avoid before procuring one. Primarily, a life insurance must be understood in the right perspective.

The sole purpose of buying a life insurance must be to protect your dependents after you are no more. This should be of prime importance; there are fringe benefits that come along with the life insurance policy and merely treated as the icing on the cake alone.

Related: Most Popular Myths Related to Life Insurance

Key Pitfalls You Must be Wary of When Buying a Life Insurance Policy

1. Many people are of the opinion that a life insurance is an investment instrument. Nothing can be further from the truth. They are both inherently different.

Some make the mistake of linking their life insurance policy with an endowment plan or a ‘Unit Linked Insurance Plan’ (ULIP).

Please understand that an endowment plan is merely a form of a debt instrument which may give you an annual return of about 5%, whereas, A ULIP may offer higher returns on account of it being linked to ‘Equity Markets’.

The returns on your investment will move in sync with the health of markets. Besides, there are extra charges involved that will eat into your profits. But, the whole purpose of buying an insurance policy is defeated as the amount of life cover that you will receive will be negligible.

Please, treat these products independently. Ideally, you must buy a standalone life insurance policy for its numerous merits alone and make your investments separately.

2. There are others who have a job or a small business, make the mistake of not buying an insurance policy altogether.

The employed may feel that the sum they are insured for by their employees is sufficient.  Also, the amount of coverage may not suffice. This is one of the gravest insurance mistakes to make for they are insured only during the tenure of their service; alternately, they may prefer investing in a car or other similar products without realizing that they are depreciating investments.

By all means, go ahead and indulge in these activities if you have surplus money. A life insurance on the other hand may protect your dependents for the rest of their lives after you have gone.

3. There is a practice with some individuals to under insure themselves. This is done to get insurance just for the sake of it. This is a huge mistake. Although, there are no benchmarks set as to the amount of insurance you may require, but it must be at least 10 times the amount of your salary or income.

There are other people who prefer to buy insurance with the lowest premium possible.  This is an erroneous decision. There is little sense of having insurance just for the sake of it.

Most of these insuring companies that offer these low premiums that operate in this fashion are to attract customers. Records show that many of them have a dubious track record when it comes to honoring their claims.

4. Another big insurance mistake that people indulge in is to exit an existing policy prematurely. The underlying reasons for this act could be varied. Money may be needed urgently for other urgent use.

This decision will hurt the policy holder the most when there is only a short time remaining for maturity. A pre-closure cost would imply, though it may be much less than exiting a policy in the first few years.

Remember, the full benefit of the policy is only when it expires on its due date. Exiting a ULIP policy will reduce your funds substantially in the first five years as most of expenses are deducted by the insuring companies in the initial stages of the tenure of the policy.

However, you may exit a ULIP if it is underperforming the general market when there are better options available.

5. We know how important insurance is. But, buying the wrong one can be one of the biggest insurance mistakes you can make.

A good well thought out insurance can be more than beneficial. Apart from protecting you and your dependents, it can help you meet other expenses like paying your hospitalization or medical bills, funding your child’s future education or invest some money wisely in other instruments to grow your corpus further.

6. Understanding the different insurances is crucial: A permanent insurance is possibly the best one you should opt for. It will keep you and your near and dear ones protected from unforeseen circumstances all through their lives as well.

A term insurance, on the other hand will protect you for a fixed period of time. In case you outlive it, you will get a substantial lump sum of money to plan your future well.

A health insurance will take care of most your medical bills whenever the need arises.

7. One of the biggest insurance policy mistakes is when you keep delaying buying one. Some people justify this stance by saying that they are still young and do not need any insurance.

You never know when a major illness or an accident or even death can manifest itself. All these unfortunate incidents come unannounced. Never make this vital insurance mistake.

Alternately, at a younger age the premium is much lower than if bought later in life. Besides, you can choose a retirement plan that will keep growing with time till you are still working. When you outlive your life insurance term, you will get a consolidated amount of money that will see you through the rest of your days.

Conclusion

While buying insurance is the preferred way to safe guard yourself from unseen future mishaps, it is best that you never make an insurance mistake, by either choosing the wrong one or not understanding it well enough.

Remember to always read the fine print of your insurance policy carefully. Many people overlook this key step and find themselves in dire straits sooner or later. This is one of the most common insurance mistakes that non-suspecting buyers make.

Insuring companies are not the friends they claim to be. Also, never make the well known insurance mistake of buying an insurance policy that is not custom made to meet all your requirements.