11 Life Insurance Mistakes & How to Avoid Them
Summary
TLDRThis video script addresses common yet often overlooked life insurance policy mistakes, including misinterpreting returns, underestimating inflation's impact on coverage, and misunderstanding terms and conditions. The speaker draws from personal experience and consumer feedback to highlight 11 uncommon blunders, offering insights into how to avoid them and emphasizing the importance of due diligence and clarity when dealing with insurance policies and intermediaries.
Takeaways
- 📊 Life insurance policies are often misunderstood due to aggressive marketing, leading to disappointment when the actual returns are lower than expected.
- 💡 Policyholders frequently overlook the impact of inflation on the real value of their insurance coverage, which can result in a significant shortfall in meeting future financial needs.
- 🔄 The misconception that life insurance premiums remain static hides the reality that the sum assured decreases in real terms over time due to inflation.
- 🚫 Endowment policies are often incorrectly sold as short-term financial instruments, which is misleading as they are designed for long-term commitments.
- 💼 Intermediaries in the insurance industry, while valuable, may sometimes provide biased information due to their income being tied to policy sales.
- ⏳ Many policyholders are unaware of the financial implications of the free-look period and the deductions that can be made during policy cancellation.
- 📝 The grace period for premium payment is commonly misunderstood, with some not realizing the consequences of policy lapse and the difficulty of revival.
- 🚫 The indisputability clause (Section 45)误区地被认为是无条件的保护,但实际上在欺诈或重大误申报的情况下,保险公司仍然可以挑战索赔。
- 🏆 Nomination rules are often misinterpreted, with nominees not necessarily being the final recipients of insurance proceeds, which can lead to legal disputes.
- 🔄 The 'return of premium' feature in term insurance is not as beneficial as it seems, as the returned premiums lose value over time due to inflation.
- 🔗 ULIPs have improved their charge structure, but policyholders must still be vigilant about the various charges and their impact on long-term returns.
- 👥 Group life insurance policies differ significantly from retail policies, and policyholders should be aware of these differences to avoid misunderstandings.
Q & A
What is the main topic discussed in the video script?
-The main topic discussed in the video script is the biggest life insurance blunders people make, including mistakes in buying, managing, and claiming policies.
Why does the speaker emphasize the importance of understanding the return component of life insurance policies?
-The speaker emphasizes the importance of understanding the return component because policyholders often misread it due to the way it's marketed, leading to disappointment and regret when they realize the actual returns are lower than expected.
What is the issue with considering life insurance policies as a short-term investment similar to fixed deposits?
-The issue is that life insurance policies, especially endowment policies, are designed for long-term commitments and have a minimum tenure of 5 years. Treating them as short-term investments can lead to misunderstandings and financial losses.
What are the three key charges that an insurer can withhold when a policy is cancelled during the free-look period?
-The three key charges are the proportionate risk premium for the days the policy was active, the stamp duty, and the cost of any medical examination conducted by the insurer.
Why is it a mistake to ignore the impact of inflation on the sum assured of a life insurance policy?
-Ignoring the impact of inflation can lead to a significant shortfall in the real value of the sum assured over time, which may not meet the future financial needs of the policyholder's family.
What is the 'Rule of 4' mentioned in the script, and why is it important?
-The 'Rule of 4' refers to four people who should know about your life insurance plan: your parents (especially if unmarried), your spouse, a cousin of a similar age, and a family friend around your age. It's important to ensure that your loved ones are aware of your policy in case of any unforeseen circumstances.
What is the significance of the indisputability clause in life insurance policies?
-The indisputability clause, as per Section 45, protects policyholders by preventing insurers from disputing claims based on inaccurate or false statements made in the application after two years of issuing the policy, unless there is fraud or material misrepresentation.
Why should policyholders be cautious about the 'loyalty additions' in ULIPs?
-Policyholders should be cautious because 'loyalty additions' are often a marketing tactic to retain customers and may not significantly boost returns as advertised. It's important to understand the actual impact of these additions on the policy's performance.
What are some of the key differences between group life insurance policies and retail policies?
-Key differences include the coverage expiring when leaving the group or if the group ceases to exist unless a conversion option is provided, and the renewal premium, which can vary in a group plan based on organizational negotiations.
Why is it important for policyholders to be aware of the terms and conditions of their life insurance policies?
-It is important because a lack of understanding can lead to mistakes such as misjudging the impact of policy lapses, misunderstanding the free-look period, and not being aware of the exceptions to the indisputability clause, which can result in financial losses or claim denials.
What is the role of intermediaries in the insurance industry, and why should consumers be cautious when dealing with them?
-Intermediaries such as agents, brokers, and online aggregators play a role in distributing policies and spreading awareness. However, consumers should be cautious because intermediaries' income is linked to policy sales, which can create a conflict of interest and lead to biased information provision.
Outlines
📊 Life Insurance Blunders and Their Impact
The script begins by addressing common misconceptions about life insurance, focusing on the mistakes people make when buying, managing, or claiming policies. It emphasizes the importance of understanding the nuances of different types of life insurance, such as term insurance, ULIPs, traditional plans, and group life insurance. The speaker aims to highlight less obvious mistakes, urging viewers to be aware of the marketing tactics used to sell policies and the importance of considering factors like inflation and policy returns. The script also mentions the role of the IRDAI in protecting consumers and suggests ways to avoid common pitfalls.
💡 Understanding the True Value of Life Insurance Policies
This section delves into the misinterpretation of life insurance policy returns and the impact of inflation on the sum assured. It discusses how policyholders often overlook the eroding effect of inflation on their coverage, leading to a shortfall in meeting future financial needs. The speaker suggests strategies to counteract this, such as purchasing additional term insurance or opting for policies with an escalating sum assured. The paragraph also touches on the benefits of seeking advice from insurance consultants like Ditto to make informed decisions.
❗ Avoiding Common Pitfalls in Life Insurance
The script continues by warning against the misuse of endowment policies as short-term financial instruments, emphasizing the long-term commitment required for such policies to be financially viable. It also addresses the role of intermediaries in the insurance industry, cautioning consumers to be skeptical of information provided by agents due to potential conflicts of interest. The speaker highlights the importance of understanding policy terms and conditions, such as the free-look period and grace period, to avoid costly mistakes.
🔍 Navigating the Complexities of Insurance Policies
This part of the script discusses the importance of being truthful in insurance applications to avoid disputes and the potential for fraud or misrepresentation. It also covers the misconceptions around nomination rules in life insurance, explaining the difference between a nominee and the legal heirs. The speaker advises policyholders to align their nominations with their will to prevent disputes. Additionally, it touches on the 'Rule of 4' for informing loved ones about life insurance policies and the mathematical fallacy of 'return of premium' policies.
💼 The Reality of ULIPs and Group Life Insurance
The final section of the script focuses on Unit Linked Insurance Plans (ULIPs), discussing the controversy surrounding them and the importance of understanding the charges and expenses associated with them. It also addresses the marketing tactics used to promote 'loyalty additions' and the potential for these to be misleading. The script concludes with a discussion on group life insurance policies, cautioning consumers about the differences between group and retail policies and the potential for misunderstandings that can lead to coverage gaps.
Mindmap
Keywords
💡Life Insurance Blunders
💡IRDAI
💡ULIPs
💡Inflation
💡Grace Period
💡Policy Lapse
💡Indisputability Clause
💡Nomination Rules
💡Return of Premium
💡Zero Cost Term Insurance
💡Group Life Insurance Policies
Highlights
The video discusses the biggest life insurance blunders and provides a comprehensive picture of common mistakes.
Mistakes covered include issues during policy buying, managing, and claiming, spanning various types of insurance plans.
Common mistakes like insufficient coverage are deliberately left out to focus on less obvious errors.
The importance of understanding the actual return on life insurance policies and the impact of marketing on consumer perception.
The often-overlooked effect of inflation on the real value of life insurance coverage.
Solutions to combat inflation's erosion on life insurance value, such as additional policies or those with an accelerating sum assured.
The misconception of endowment policies as a short-term investment alternative to fixed deposits.
The role of intermediaries in the insurance industry and the potential bias due to their income being linked to policy sales.
The importance of understanding the terms and conditions of life insurance policies, especially the free-look period and its financial implications.
The common misunderstanding about the grace period for premium payment and its impact on policy lapse and claims.
The significance of the indisputability clause and its exceptions after two years of policy issuance.
The proper understanding of nomination rules in life insurance and the distinction between a nominee and legal heirs.
The 'Rule of 4' concept to ensure loved ones are aware of one's life insurance policy.
The critique of 'return of premium' feature in term insurance and its actual value considering inflation.
The comparison between different variants of term insurance plans and the importance of mathematical understanding in choosing the right one.
The detailed explanation of ULIPs, their charges, and the importance of being aware of the expenses involved.
The critique of 'loyalty additions' in ULIPs as a marketing strategy and its actual impact on policyholder returns.
The differences between group life insurance policies and retail ones, and the unique considerations for each.
Transcripts
So inspite of what the thumbnail says – I won’t be talking about my life’s biggest mistakes
Instead we’ll do something more relevant as we look at the biggest life insurance blunders
These are mistakes I have made in the past and I’ll also source a
few from some emails I have received & also websites like mouthshut.com,
google reviews etc. to have a more comprehensive picture of where people are going wrong
Now these mistakes could have happened while buying,
managing or claiming the policy, so I’ll cover all three
This won’t be just term insurance specific
I know there’s already a lot of content on term, so I’ll include ULIPs,
traditional plans like moneyback, endowment and also group life insurance policies
To the extent possible, I’ll leave out the common ones so mistakes like insufficient coverage,
a delay in the purchase, not updating the policy,
not disclosing health conditions etc. and instead, I’ll be covering the more uncommon
mistakes that surprisingly we all make either accidentally or by way of ignorance
And finally & wherever possible, I’ll also tell you what the law,
the IRDAI has to say on it and how we can protect ourselves against these mistakes
The list isn’t small
I found atleast 11 mistakes, 11 uncommon mistakes and I’m pretty sure,
you too will be guilty of committing atleast 2 or 3 of these blunders
So keep a count of your mistakes, let me know in the comments and let’s begin
OK so this is not uncommon, it’s a very common mistake and I’m certain
many of you watching this video have been a victim of this with some of
us still carrying those policies like an albatross around your neck
The problem starts from the way these policies are marketed. I mean, picture this for a proposition –
“You pay 1 lakh rupees for the next 10 years and then from the end of 12th year,
you’ll receive 1 lakh rupees every year for the next 50 years”
Now I don’t know if there’s actually a plan like this but if there is,
then pitching something like this to any regular person is frankly a piece of cake
But you show this same construct to a mathematician and he or she would – “Kya
bakwaas plan hai. This doesn’t even cover inflation. It’s an IRR of just 6.3%”
Ofcourse I must add that this return of 6.3 is guaranteed, so that’s good
And and it’s also tax-free so these two advantages have
to be considered alongside the 6.3% return number
But irrespective the point I want to stress here is that policyholders often misread the
return component of these policies which is typically between 4 & 6% because of the
way it’s marketed and once we realize it, it leads to a lot of disappointment and regret
My point is – such situations are definitely avoidable with some simple mathematics and
basic research on the Internet so if you haven’t been doing it yet, please don’t skip this part
Now one of the plus-points of any life insurance policy is that the
premium remains constant for a pretty long time and so does the sum assured
But if we think more realistically our sum assured
is actually going down & that’s entirely on account of inflation
Just to put that in numbers – a crore of sum assured today
is probably worth 13 lakh rupees at an inflation rate of 7% 30 years from now
So the mistake most of us end up making is, we fail to account for inflation eroding the
real value of sum assured over time which means there’s actually a gap,
a significant shortfall with respect to the future financial needs of the
family which starts from the day we buy a life insurance policy
I think a lot of us including me, have been ignoring this and as a solution one
can either take a second term insurance policy after a few years like I have done
or you can also opt for policies which have an accelerating sum assured feature
i.e. your life insurance coverage keeps increasing every year by say 5% or something
I think some companies have this option and if you’re keen on getting more information on this
then I’ll suggest you book one of those free 30 minute consultation calls with the folks at Ditto
It’s a service even I availed a few months back when I was confused on whether I should
port my health insurance policy or not and the advisor’s suggestion really helped me
Infact I was pleasantly surprised that:
They didn’t try to sell me anything
My problem was resolved in the first call itself
The agent did not call me a second time attempting to cross-sell something
There was no pushing, shoving, emotional atyachaar
Believe me, it was an absolutely wonderful experience
So if you haven’t tried Ditto, do try them out and if you’ve interacted with any other agent
from somewhere else in the past, you’ll now know what a delightful interaction is
As always, the booking link is available in the video’s description
Oh, this is a bad one and one blunder I came across is where a policyholder
purchases an endowment policy believing it to
be a viable solution for his or her short term parking of money
Now, the reason this happens is because many of us substitute a traditional life insurance policy
or if we don’t do it ourselves, we are told by our neighbourhood LIC-wale uncle that this
policy is a good alternative for a fixed deposit or better still, it’s a tax-free fixed deposit
Now this is still fine if you’re a super conservative person and your investment
window is a good 10, 15 years from now but if the tenure you’re looking for is
2 or 3 years then an endowment policy is an absolute non-starter as all such policies
are for atleast 5 years with typical maturities ranging from 10 to 20 years
So it’s mostly a case of mis-selling but as a thumbrule – any life insurance policy that has
an investment element to it, so an endowment, moneyback, annuity or even a ULIP – they all
require a long-term commitment not just by law but also for it to be financially viable
So kindly watch out for that and please ensure
none of your friends or family members are making this mistake
Intermediaries play a big role in the insurance industry in not only
distributing policies but also spreading awareness
Typical questions from any consumer would revolve around the different types of policies
Specifics, the nuances of each policy
The plan’s suitability based on individual needs
Policy riders
Coverage options
Premium calculation
Policy purchase
Endorsements
Renewals and much much more
Agents, brokers, online aggregators – while they add a lot of value to the process one must
still remember, because the intermediary’s income is linked to the sale of a policy,
there’s that in-built incentive to provide only that part of the information that suits them
For example – when selling a ULIP policy, while every agent will
talk for hours about how the fund has performed
20% growth over the last 5 years
India is growing
Production linked incentives
Infrastructure blah blah blah
But do notice they’ll be very cagey when you start seeking information on things like the
premium allocation charges, the surrender value of the policy, mortality rate and stuff like that
That being said we, as consumers although we are very trusting,
we also have to be a little practical here or rather, it would be a mistake
on our part to not do our research and to take the intermediaries word for it
And what I’m saying extends to everyone — agents, the insurance company call-centre,
brokers and even Ditto – although knowing Ditto, I’m certain they’ll encourage you
to do as much research as you want before deciding to work with them
OK, now let’s go deeper into the policies and
especially the terms & conditions which is where a bulk of the mistakes happen
My first area of inquisition is the free-look period and unfortunately,
most policyholders mistakenly believe that they can cancel their life
insurance policy during this period – without any financial implications
Well, that’s not true because while the insurance regulator mandates a free look period of 30 days
beginning from the date of receipt of the policy document upon cancellation during this period,
the rules allow the insurer to deduct certain expenses while calculating the refundable amount
Specifically, there are 3 key charges that the insurer can withhold –
The proportionate risk premium so if the policy has run for 20 days then
the insurer can deduct the risk premium, the mortality charge pertaining to those 20 days
The insurer can also deduct the stamp duty
And thirdly, the cost of any medical examination that the insurer had conducted
I don’t think any agent or even any marketing material issued by a life insurance company talks
about this, they’ll just majestically say “there’s a 30-day free look period” but when the refunded
money comes back with these deductions, then obviously the policyholder is pretty dissatisfied
So jagruk baniye
Jagruk janta as my friends at Labour Law Advisor would say it
Another relatable T&C mistake in on the grace period and policy lapses
Infact, I’ll say there are two kinds of policyholders
The first kind is someone who isn’t aware of anything including the fact
that the policy lapses if one doesn’t pay the premium, that he or she might
lose all benefits & the revival process is not guaranteed and that every life insurance policy
offers a grace period of 15 to 30 days depending on the mode of premium payment
Then the second set of policyholders are those who are aware of a policy lapse & the grace period
offered but have seriously misjudged the impact of this lapse in terms of coverage and claims
For instance – if a death claim happens during the grace period, the life insurer generally allows
it but if the policy was lapsed, then there’s almost no chance of receiving the death benefit
Likewise, reviving a lapsed policy is not easy
It requires medical re-examinations & this cost has to be borne by the policyholder
The premiums might be bumped up if something comes up
And it can go to extent that the reinstatement itself might also be denied
Now imagine getting into a reinstatement-denied kind of situation when you’re much older, say 50
years old, because if you have to enroll into a new term insurance plan now then the premium
will be like 3 times more as compared to when you initially bought it, lets say at the age of 30
As you see here, this mistake can be a rather costly one so kindly avoid
it by simply setting up an e-mandate or keeping renewal reminders on your computer
Speaking of which I hope you’ve noticed my newsletters have restarted
I’m publishing one every week, mostly on a Thursday and the response,
the discussions around it have been very heartening
The community is big now almost 30,000 subscribers and thank you everyone for the kind messages and
if you’re finding my work useful then please do share it with your friends and connections
Right, so the indisputability clause is something many of us know and according to Section 45,
insurers cannot question a policyholder’s declaration
citing inaccurate or false statements made in the application or any report
by the medical officer after two years of issuing the policy
So this Section 45 is very helpful for policyholders like you & me,
it gives us some protection and this protection is primarily to ensure insurers do not randomly
or indiscriminately dismiss claims on the grounds of inaccurate declaration by the policyholder
Now the common mistake or rather the uncommon mistake is when a policyholder believes that
after the two-year incontestability period – no insurer can dispute a claim
The truth is there are exceptions and an insurer can definitely challenge a
claim especially in the event of a fraud and also in case of material misrepresentation
Some examples would include things like –
Falsification of age because the applicant wanted to pay a lower premium
Non-disclosure of serious pre-existing medical conditions like a heart disease
or cancer at the time of purchasing the policy
False information about occupation like claiming to be in a low-risk job
Claiming to not smoke or consume alcohol and stuff like that
Now the best way to avoid this particular situation is to be 100% truthful when filling
out your application form and if you have the slightest doubt then please consult an experienced
operator like Ditto who can guide you through the steps and help you take corrective action
Yet another uncommon mistake is our understanding or rather
the misunderstanding of the nomination rules
You see policyholders often nominate someone typically the spouse or their
children as the policy’s beneficiary without understanding that a nominee
is not necessarily the final recipient of the insurance proceeds and that the
legal heirs are well within their right to contest this out in a court of law
Infact there have been numerous court cases where nominees were denied payouts in favor
of the legal heirs and if you’re wondering why, then according to the IRDAI or maybe it’s one
of the courts say this but according to them – a nominee merely acts as a trustee or a custodian
to receive the death benefit on behalf of the legal heirs unless specifically stated otherwise
So as a policyholder, it is critical to align your policy
nomination with one’s will & legal heirs to avoid any disputes later
This will require you to regularly review and update your nominations particularly
after major life changes like marriage, death of a parent, having a childbirth etc.
Remember, if your intention is for the nominee to be the final recipient,
this should be explicitly mentioned in the policy documentation to avoid any ambiguity
Relatably, when did this podcast with Shrehith a few months back I recall
him mentioning something called a “Rule of 4”
So essentially and I’m assuming Ditto says this to all their customers –
there 4 people who should know about your life insurance plan
Your parents especially if you’re unmarried
Your spouse, very important
A cousin who is of a similar age as you
And also a family friend who is also somewhere around your age
I think this “Rule of 4” is a good thing to have so do make sure your
loved ones know about your life insurance policy
Right so when it comes to term insurance,
the “return of premium” feature attracts many individuals who believe it to be a
better deal since they get their premiums back if they survive the policy term
But when one looks at it mathematically – what are we exactly doing?
For example - a regular term insurance policy with a term of 30 years for a 25-year old would
cost an annual premium of 10,000 rupees for a 1 crore sum assured while the same
1-crore policy under a “return of premium” variant would come at 20,000 rupees per annum
So figure this – we’re buying life insurance for
the next 30 years and we’re OK to pay double the premium during this time
But when we get back the premium i.e. 20000 multiplied by 30 – so 6 lakh rupees – and
assuming a 7% inflation, what we actually get back is actually worth just 78,000 rupees
It’s something worth thinking about and I’m sure all of you know this part that instead,
if one had applied that additional 10,000 rupees on a pure investment
product like say a flexicap fund, the results would have been far better
Now, a recent variant of the “return of premium” feature is – zero cost term insurance
The concept of a zero cost term plan is very similar to an ROP but it’s definitely better
given the fact that firstly, one doesn’t have to pay almost twice the premium as
was the case with ROP and secondly, the policyholder can reclaim all premiums paid
after he or she has reached a pre-determined point during the policy term so basically,
the policyholder doesn’t need to wait until the completion of term
Essentially, there’s an exit value option that’s available but honestly in my view,
this is just a mind game and it doesn’t negate the fact that the premium you receive 20,
30 years from now has so much less value than the premium you pay today
Yes, it’s a good marketing ploy that’ll attract customers but that’s just about
it and eventually some basic mathematics will help you understand which variant of
the term plan – the seedha-saral regular term plan or the return
of premium or the zero cost plan – which of these three is best for you
OK, now let’s look at ULIPs
Unit Linked Insurance Plans — probably the most controversial
word in the insurance space and there’s definitely a reason for this animosity
I remember, when I was first told to sell ULIPs way back in 2004,
when the premium allocation charge for the first year was a whooping 36% and that’s not all
There were deductions made for policy administration, fund management charges,
mortality which is OK, it makes sense but then there were also switching charges,
surrender charges, partial withdrawal charge, discontinuance charge and much more
Now although modern-day ULIPs have dramatically improved their
charge structure, it is still the policyholder’s responsibility to
be aware of what is being charged and what’s the impact of those expenses
For instance if a ULIP were to knock off 36% of your investment in the first year or if not 36,
even if it was 5%, that’s a good 5% lower returns that your corpus might
achieve in that year and since ULIPs are long term investments, that gap of 5, 4,
3 or whatever percent can amount to a lot of money
OK now that I’ve said it, many of the recent ULIP offerings have what’s called “loyalty
additions” which is marketed as something that can significantly boost one’s ULIP returns
But the truth is – there is nothing significant about them and secondly,
not many policyholders are aware of how it works
I mean – it sounds good, right? Loyalty addition
But if goes a layer deep then it’s nothing more than a marketing stunt
that’s designed to stop you from surrendering your policy
The more you stay, the better it is for the insurance company but for a policyholder,
it might mean remaining stuck in an inefficient product just because of these sweet nothings
The final mistake I want to highlight in this video pertains to group life insurance policies
This is important because what was earlier seen only with banking partners or NBFCs, I’m now
seeing a rising trend of life insurance companies working with fintechs to create custom group plans
I know this because when I was working at ET Money a dozen or more life insurers
would have approached me to design & distribute a group insurance plan
which obviously I didn’t agree to, the reason being – a group life insurance
policy does not carry all of the same rules that applies to a retail policy
I have listed some of differences on the screen here but look at this – so firstly,
the life insurance coverage expires when you leave the group or if the group
ceases to exist unless a conversion option is provided by the insurer
Another important point is on the renewal premium and while the amount remains constant in a retail
policy, this number can vary in a group plan based on how the organization negotiates it
There are many more differences but my point is – a majority of policyholders
mistake a group life insurance plan for a retail one and often
assume that everything is exactly the same which in reality is not the case
And with this uncommon mistake, we come to the end of this video
I sincerely hope you found these insights useful and you’ll take
extra care & caution when evaluating insurance policies, when working with intermediaries,
when it comes to reading the rules, terms & conditions and when selecting products
Take help wherever and whenever you are stuck,
there are people writing good blogs & articles on the subject and there’s always Ditto – a
great platform to not just buy policies but also to get your doubts clarified
Just to recap:
Ditto is India's highest-rated Insurance Advisor with a rating
score of 4.9 from 8,000+ reviews on Google
They are backed by Zerodha
Ditto has been named LinkedIn Top Start-up for two years in a row
They have invested in a strong claim support team and much more
You can always book a free call with them but do that quickly
as the slots are limited & from what I’ve seen, they run-out pretty quick
Once again, thank you for your time,
do like this video, subscribe to my newsletter and I’ll see you very soon
Until then
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