Don't buy insurance only for liability cover

Last weekend we received the sad news on the demise of a young insurance professional in his early 40s in his sleep due to heart attack. The news trickled that he was insured for the home loan and his insurance claim was paid promptly as he was a part of the fraternity. This would help close his home loan and thereby, provide support to his family. We noticed that although he was an insurance professional he had only taken the insurance to take care of his liability and had not taken into account that he also need to provide for the future of his family to maintain the lifestyle they are used to.

Over the years as we have paid out claims we realise that many people are underinsured compared to their financial value to their family. Let us see what are some of the common mistakes policyholders make.

Buying insurance for tax benefits

Most men who are bread winners for the family are generally insured only to the extent of the premium required for their tax benefits or in order to cover their home loan. It is imperative that they do a financial need analysis to ensure that their insurance cover is adequate to ensure that their dependents - parents, spouse and children can maintain a decent lifestyle in case of any eventuality. Also in case of any financial crunch due to job loss or illness or any other emergency people tend to stop paying insurance premium and lapse the policy and lose cover. They should ensure that at any point of time the premium should be paid to ensure the cover is in force.

Majority of women, especially housewives are not insured adequately while they continue providing support to their spouse, children and families as this is not measurable in economic terms. Working women also take insurance just to take care of tax breaks for income tax or cover their home loans and don't really work out their financial worth before taking insurance to protect the lifestyles of their dependents.

Buying insurance in children's names

Another common mistake made is that instead of insuring their own lives adequately to ensure that children's future needs are taken care of, most parents out of sentimental reasons are convinced to buy insurance on the life of the child. They don't realise that in case of any unfortunate event the child will not have the financial means to pay the premium and the policy would lapse. It is important to ensure that parents are covered adequately to meet the future needs of the child.

We need to make insurance cover a major part of our financial planning for achieving our long-term financial goals and not push this in the background hoping that nothing will happen to us.

It is important that everyone takes insurance not only for covering liability, but also to ensure that their dependents are able to continue with the life and lifestyle of their choice in case of any unfortunate event.

MISTAKES TO AVOID

• Buying insurance only for tax benefit or to cover a liability like home loan 
   
• Buying insurance in the name of the child; in case of an unfortunate event premiums will be unpaid 

The writer is chief operating officer, IDBI Federal Life Insurance