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February 1, 2023Life Insurance is one of the most important things to do in personal finance. In fact, many financial advisors say that life insurance should be one of the first things you should do when you start your personal finance journey. However, considering life insurance as an investment option is one of the biggest mistakes we make. Life insurance has its own advantages, especially for a person who has dependents and does not have a corpus that is enough to take care of his/ her family’s needs for the future.
But blindly investing in Life Insurance does not make sense in many conditions and people. It is a waste of time and money in such cases. So, let’s take a look at such scenarios:
1) For a single person or a person who has no dependents, life insurance is of no use since after his death nobody will need the life insurance money for their future needs.
2) For a person who has become financially independent, there is no requirement for life insurance as his corpus will generate enough cash flows to meet his dependents’ financial needs in the future.
3) Another situation is when a person is in his 70s or 80s, then buying life insurance may be very expensive and may defeat the very purpose of buying life insurance.
4) The problem with life insurance is that people look at it as an investment instrument. This is the reason that people buy complex and expensive options such as ULIPs, etc. The purpose of Life insurance is not for investing purposes. It is similar to buying any other insurance like a car, home, fire insurance, etc.
Mixing insurance with investments is the biggest problem that we have. Most people buy expensive Life insurance as an investment instrument, paying exorbitant premiums for measly returns. You should only buy Term Insurance, never anything else as those are just marketing gimmicks to loot your hard-earned money. For investment purposes, put your money into fixed deposits, mutual funds, etc.
One of the most common mistakes I have seen people make is buying one or more life insurance policies sold by agents assuring guaranteed returns. People do not know that they would get a better bang for their buck by buying insurance and investment separately. Life Insurance is a good way to secure your family’s future after you, but people have to be wary of the misselling that happens in India. Buying a life insurance/ term insurance from a reputed insurance company with a good settlement record is the only insurance that I would suggest. Stay away from all other types.