Imagine that you, as your family’s primary breadwinner, are no longer around to provide for your loved ones. It goes without saying that your family’s lives and livelihood would be affected drastically. The situation gets worse if you had left behind housing loan, car loan or credit cardbalances. Your dependents may not be able to hold on to the assets you had left behind, and late payment interest charges could accrue to nightmarish amounts.
It is for this reason that many people purchase life insurance policies. However, adequate protection only happens if you had bought the right policies! One can easily end up under-insured or over-insured (still better than uninsured though). More commonly, many people end up paying too much in premiums for the amount of cover they are getting.
For your benefit, we listed down 7 of the most common mistakes people make with life insurance. Once you know this, you can avoid these newbie mistakes and purchase life insurance policies the smart way(and get you in the ‘sufficiently insured’ category).
What's covered in this article?
1. Not understanding the difference between the 5 basic types of life insurances
There are 5 flavours of life insurance most commonly found today:
- Whole Life Participating Plan (aka Endowment Plans)
- Whole Life Non-Participating Plan
- Term Life Plan
- Reducing Term Life Plan
- Investment Linked Plan (aka Unit Linked Plan)
Each of them offers different components (insured amount, savings and dividends component, cash value, units etc.) and very different premiums payable. Buying the wrong plan for the wrong purpose is a sure way of overpaying for features you may not want/need.
If you do not already know the differences, start by reading this article. In fact, this is the MOST IMPORTANT step to avoid mistakes. Learning these differences is the best thing you can do for yourself when it comes to buying life insurance. (Don’t wait. Start here.)
2. Not having a clear objective of why you are buying insurance
Generally, aside from tax savings, there are 4 reasons that people buy life insurance policies
- To protect your loved ones against your death
- To protect yourself against Permanent Disability / Critical Disease
- Forced savings
- As an investment
Before purchasing a policy, always ask yourself why you are purchasing the policy. It can even be a mixture of objectives. Then choose and customize the right policy for your objectives.
For example, if the only reason you want insurance is for the protection element, then why buy a Whole Life Participating policy where up to 80% of the premiums paid goes towards a savings component?
3. Thinking it is expensive, complex OR can only be bought through agents
Only 56% of the Malaysian population have life insurance. For something so important, why do such a large percentage of Malaysians still not have life insurance? The reasons given by the public provide an interesting picture.
Some cite its complexity or affordability. Some are sceptical because of prior experiences with misleading, pushy or aggressive insurance agents. Surprisingly, an oft-cited reason is that some people do not like feeling obligated to buy from the agents whom they meet. The good news is, purchasing a life insurance policy doesn’t always have to cost an arm and a leg. It can also be hassle free and pressure free. You just need to do a little more research.
4. Thinking the higher / lower the premium, the better the policy
Higher premiums do not equate to better policies. Insurance agents are compensated via commissions and are generally better incentivized towards selling policies with higher premiums. On the flip side, paying as little as possible for the same amount of insurance cover is NOT a sure sign of being smart with your policy selection.
Frankly, both schools of thought are dangerous.
The best policy is the one that suits your needs like a glove. If you have to compare prices, compare only between comparable policies that have already been customized to suit your needs.
5. Thinking I am unmarried/have no dependents, hence no need for life insurance
Here’s some food for thought.
Did you know that about 30% of life insurance claims are because of disability / critical disease and not because the policyholder has died?
6. Thinking you will need life insurance for the rest of your life
This belief is a common cause of over-insurance during old age.
If your purpose is to ensure that your dependents can sustain their current lifestyle upon your death, then you may not need it when you are no longer the primary breadwinner AND no longer have any unsettled debts.
7. Being under-insured / over-insured
In Malaysia, the average coverage amount is lower than RM50,000. Considering the cost of living in 2015, most people are grossly under-insured. Contrastingly, many people are over-insured. Unknowingly, they purchase multiple life insurance policies packaged as savings plans, investment plans or MRTA / MLTA when taking on a new home loan or personal loan.
So, how much coverage should you be insured for?
The general rule is to have a death benefit worth 5 to 10 times of your annual income to sustain your family financially for a few years after your death.
Conclusion
We hope that through this article, you will have a clearer view of what type of life insurance you will need for you and your family. Now go and get your life insurance like a pro! Also, if you're planning to get insurance for your car, motorcycle or travel, check out our insurance page. You can get an instant quote for FREE and purchase it right away if it fits your need.
FAQs
Medical history: Your life insurance application will ask about significant medical conditions you have or have experienced including chronic illnesses, past surgeries or other major medical treatments. Be as specific and detailed as possible about each situation, its duration and your ongoing or past treatment.
How to answer life insurance questions? ›
Medical history: Your life insurance application will ask about significant medical conditions you have or have experienced including chronic illnesses, past surgeries or other major medical treatments. Be as specific and detailed as possible about each situation, its duration and your ongoing or past treatment.
What not to say when applying for life insurance? ›
The smallest lie or omission can give the insurer grounds within the first 2 years to deny a death claim. We have seen claims denied for failure to disclose use of a seasonal allergy inhaler, substance abuse treatment, and even the insured's height weight measurements.
What are 3 reasons you may be denied from having life insurance? ›
They can include engaging in risky hobbies and behaviors like skydiving; having a history of DUIs or speeding tickets; having a dangerous job like roofing; having a criminal record or a less than ideal financial history; being a smoker; and failing a drug test.
What is the major problem with life insurance? ›
Cons of life insurance
One disadvantage of life insurance is that the older you are, the more you'll pay for a policy. This is because you're more likely to pass away during the policy period than a younger policyholder and will, in turn, cost the life insurance company more money.
What is life insurance in one word answer? ›
Life Insurance can be defined as a contract between an insurance policy holder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set period.
What is insurance best answer? ›
Insurance is a contract, represented by a policy, in which a policyholder receives financial protection or reimbursem*nt against losses from an insurance company.
Who gets denied life insurance? ›
Life insurance applications can be denied due to health conditions, high-risk occupations or hobbies, lifestyle factors, financial considerations and age or life expectancy. It's possible to challenge a life insurance denial by writing a well-structured appeal letter and reapplying.
Do life insurance companies verify income? ›
Financial situation
The insurer may ask questions about your income, net worth and assets. This is to ensure you can afford to pay the premiums to maintain your life insurance, and that the amount of coverage you're applying for makes sense.
How honest should you be on a life insurance application? ›
And it's even rarer that the insurer would deny a payout during the contestability period, but it can and does happen. It's important for you to be honest when you apply so you can be assured that your loved ones won't have any trouble making a claim on your policy if they need to.
Here are some life insurance exam tips to help you prepare:
- Eat healthy. During the life insurance physical, the examiner will take a blood sample for testing and he or she will check your blood pressure and pulse. ...
- Drink water. ...
- Consider fasting. ...
- Skip the gym. ...
- Get a good night's sleep. ...
- Wear lightweight clothing.
Contact the insurer
Providing additional supporting documentation may help you contest the denial. This may include medical records, autopsy reports or insurance payment receipts. For instance, if you produce receipts of the policyholder paying their premium on time, you may be able to disprove policy delinquency.
Why would a life insurance company deny a beneficiary their benefits? ›
The insurer might request medical records and other documents to evaluate them for any evidence of material misrepresentation on the life insurance application. If your insurer finds evidence of material misrepresentation, the policy could be voided and your beneficiary would not receive a death benefit.
Why do people avoid life insurance? ›
What are reasons not to buy life insurance? Reasons not to buy life insurance can include not having beneficiaries, not having beneficiaries who need financial support in the event of your death, or not having enough cash flow to pay for premiums.
When to drop life insurance? ›
If you're experiencing financial difficulties or your life insurance policy has fulfilled its primary need to protect you when you need it most, such as protecting your mortgage payments until you pay off your home, you may find that ending your policy is the best course of action.
Why do people not take life insurance? ›
They don't like to gamble
They see insurance as a gamble – investing for a big pay out that might just not ever happen. Have we got news for you! 99% of all life insurance claims get paid out – that's barely a risk. And when you think about the risk you have to take when you don't insure – it's a no-brainer.
What is the simplest way to understand life insurance? ›
What Is Life Insurance? Life insurance is a contract between you and an insurance company. In exchange for your premium payments, the life insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death, as long as your policy is in force.
How do you answer the question why insurance? ›
4 example answers
I'm an extroverted individual who enjoys solving problems, so the insurance industry is perfect for me. I never encounter a challenge that I'm not excited to overcome, and I embody a positive attitude every day that I come to work so that I can help my customers and place of employment thrive."
What are 10 things you absolutely need to know about life insurance? ›
If you're wondering whether life insurance still makes sense for your financial plan, here's what to know.
- There are different types. ...
- Life insurance can build savings. ...
- Tax laws are favorable for growth. ...
- Investment fees can be high. ...
- You can combine life insurance with long-term care coverage.
Lying on your life insurance application is a form of insurance fraud and could come with serious consequences. It may impact your future insurability, and the consequences may vary based on the severity of the omission. For instance, intentional fraud or forgery may be punishable in criminal court.
