A few people buy life insurance, some are persuaded to buy life insurance and most have life insurance thrust upon them by an agent. When everything in life is going fine, life insurance hardly draws anyone’s attention. The policyholder also rarely finds time to look at the conditions, benefits and the privileges under his policy. But insufficient life insurance cover and mismanagement of a life insurance contract can ruin the future of the dependents. Adequate life insurance alone serves the purpose of providing financial security to one’s spouse or children. While buying a policy one should not look at the amount of premium only for taking the final decision.
Living with inadequate life cover
One should decide the amount of sum assured on the basis of future obligations to the family and explore with the plans and benefits that could be availed of for securing the family’s future with the risk cover as decided first. Living with inadequate life cover is Sin No.1. This may ruin a family permanently and the spouse and children may find themselves in a sinking boat.
Not paying premium on time
Life insurance is valuable so long as the policyholder continues to pay due premium not later than the grace period. Normally, the policyholders wait for reminders from agents or the company. Not remembering the due date and not paying the premium on time is Sin No.2. A life insurance policy lapses if premium is not paid within the grace period. If unfortunately the policyholder dies when the policy is not in force, either nothing is payable to the family or only the paid up value is paid which is a very negligible amount during the early years of taking a policy. No bonus accrues to a lapsed policy and almost all the riders become inoperative.
Not mentioning nominee’s name
Nomination under a policy is a must for smooth settlement of claim. If the spouse is not the nominee, the insurer will not be obliged to honour a claim by her or him in case of death of the policyholder. The claims in such situations are settled either through order of court or following completion of several time taking procedures. Dispute among rival claimants often ruin the dependents extensively. Not ensuring timely nomination or change of nominee following marriage or death of the first nominee is Sin No.3.
Not careful in filing fresh nomination
Life insurance policies grow into valuable assets and can be utilised for raising loan from any lender. The policy can be assigned to another individual or to any entity such as banks and housing finance companies for raising a loan. The policy is accepted as a collateral security. The policy can be assigned to another individual out of natural love and affection also. But when the policy is assigned, the original nomination gets cancelled. Hence, on reassignment the policyholder needs to execute fresh nomination, otherwise in case of death claim it will be treated as a claim without a formal nomination. Not being careful about filing fresh nomination is Sin No. 4.
Not sharing policy information with spouse
A responsible family member needs to share all information regarding life insurance policies held by him with his wife. Insurance is for the spouse and the children hence they should know number of policies and where the original documents are kept in the house or in the lockers. Generally, spouses consider life insurance a sensitive subject and avoid talking about death claims between themselves. But not talking and sharing vital information with spouse is a blunder everybody tends to commit and this is Sin No. 5.
Surrendering the policy
Life insurers provide for an exit route by way of surrender of a policy if the policyholder is unable to pay the premium due to some financial crisis. Surrender of a policy normally provides reduced cash value against the policy. Surrender provides the policyholder cash in his own hand, hence on a slight pretext, very often some policyholders surrender their policies and deprive their family members, specially the spouse, of the invaluable life insurance cover and this is Sin No.6. As buying another policy is always costlier due to increased age, such policyholders permanently deny their family financial protection and expose them to huge risk if the unfortunate event occurs in their life.
The writer is former MD & CEO, SUD Life, an Indo-Japanese JV