When should you not buy Life Insurance?

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Many a times, what we do not do is more important than what we do. Similarly, understanding something which is not, can give insights into what that something actually is. This thought process can be applied to life insurance which is the most misunderstood concept in the personal finance world and bought for all the wrong reasons. So, instead of writing on the usual life insurance topics of why to buy, how much to buy and when to buy, I thought of penning down about when not to buy life insurance. I am hoping if you really understand when is it unnecessary to buy life insurance, you will be able to comprehend its genuine need. If you do not own a car, you do not need auto insurance. Similarly, in certain situations, life insurance is not required or some people may outlive the need for insurance in their lifetime. Let us examine the possible situations in which life insurance is not required to be bought:

  • No income: The simple fact is that if a person has zero income, there is no need to buy life insurance. But it is common to find life insurance policies being sold to non-earning members in the family. Endowment and money back policies are typically bought in the name of housewives. And, also for minor children. Child insurance plans are no different from the other traditional plans involving the investment component. Such products prove to be expensive, offering sub-optimal returns and do not serve any purpose for the child. The primary purpose of life insurance, to cover for loss of income is defeated here.

  • No financial dependants: Financial priorities change through various life stages. When a person is single, working and has no dependants, he may not require a very huge life cover. After getting married and starting a family, he will require a big sum assured which would cover for living expenses, outstanding liabilities and financial goals, incl. children’s education & marriage goal. Ideally, at the time of retirement, the liabilities are over, the kids are all grown up, working and capable of taking care of themselves. So, when there are no financial responsibilities, the life insurance requirement should cease. Some retirees commit the mistake of buying a life insurance policy during old age with the intention of investing their hard-earned savings and earn income. Instead, they are better off investing in other liquid options like fixed deposits, recurring deposits, etc. If sufficient corpus has been accumulated to replace regular income in retirement, then life cover is not required in old age.
  • Super rich: There are people in this world who are so ‘Filthy Rich’ that they have no idea what to do with the excess money! They are easy baits for unscrupulous agents who earn hefty commissions by selling them policies. The fact is that the wealthy people having accumulated enough assets which take care of their lifestyle, emergencies, liabilities and financial goals do not require life insurance at all. Instead of wasting money in paying insurance premiums worth lakhs of rupees, they can invest in real estate, equities to grow their net worth further.\
  • Tax saving deadline: Insurance policies are popularly perceived to be a tax saving investment option. There is a rush in the March quarter of every financial year to submit tax proofs HR department. To invest before the deadline, people become vulnerable and get lured into buying life insurance policies from agents desperate to meet their year-end sales targets. Endowment and unit linked insurance plans (ULIPs) are the typical products pitched to investors to take benefit of section 80C. Just to save tax in a particular year, investors buy policies to commit to paying premiums for 20-25 years. Such haphazard tax planning affects both their insurance and investment goals. So, life insurance should not be bought with the primary intention of saving tax.

Like we pay for our regular household expenses, insurance is one of the basic necessities of life. Life insurance policies need to be bought with a calculated approach by assessing genuine financial requirement of the future. Hope this article will help understand all the wrong and right reasons of buying a life insurance cover.

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