Debunking 15 Common Myths About Life Insurance: Differentiating Fact from Fiction

Despite its significance, life insurance often falls victim to misconceptions and myths stemming from a lack of understanding about its intricacies and diverse options. Hence, this article aims to dispel 15 prevalent life insurance myths, empowering readers with accurate information to navigate this crucial aspect of financial planning.

By debunking these misconceptions, you will gain clarity on crucial aspects such as policy types, coverage options, and benefits. You will also be able to make informed decisions when selecting a life insurance policy, ensuring that you adequately protect your loved ones' financial future.

1. Life Insurance Is Expensive:

There are a plethora of life insurance policies available in today's market. Although certain providers may demand a hefty premium, diligent research can uncover policies that align with your financial means while offering adequate coverage.

Term insurance, renowned for its simplicity, offers substantial financial protection for your family at an exceptionally affordable premium. For instance, a 32-year-old individual could secure a term plan worth Rs 1 Crore for an annual premium of approximately Rs 12,000 to Rs 14,000.

[Also Read: 4 Ways to Calculate Coverage of Your Term Life Insurance]

2. You Don't Need Life Insurance If You Are Not the Primary Breadwinner:

It is generally believed that only the primary breadwinner in a family requires life insurance coverage. Nevertheless, every member of the household, regardless of their financial contributions, plays a vital role in its functioning.

For instance, if you're a stay-at-home spouse, you likely handle numerous household responsibilities. The absence of your support could pose significant challenges and financial burdens to the primary earner, who may need to hire help for childcare, cooking, etc.

While the emotional toll of such a loss is immeasurable, sufficient life insurance coverage can provide the required financial support for the family to maintain stability in your absence.

3. Life Insurance Is Not Necessary If You Have Enough Savings:

A common misconception often circulating is that life insurance becomes unnecessary if one possesses substantial savings. The belief rests on the assumption that savings alone can adequately cover any financial needs that may arise in the event of the policyholder's demise.

However, relying solely on savings overlooks several critical factors. Firstly, the unpredictability of life events may deplete savings faster than anticipated, especially if they occur simultaneously with the loss of income. Additionally, savings may not cover long-term financial obligations such as debt repayment, children's education, or ongoing living expenses.

Moreover, life insurance serves as a crucial tool for immediate liquidity. While savings may be tied up in investments or inaccessible in the short term, life insurance provides immediate financial support to beneficiaries, ensuring they can meet their needs without delay.

4. Life Insurance Offers Excellent Returns:

In recent years, banks and insurance agents have marketed life insurance as an investment vehicle, enticing many individuals to view it as a means to achieve financial objectives such as funding a child's education, planning for retirement, or covering the expenses of a child's marriage. However, the reality often falls short of expectations.

While these investment-cum-insurance plans may seem attractive, they often fail to deliver returns that outpace inflation or provide adequate life insurance coverage. With the growing awareness of alternative investment avenues like equity mutual funds, many investors opt to bypass life insurance altogether in favour of potentially higher returns.

It's crucial to understand that while equity mutual funds may offer promising investment opportunities, they do not offer the security of life insurance coverage. Consequently, it's prudent to supplement your investment portfolio with sufficient term insurance to safeguard your family's financial well-being in the event of your untimely demise.

[Also Read: Single Premium Life Insurance vs Regular Premium Life Insurance: Which Is a Better Option?]

5. Your Claim Will Be Denied:

A prevalent fear among insurance buyers is the belief that their claims will be denied when the time comes. However, this misconception can be dispelled by understanding key factors influencing claim settlement.

One crucial indicator to consider is the Claim Settlement Ratio (CSR) and solvency ratio of your chosen insurance provider. A higher Claim Settlement Ratio (CSR) signifies better assurance that the company will honour claims promptly and efficiently. It's advisable to opt for an insurer with a longstanding CSR exceeding 95%, indicating a track record of settling at least 95 out of 100 claims, instilling confidence in their reliability. This information is readily available on the Insurance Regulatory and Development Authority of India (IRDAI) website.

You may read our article "How to Choose the Best Term Insurance Plan in India?" to understand these concepts better.

Additionally, transparently disclosing all medical conditions during the proposal stage is important. Failure to do so could potentially lead to claim denial in the future. By providing accurate and complete information upfront, you minimise the risk of your nominee's claim being rejected later.

6. You Have to Buy Accidental Insurance Separately:

Many individuals believe that term plans do not offer accidental coverage, and hence, it is necessary to buy a separate policy or an add-on for coverage for accidental death and injuries. However, this is not true when it comes to term insurance policies.

Many term plans include coverage for both accidental and natural causes of death, such as illnesses or diseases. Individuals believe this misconception because there are accidental death benefit policies and add-ons sold separately, and the agents might ask them to purchase those add-ons/policies to increase accidental coverage.

Accidental death coverage within the term policies typically provides a lump sum benefit to beneficiaries if the insured person passes away due to an accident. Similarly, disability coverage ensures financial support by paying out a percentage of the death benefit in the event of limb loss or permanent disability resulting from an accident.

Therefore, purchasing a separate accidental insurance policy may not be necessary if you already have a comprehensive term insurance plan. Understanding the inclusions of your existing policy can help you avoid unnecessary expenses and ensure adequate coverage for both natural and accidental occurrences.

7. Term Insurance Is a Waste of Money As It Offers No Returns:

While it's right that surviving the policy term means no payout, the inherent value lies in the assurance it provides. The peace of mind stemming from knowing you have financial protection in place can prove invaluable, particularly during unforeseen circumstances.

Nowadays, certain term plans offer a Return of Premium feature, offering a solution to this concern. With this option, if you outlive the policy term, you can get back the entire amount of premiums paid after the deduction of taxes. This feature essentially transforms the policy into a savings vehicle, providing a financial benefit for policyholders who do not use the insurance coverage during the term.

8. Homemakers Cannot Buy Life Insurance:

There's a widespread misconception that homemakers, who may not have a traditional income, are ineligible for life insurance. However, this belief overlooks the significant contributions and financial value provided by homemakers. While they may not earn a salary, their roles include numerous responsibilities critical to the functioning of the household, such as childcare, household management, and caregiving.

Life Insurance is not solely based on income but rather on the financial impact of an individual's contributions to the family. Homemakers play an essential role in the family's well-being and may require coverage to ensure financial stability in the event of their passing. Life insurance can provide funds to cover childcare expenses, household maintenance costs, and other financial obligations that may arise.

Hence, homemakers are indeed eligible for life insurance and should consider obtaining coverage to protect their families' financial future.

[Also Read: Guardians of the Home: Importance of Buying Life Insurance for Homemakers]

9. It Is Only for High-income Individuals:

Contrary to popular belief, the necessity for financial protection through life insurance does not depend on income level. Regardless of your earnings, life insurance can serve as a vital safety net if you have dependents or outstanding debts. The primary purpose of life insurance is to provide financial security for loved ones and alleviate burdensome debts in the event of your passing.

Therefore, anyone with dependents or financial obligations can benefit from life insurance coverage, irrespective of their income.

10. Your Goal should Be to Get the Policy for the Lowest Premium:

While conducting thorough research and comparing various policies to secure maximum coverage at a lower premium is vital, it's equally imperative to consider other essential parameters. When purchasing a life insurance policy, it's advisable to scrutinise the plan's features, benefits, ease of purchase and renewal, customer service quality, claim settlement ratio, customer reviews, and overall company reputation. Opting for the cheapest policy may not fulfil the primary objective of buying life insurance if it lacks adequate customer support or results in claim disputes.

11. Your Corporate Plan Is Enough:

Corporate life insurance provided by corporations might suffice for certain individuals, particularly those in higher management roles. Nevertheless, it's essential to understand that corporate life insurance remains valid only for the duration of your employment with the company.

Furthermore, if you get a new career opportunity, your existing group insurance coverage will cease, requiring enrolment in a new group insurance plan under the terms and conditions of your new employer.

Moreover, many corporate life insurance plans may not offer sufficient coverage to address outstanding debts or adequately provide for your family's future financial requirements. Hence, it's prudent to evaluate your life insurance needs independently and ensure the purchase of adequate coverage tailored to your individual circumstances.

12. You Don't Need Life Insurance If You Have No Dependents:

Life insurance can offer valuable benefits for individuals who are single and childless. Even without dependents, having life insurance coverage can provide financial security in various scenarios.

For instance, if you have outstanding debts or business partnerships, a life insurance policy can ensure that these obligations are settled without burdening loved ones. Moreover, life insurance can be utilised to create charitable trusts, allowing you to donate assets and leave a lasting impact.

13. You Are Too Old Or Too Young to Buy Life Insurance:

Many individuals believe that they are either too young or too old to consider purchasing life insurance. Young adults in their early 20s or 30s often perceive little need for coverage as they are probably fit and healthy. Conversely, individuals over 60 may feel discouraged from seeking coverage due to potential age-related health concerns and increased premiums.

However, these beliefs overlook crucial factors and fail to recognise the benefits of life insurance at any age. For young adults, purchasing life insurance early offers significant advantages. Generally, younger policyholders enjoy lower premiums, provided they have no significant health issues.

On the other hand, while age-related health concerns may influence premiums for older individuals, affordable coverage remains attainable. Shopping around for life insurance quotes enables individuals to find providers offering competitive rates tailored to their age and health classification.

[Also Read: Secure Your Future with Life Stage Benefit in Term Insurance]

14. You Will Need to Take a Medical Test to Buy Life Insurance:

There is a common misconception that undergoing a medical examination is a mandatory requirement for purchasing life insurance. While some insurers may require a medical exam as part of the underwriting process for term insurance, it is not a universal prerequisite.

Many insurance providers offer options for buying coverage without undergoing a medical examination. Instead, applicants may be asked to complete a health questionnaire and grant access to their medical records. Through this information, insurers can assess the applicant's health condition and determine the appropriate underwriting for the policy.

15. Buying a Life Insurance Policy Is a Task:

Despite the convenience and efficiency of purchasing life insurance online, a persistent myth persists that buying a life insurance policy online is inherently unsafe. This misconception often stems from concerns about online fraud and security breaches.

However, with proper precautions, buying life insurance online can be both secure and beneficial. Taking necessary steps, such as ensuring you're purchasing from the insurer's authentic website, thoroughly understanding the product and its terms and conditions, and using secure payment networks, can mitigate risks associated with online transactions.

Opting for online life insurance offers numerous benefits, including the convenience of comparing various plans, a streamlined purchasing process, and potentially lower premiums. Additionally, purchasing online allows for transparency, as all policy details are readily accessible for review.

[Also Read: Buying Insurance as an Investment - A Smart Strategy or Risky Move?]

To conclude:

Learning about the prevalent myths surrounding life insurance, it's crucial not to be swayed by them when purchasing a policy. Instead, diligently compare various life insurance plans, meticulously review the policy terms and conditions, and choose the policy that aligns best with your needs. Understanding and dispelling the life insurance myths will enable you to approach the process with clarity and make well-informed decisions when purchasing, renewing, and making claims on your policy.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.