From procrastinations to not knowing enough about financial products, people make tonnes of mistakes while buying insurance.
People sometimes end up incurring financial losses when they pick insurance products that don’t align with their investment or insurance needs. In this article, we will look at the five most common mistakes related to insurance purchase.
Mixing Insurance & Investment
People often find the two synonymous, thus using them both interchangeably. The two need to be treated separately for greater financial security, higher returns and tax exemptions. While insurance is a financial instrument meant to protect your family in case of your demise, an investment instrument is meant for building wealth for children’s education, life after retirement etc.
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As an investment product, the typical endowment plan offers conservative returns that do not match small saving schemes such as PPF, NSC and Kisan Vikas Patra, let alone equity-linked options such as ULIPs and ELSS. Nor does it do a very good job of protecting the long-term financial needs of your dependents in case of your untimely death.
Therefore, separate insurance and investment. Go for a term plan if you have dependents, for this should adequately cover their long-term interests. And invest in a combination of small savings schemes, mutual funds, equity, real estate, etc.
Assessing Insurance By Returns
Not buying insurance because of low or limited returns associated with them is a mistake. The purpose of insurance is to protect you and your family from unforeseen financial crises. Insurance companies promise to pay the sum assured when claimed, irrespective of the number of premiums paid, subject to certain conditions. In order for endowment plans to generate assured returns, your premiums are invested in low-risk and liquid instruments such as government and corporate securities. Thus, the returns from such products are low. In order to fetch good returns with insurance protection, you must diversify your funds into a term plan and tax-saving investment instruments with high returns.
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Not Buying Adequate Insurance
Another common mistake is in going for shorter or cheaper plans in an attempt to pay smaller premiums. Although this might appear to be a short-term gain, it comes with a heavy price in the long run. The inability to calculate how much money will be required during an emergency could land an insured person’s dependent family in financial trouble. The right thing to do is to calculate exactly how much insurance you need keeping in view the rate of inflation and your regular expenditure. There are financial tools to help you with these calculations.
Providing False Information
While filling out the insurance forms, it’s important to make full disclosure of your personal and health conditions even if it translates into paying higher premiums. Any discrepancy could lead to losing out on all benefits associated with the plan, leaving you and your family with nothing. For example, if you don’t disclose a negative health condition or habit such as smoking, and in case of your death the insurance company establishes a link with your undisclosed health condition, the company might refuse to pay the sum assured to your dependents.
While insurance is a must-have in a financial portfolio, make sure you maintain the right balance without over- or under-insuring yourself and by picking the right insurance products. There are IRDA-approved insurance web aggregator portals to help you compare the different products available in the market and buy the one that suits your requirements.
(The writer is the CEO of BankBazaar)