Tips on Buying the Right Insurance:: Part 2

Can I afford it?

We should take care that insurance premiums do not eat into a huge chunk of our income. This is especially important in case of long-term contracts such as life insurance. This may mean working backwards, and calculating the size of the cover, based on the premium afforded by you.

Beware of agents who try to hard sell you high-priced insurance covers, as they may be detrimental to your long-term finances.

Two of the most common mistakes committed by customers in the case of life insurance are:

Income tax-led decisions:

While contributions towards life insurance premium of up to Rs 100,000 can be reduced from "gross total income" under section 80 C, there is no need to be guided solely by this consideration. Also, do not wake up to the need for insurance only in the final quarter of the year.

By doing so, you are only playing into the hands of agents who will exploit your urgent need to save tax and sell you policies that are not really suited to your needs. Let tax saving be incidental to choosing a cover, not the sole force behind it.

Bundling insurance and investments:

Unfortunately, globally, over the years insurance products has been sold more as an investment tool rather than a 'protection' vehicle. The nomenclatures change (endowment policies, money back policies, and unit-linked plans) but the underlying principle remains similar.

Agents often succeed in their efforts owing to the following factors:

• Providing rosy illustrations of future investment returns, conveniently side-stepping the basic question of whether the coverage amount contained therein is adequate or not.

• Stressing that an insurance-cum-investment policy compels the policy holder to be disciplined in their savings program and this aids in long-term wealth creation.

Several studies have proved that unbundling of the insurance and investment aspects lead to better overall results. Of course this will call for investing discipline on the part of the policyholder, but that is another story altogether.

I feel that apart from insurance agents, consumers too are responsible for the so-called mis-selling. Against this backdrop, we will look into specifics of different policies from the next article onwards.