7 Insurance Myths Debunked

Planning for contingencies like death and hospitalization also forms an important part of financial planning. Buying life insurance provides for the living expenses of bread earners family in his absence on death. Let me debunk a few insurance myths today so that you will be able to take better financial and investment decisions.

Myths about Insurance:

Myth 1:  Life insurance is a waste of money. But it is good to understand that it is bought to protect ourselves from the contingency of untimely death. It would give finances for living expenses of your family if you die young. Life insurance is an investment that is more a safety mechanism; it is to provide financial security on death. Term policies that cover the risk of untimely death only are cheap and most ideal for providing life coverage alone.

Myth 2: Life insurance is taken to save taxes. This could probably be a selling point for agents. But far from the truth tax savings is one of the benefits arising from life insurance. The main benefit is the provision of finances in the case of the death of the policy holder. Saving taxes alone can be done by other tax saving instruments like mutual funds, tax saving bonds and Government bonds, post-office savings schemes and PPF. So paying premium to cover the full financial needs of the family in case of the death of the bread-earner is very important. This is about 7 to 10 times the annual income.

Myth 3:  There is no need for life insurance in case of very young people. This is a wrong notion for death is something that could happen to anyone at anytime and in any way. The common notion that people die when they are old may be true to a large extent. But covering of risk of death is definitely better than to be left financial bereft in case of an untimely death. In addition it is smart to take benefit of the lower premium rates offered to the young. Also you may find it difficult to take life insurance when you are old due to higher premium rates or being refused because of ill-health.

Myth 4:  Life and medical insurance is provided by employers, so we need no life insurance. This benefit is available only until you are in a particular company or till retirement. Also life insurance provided by employers may not adequately cover the living expenses of your family in case of your untimely death. It is smart to buy medical insurance young, as fresh medical insurance taken just prior to retirement could be refused on medical grounds. Critical illness policies help meet additional living expenses of the family in case of critical illness.

Myth 5: Unit linked plans for a limited period seem attractive.  I would say that this is more of a sales gimmick in many cases. Most insurance products are so designed that the major costs are incurred in the first few years and deducted from premium. There are charges that the company wishes to recover over the entire tenure of the policy. So very less is actually invested in units. So it is best to look at unit-linked insurance plans with an open mind and consider a commitment of periodic investment for the whole tenure of the insurance policy. Paying for a longer tenure could result in a more profitable proposition.

Myth 6: Buying a policy in the name of a minor child is best. This emotional sentiment selling point has helped many to sell insurance. Also the premium paid on child policies may be much less than an adult wanting the same coverage.  A life insurance policy is taken to replace loss of income to the family, so taking a policy where the child is a beneficiary or nominee may be smarter.

Myth 7: Pleasing your friends/relatives/associates is very important.

Kindly avoid taking policies just for the sake of satisfying your friends and relatives who are insurance agents. Also you need to avoid taking policies just to maintain the relationship with business associates like bankers.

Insurance policies need to be taken to based on the need. Now a days online term insurance are 50% cheaper when compared to the term policies taken through agents or brokers.

Having understood these myths I am sure dear friends you would make insurance a very valuable and useful proposition for you.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the  Director and Chief Financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.