What does one need to note when purchasing an insurance policy?

Standard

Purchasing an Insurance Policy in India:

1. Buy insurance for risk cover

The purpose of an insurance policy is to protect the family members of a person from any financial complexities in case of his/her premature death. Such unfortunate eventuality to a breadwinner in the family can put the other family members in serious financial problems. Insurance seeks to offer financial help in such times.

This, therefore, must be the main objective for buying an insurance policy. Any other benefit such as tax advantage etc. must be of secondary consideration.

2. Do not consider insurance as an investment option

The primary aim of the insurance policy is to provide a risk cover. Therefore a part of the premium paid is first appropriated towards this purpose. The balance amount is invested in financial instruments, which are generally very safe ones. Also, the commissions and charges are substantially higher than other investment options.

Consequently the returns from an insurance policy are nothing much to talk about therefore it cannot be considered as a feasible investment option in comparison with other competing financial products.

3. Preferably buy only a term policy

Term policies are pure insurance products with no investment option. They are the cheapest and the simplest among the available plans. But cheapest does not mean they are inferior to other costlier insurance policies. As far as the basic purpose of risk cover is concerned, there is no difference. And usually for most of us this term policy must be more than sufficient.

In such policies the premium paid is foregone at the expiry of the policy and one does not get anything if one survives the policy term. This fact that one does not get anything back is possibly the most important psychological factor for the low popularity of a term policy.

4. Do not prefer savings-linked insurance policies

In contrast to the term policies, savings-linked insurance policies are such as money-back, endowment and whole-life provide the risk cover and also give back some returns to the insured at the end of the policy term, in case nothing happens to him/her in the interim. The premiums of such policies are much higher than the term policies. This assurance of getting some returns at the end of the policy term is why most people choose for such savings-linked policies in comparison with term policies.

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