5 Common Insurance Myths – BW Businessworld
Despite their widespread proliferation, insurance products remain widely misunderstood by a large part of the investing community. Here are five of them you should be aware of.
Your company provided Health Insurance is enough
No, your company provided group Health Insurance plan will not suffice in case you encounter a serious medical emergency. It’s old news that medical costs have gone through the roof these days. Many company provided coverages have an inadequate quantum of Sum Insured attached to them. Also, remember that you’re only covered as long as you’re employed with your company – so if an emergency strikes while you’re in between jobs, your finances may take a deep cut. Also, you may find it difficult to find a good policy that suits your needs when you retire from your job. It’s best to have a comprehensive Mediclaim in place, and to renew it each year in a disciplined manner.
You only need Third Party Liability Insurance for your vehicle
Since the government mandates the purchase of TPT (Third Party Liability) while not having any such rule in place related to own damage insurance, many people try to save money by opting for a pure TPT motor insurance plan. However, you should know that the probability of a TPT claim being exercised is much lower than the probability that your own vehicle will encounter some form of damage that could set you back several thousand in expenses. Not only should you purchase a comprehensive motor insurance plan; you should also ensure that it has a zero-depreciation add-on in place.
Traditional Insurance plans will help you meet your long term goals
Traditional Plans (such as Endowment Policies, Money Back Policies or typical non-linked Child Plans) really don’t serve much of a purpose when it comes to planning for, or protecting, your sacrosanct financial goals. Although their returns are tax-efficient, they are also very low. The opacity of the representation method of these plans makes it difficult to estimate the actual returns from these plans, but a good guess would be the current yield on the 10-year government bond, minus 1 – 1.5 per cent. For policies issued today, that would work out to 5.5 to 6 per cent annualised returns – a pittance when you consider the lengthy investment duration associated with these plans. You need to look beyond insurance as a means to achieving important financial goals – such as your retirement or your childs education.
Taking a Life Insurance Plan “in your child’s name” is a good idea
Why some people insure their children’s lives is utterly confounding. Each year, thousands of people unknowingly buy life insurance plans that are utterly useless, as they essentially name their kids as the insured person, and themselves as the nominee! This trend actually underscores the deep-rooted lack of understanding of the actual problem that Life Insurance solves. If you must insure a life, it should be your own – with your child as the nominee. Doesn’t that make a lot more sense?
ULIP’s combine the best of both worlds
ULIP’s (Unit Linked Insurance Plans) received a lot of bad press in the early 2000’s, as they mostly had very high costs inbuilt into them. Oftentimes, these costs were loaded into the first-year premiums to the extent that anything from 40 to 70 per cent of the premium amounts were taken away and paid out as commissions! However, post the ULIP reforms of 2009, ULIP’s have actually become much better products. Unfortunately, a combination of pure term insurance with a great mutual fund portfolio still remains a better option in terms of wealth creation potential and cost efficient insurance, so ULIP’s are still best avoided.
