Despite their widespread proliferation, insurance products remain widely misunderstood by a large part of the investing community. While Risk Management is the bedrock of any Financial Plan worth its salt, harbouring some of these all too common fallacies will rob your protection plan of a large chunk of its efficacy.
You only need Third Party Liability Insurance for your vehicle
We often come across people who are pennywise, pound-foolish with respect to insuring their vehicles. Since the government mandates the purchase of TPT (Third Party Liability) while not having any such rule in place related to Own Damage insurance, they 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.
Your company provided Health Insurance cover will suffice
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. Most 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.
Traditional Insurance plans will suffice for your important Financial 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%. For policies issued today, that would work out to 5.5% to 6% 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.
You need to insure your Child’s life
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?
All ULIP’s are bad for you
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% 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. Ironically, their sales have fallen steadily since, as they became less remunerative for agents! Nowadays, a number of ULIP’s are at par with Mutual Funds when it comes to their inbuilt costs. Some examples are – Aviva i-Growth, HDFC Click2Invest, Bajaj Allianz Future Gain & Edelweiss Tokio Wealth Accumulation; all of which have annual costs below or more or less equal to 2%. Though the vilification of ULIP’s continues in many circles, this is really an overhang of the pre-reform era. Many of these plans are definitely worth considering now.
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