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10 insurance myths -- BUSTED

November 20, 2009 09:13 IST
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Insurance is a highly misunderstood product and it's often bought and sold for the wrong reasons.

Here, Investmentyogi busts the top 10 myths associated with insurance.

Myth 1: Insurance is a tax saving instrument
Most salaried people scramble for investments in tax saving instruments at the end of the financial year and insurance comes at top of the list. Section 80C tax benefit is only an added advantage and it should not be the main reason for buying insurance. The primary objective of insurance should be to provide protection to your family and to build a corpus for your future needs.

Myth 2: I should buy policy in my wife and child's name. It's for their future
Insurance should always be bought by the person who is supporting dependents. It should never be the other way around. Ask yourself a basic question: what will happen if something happens to me (or the earning member of the family)? Who will take care of dependents (non-earning members) like your wife, kids, parents? The answer is insurance. It's a very simple concept -- don't complicate it. You should take a policy to insure yourself; not your dependants.

Myth 3: My company's group insurance cover is enough
Your group insurance may be enough at the moment but what if you lose your job or change your job with a gap in between. You will suddenly be left without cover. If you just rely on group insurance and say you leave your job and start a business at age 40+, getting insurance becomes expensive due to age and health conditions. It's always advisable to keep a term insurance/health insurance policy running along with the group plan. You will realise the benefits when you stop working.

Myth 4: I am single without dependents. I don't need insurance
Well in that case you really don't need life insurance but think of medical emergency or health disorders. It can simply wipe out all your savings. It will make a lot of sense to take a health policy and some retirement planning product. If you start early you may retire rich. Health policy should be bought by every working person as it cushions your savings against unforeseen emergencies. You could add on a Critical Illness Rider to your policy so that even if you get an illness which keeps you out of action for some period of time, this is taken care of due to this rider. Medical Insurance pays the cost of the hospital/ treatment; Critical Illness Rider pays you the Sum Assured (if the conditions are satisfied) while you recover from that illness.

Myth 5: Term insurance is a waste as I am just paying premium and not getting anything in return
No, it's not. In fact it's one of the best insurance products everĀ -- simple, inexpensive and serves its purpose. Each insurance product has this at its core and the cost is a part of the premium you pay. It gives you peace of mind through the year as you know that you are protected. That's exactly what insurance is supposed to do.

Myth 6: If it's more expensive, it must be worth it
Sadly, it's not so. Term insurance is usually sufficient for life insurance provided you have the investing discipline and you can pursue better investment alternatives. ULIPs and other complex products suffer from high upfront costs and commissions. No wonder these products are pushed more. However these products bring certain investing discipline to you which is good if you invested for a long period of time (15-20 years).

Myth 7: Buying insurance is a hassle
Not anymore. There are plenty of websites that give you comparisons and quotes from many companies. You can buy at a click of a button from the comfort of your home/office. Go with someone you know, has been in the business and most importantly provides solutions to your needs. Insurance is not something that is outside the purview of common man. But, it should be explained in a manner in which you understand so that you know what you are getting into. For most people selecting the right product is a very difficult task. A financial planner may guide you and help you make a better choice.

Myth 8: My credit card has given me free insurance. Why do I need more?
It's even riskier than your group insurance. In this case there is a big layer between you and the insurance company. A policy is a legal contract between the insurance company and you and that's how it should remain. Have you heard of anyone who has got insurance money from a credit card company? These should be seen as more of extra offerings for marketing purpose.

Myth 9: I have already exhausted the investment limit as per section 80C. I don't need more
It's a mistake most people do year after year. Do not confuse premiums paid under sec 80C with adequate life cover. If possible, consult a qualified financial planner who can tell you what insurance you need and how much by looking at your profile and understanding your future aspirations. Your insurance requirement will change according to events in your family like birth of a child, taking of liabilities etc. For example if you have taken a home loan, the policy should cover that.

Myth 10: Insurance and financial planning. Are they related?
Insurance planning is an integral part of overall financial planning. You should not look at insurance as just another product to buy. Take a more balanced view. Look at your income, expenditure, savings, liabilities and financial goals. It is only then that you will be able to take the best decision regarding your insurance needs. is a one-stop personal finance website which helps in managing finances, investments and taxes through services like financial planning, online tax filing, budgeting and 'Ask the Expert'.

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