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This article was first published 10 years ago

BEWARE! 7 really ridiculous insurance myths

Last updated on: August 21, 2013 18:56 IST


Photographs: Dominic XavierRediff.com Ramalingam K

You've heard of them, surely. But don't EVER fall for them.

Planning for contingencies like death and hospitalisation forms an important part of financial planning. Buying a life insurance cover provides money to the dependents of the bread earner on his or her death.

However, there are number of myths associated with life insurance that should be debunked first to ensure that you buy adequate life cover to protect the family.

Myth 1: Life insurance is a waste of money

Life insurance is bought to protect one’s dependent family from the contingency of untimely death. It would take care of the living expenses of your family if you die young.

Life insurance is an investment that is more of a safety mechanism; it is to provide financial security to the dependents. Term policies that cover the risk of untimely death are cheap and most ideal for providing life coverage.

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 atramalingam@holisticinvestment.in.

BEWARE! 7 really ridiculous insurance myths


Photographs: Dominic XavierRediff.com

Myth 2: Life insurance is for saving taxes

This could probably be a selling point for agents.

But tax-saving is one of the many benefits life insurance offers. The main benefit is the provision of finances in case of the death of the policyholder. Taxes can be saved with other tax-saving instruments like mutual fund ELSS, NSC, and Public Provident Fund.

Paying a premium to cover the full financial needs of the family in case of the death of the bread earner is very important. The cover should be for about 7 to 10 times the annual income of the bread-earner.

Myth 3: The very young don't need life insurance

This is a wrong notion.

The common notion that people die when they are old may be true to a large extent. But having the risk of death covered is definitely better than leaving dependents financially bereft in case of an untimely death.

Besides, 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.

Tags: ELSS , NSC , BEWARE

BEWARE! 7 really ridiculous insurance myths


Photographs: Rediff Archives

Myth 4: Life, medical covers are provided by employers

These covers are 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 advisable to buy medical insurance when you are 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 a critical illness.

Myth 5: ULIPs for a limited period seem attractive

In most cases, this is more of a sales gimmick.

Most insurance products are so designed that the major costs are incurred in the first few years and deducted from the 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.

It is, therefore, 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.

Tags: BEWARE

BEWARE! 7 really ridiculous insurance myths


Photographs: Rediff Archives

Myth 6: It's best to buy a policy in the name of a minor

This emotional sentiment selling point has helped many to sell insurance. Also, the premium paid on child policies may be much less than on a policy for an adult wanting the same coverage.

Do we really need life cover for a minor?

A life insurance policy is taken to make good the loss of income to the family. Hence, taking a policy with the child as a beneficiary or nominee and life cover to the bread earner is actually a smarter thing to do.

Myth 7: Pleasing relatives/associates is important

This actually sounds the most ridiculous of all. But the truth is many people buy insurance policies just because their cousin or an in law or their uncle’s aunt is an insurance agent. Shocking, but true!

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 relationship with business associates like bankers.

Insurance policies need to be taken based on your need. These days, online term insurance plans are approximately 50 per cent cheaper when compared with 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. If there are any other myths you want to add to the list, make sure to leave a comment below.

Tags: BEWARE