Commit to a policy before buying it

With no social security scheme worth its name covering a majority of the citizens of our country, it has become imperative for everyone to opt for individual insurance schemes or policies.

While doing so, many commit some common mistakes, as a result of which those policies do not help meet the intended goals. The purpose of this article is to create awareness among those evaluating an insurance policy. Some of these erroneous approaches appear silly but happen all the time.

The usual missteps

‘The adviser is my brother-in-law or childhood friend or classmate. Hence, I have to take a policy otherwise he may feel bad.’ But, after taking the policy, it is you who will actually end up with bad feelings. So, initial refusal is always better than refusal at the final stage.

Second: ‘The adviser is virtually after me, pestering constantly to take a policy. I need to take one and get rid off him at the earliest.’

But once you take a policy, you might have succeeded in getting rid of the adviser but not the policy itself as it is meant for a lifetime.

Three: ‘I need a policy to avoid tax or avail myself of tax concessions under section 80C.’ There are a host of other products eligible for tax concession under section 80C such as PF (which is mandatory for every employee), APF etc,.

Four: ‘Just because every earning individual has a policy, I too should have one.’ Just like one has a table, sofa set or a chair, should you also buy an insurance policy just so that the policy bond may be displayed in the showcase?

Five: ‘For the fear of mortality.’ One wants to take a policy whenever one encounters such a situation concerning near and dear. An very small percentage of policyholders fall under this category.

Taking a policy is easy and simple but to continue the same after the initial euphoria subsides is critical. That is why it is important to continue the policy till the end of the term. Because discontinuation or lapsation of a policy is a loss both to the policyholder and the insurance company alike. For the policyholder, it will be like holding a torn umbrella which does not cover him or her come rain or shine. For the insurance company, it will be like a single plant that is neither watered nor nurtured in an entire field, ultimately withering away.

Above all these lies the fact that one’s commitment towards one’s family viz. parents, spouse and children, which leads to the decision in taking an insurance policy. These commitments are to be kept in mind while taking a policy. After all, an agent or a broker or an intermediary works to earn a commission on his sale. But the client needs to delve into all aspects of an insurance firm before taking a policy. Responsibilities at every stage of life are to be articulated in advance and need to be planned in a foolproof manner to absorb any unforeseen shocks or incidents.

Be it life, vehicles or medical insurance, one needs to be doubly cautious and careful while buying policies. The purpose for which they are being taken should be fulfilled in the first instance.

Enter young

The younger the age, the lower will be the premium. As age advances unnoticed, responsibilities increase, which require more caution and planning. Term insurance for a longer term taken at a younger age, commensurate with one’s income, costs a lot less.

With no social security scheme to protect us, one should also plan for one’s retirement expenses, starting from the time of joining employment. Due to its longer gestation period, this fund grows exponentially to meet one’s post-retirement expenses.

ULIPS and SIPs are also to be considered at an early age because corrections in the markets can be neutralised over a longer term.

Once a person gets married and has children and the need for vehicle and housing loans crop up, one should plan for different goals at different times. Mediclaim for the entire family and children’s education or marriage needs decide the type of insurance protection one needs at this stage of life.

There are several schemes offered by insurers.

They are broadly traditional insurance policies that combine risk coverage and savings and where the returns at the end of the term are defined: term insurance policies (pure risk coverage with zero returns); ULIPS (which are exposed to stock market nuances and where returns are not at all defined); pension policies (longer gestation periods with defined returns that make them attractive) and health policies (which cover hospitalisation expenses in case of any illness).

An insurance policy serves a purpose in the same way an estate created in one's family’s name does, if free from encumbrances. Hence, one must think twice before taking a policy, be it for a vehicle, a house, a person or his health.

(The author is Associate Member of the Insurance Institute of India)