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Tuesday, December 12, 2017

Insurance Policies Which Can Be Avoided



1. Life Insurance for kids: Parents love their children and insurance companies know that this is sensitive area. So, they will come and tell you that it’s for assuring your child’s future and will help them in their financial requirements when they grow up. But buying a policy for a child contradicts the concept of insurance as the objective of insurance is to support your dependents financially when the main earning member of the house is no more. Hence, the insurance cover must be for the earning member rather than for your child. Not only that, child plans are costly and have a very low return on investment which makes them even more useless from investment point of you. Insurers have smartly figured this concern and play the emotional cards well. They create products in the name of the child and get the parent insured. However, child policies are nothing but a regular policy!
2. Accidental death insurance: Accidental death insurance covers you in some of the ways if you die accidentally, i.e, perishing due to something other than disease or old age. However, the chances of this happening are very slim and even if it happens, there are chances that your existing life insurance policy will cover you in most of those events anyway. Accidental death claim to settlement ratios are very low as well.
3. Medical insurance covering only a particular disease: Taking a medical insurance only covering a particular disease like cancer is worthless as this is like betting a specific number on a roulette wheel, and the chances of hitting it are very very low. One must never buy such an insurance policy, which is covering just for certain scenario. It is always suitable to invest in an insurance plan which covers all circumstances. Applicants get tempted with such policies as they are very low on premium and the insurance agent scares the applicant by showing fancy presentations about how the so-called ‘critical illness’ is a definite occurrence in everyone’s life.
4. Insurance linked with investment: One should make one’s mind whether one has to make an investment or has to get a risk covered. Using policies with a mix of both is a big no no from a financial expert point of you as these policies have high costs and low return. Instead, a person can be better off by putting in half the money in a pure insurance plan and half the money in a pure investment plan. Treat insurance as ‘insurance’, ie: Cover of Risk!
5. Return on Premium in Term plans: Investors cannot fathom the though of paying for insurance premiums for years and get nothing in return. This is absurd as they do not expect such money back when they buy vehicle insurance or house insurance. Surprisingly, when it comes to insuring human life, everyone wants to get the money back or some return on the premium! It is important to note that the premium on a vehicle insurance ranges from 3-4% of the insured amount, but for a life cover for someone aged between 20 and 25 years it is as low as 0.15-0.20% and about 0.5% till the age of 40.
Hence, insurers have a ‘Return of Premium’ plan. It is a no brainer as in this case applicants tend to pay double the premium than the regular premium and get all the premium paid at the end of the policy term. What is not realized is that the interest lost on the extra premium paid is what helps the insurer to return the entire premium amount back to the applicant

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