7 insurance myths debunked

Remember insurance is, first and last, a safety mechanism for your dependants. Let not these insurance myths jeopardise your family's future.

Planning for contingencies like death and hospitalisation also forms an important part of financial planning. Buying life insurance provides for the living expenses of bread earners' family in his absence on death. Let me debunk a few insurance myths today so that you will be able to take better financial and investment decisions.

Myths about insurance:

Myth 1: Life insurance is a waste of money

Life insurance is bought to protect ourselves from the contingency of untimely death. It would take care of the living expenses of your family if you die young. Life insurance as an investment is more of a safety mechanism; it is to provide financial security to the dependants. 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 at ramalingam@holisticinvestment.in.

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 policy holder. Taxes can be saved with other tax-saving instruments like mutual funds, tax-saving bonds and government bonds, post-office savings schemes and Public Provident Fund.

Paying a premium to cover the full financial needs of the family in case of the death of the breadearner 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 dependants 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.

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.

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. A life insurance policy is taken to make good the loss of income to the family, so taking a policy with the child as a beneficiary or nominee may be a smarter thing to do.

Myth 7: Pleasing relatives/associates is important

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 50 per cent cheaper when compared to term policies taken through agents or brokers.

Having understood these myths I am sure friends you would make insurance a very valuable and useful proposition for you.