Seven common mistakes that people make when choosing an insurance
Buying insurance and buying the right insurance are two different things. Yet, many people buy insurance for the wrong reasons or without considering important aspects. Are you guilty of the same?
Take a look at some of the common mistakes that people make when shopping for insurance plans:
1. Wrong priorities
A classic example of poor prioritizing occurs at the end of the financial year, when people rush to buy life or health insurance for the tax-saving benefits. Tax benefits are indeed wonderful but they should not dictate the coverage, premium or other details of your insurance policy. Buy a plan based on its merits and your needs.
2. Confusing insurance with investment
People are frequently disappointed to learn that their insurance policy offers no or limited ‘returns’. This is because insurance is strictly about risk protection whereas investment is about growing your savings. Although bundled insurance-cum-investment products do work for the right customers, the returns tend to be lower than, say, for a mutual fund. Therefore, it is important to recognize the purpose of insurance before buying a policy.
3. Choosing the cheapest policy
One big mistake that people make is to pick the plan that costs the least. You see this across all types of insurance—life, car, travel, etc. Your insurance spend should be determined not by the cheapest premium but by the maximum coverage that you need and can afford.
4. Picking the wrong plan
This can be a major issue because the insurance would not cater to your needs adequately. For instance, why would you buy a ULIP (where the premiums are typically high) when you could get a higher death benefit from term life insurance? Meanwhile, a 50-year-old should not buy health insurance unless it has a high renewal age.
5. Trusting the agent blindly
The point to note is that agents are looking to make a sale. Hence, they might gloss over certain key aspects, which could result in mis-selling. Even if your agent is largely honest, he/she lacks the required insight about your specific financial needs and may not necessarily be able to suggest the ideal product for you.
6. Not doing the math
Let us consider an example. A number of insurers are currently offering high-value health insurance policies with coverage of between Rs. 25 lakh to Rs. 50 lakh. These policies are far more comprehensive than standard health plans, but their premiums are also extremely high. It might be reassuring to know that your plan covers everything from dental work to diagnostic tests, but note that most people do not incur more than a few lakh rupees per year on hospitalization and medical care. Given this context, do you really need the Rs. 50 lakh coverage?
7. Underinsuring
Underinsurance is a particularly insidious problem because you do have insurance, just not enough of it. Imagine filing a claim for car repairs only to learn that your insurer will fund only a fraction of the repair costs. Why? Because you are underinsured. The problem is magnified in the case of health insurance, for example, when you seek treatment believing that the insurance will cover most of the costs, only to discover that it will not.