Your Need
It must be sounding strange that I am asking you to consider your need before buying insurance. Isn't that obvious? I'm afraid it's not. Most people buy insurance because of reasons other than their need:
- Because a friend bought the policy,
- Because it is good investment,
- Because the agent said it is the best policy for me, etc.
You should buy insurance only because you need it, and the type of insurance you buy should depend on your specific need. You shouldn't think it is a good policy for you just because Miss Z bought that policy or because your agent thinks it's the best one for you. Only you know your needs best, and you can find out what policy to take by carefully considering your need. The agent, of course, knows his own needs best .
History of the Company
What do we buy insurance for? So our nominees can be compensated for the loss, right? But rarely do we consider the claims settlement history of the insurance company, which is so crucial to protecting our interests. And this information is easily available. In most countries, the government's insurance regulatory body releases data pertaining to claims settlement history of each insurance company, which is available on the net. Even if there is not a huge difference, why not go for the company that settles the maximum claims?
Most importantly, beware of companies that offer maximum benefits for the lowest prices. Those are the ones who will go to a court rather than settle your claim.
Policy Document
Would you sign a legal agreement with me entailing significant financial obligations without even reading the agreement? And if you read and find it difficult to understand some terms, would you ask my secretary the meaning of those terms? Well, that is exactly what most of us do in case of an insurance policy. The policy document is a legal agreement, and the agent is a commissioned employee of the company.
So not only you should make it a point to read the entire policy document, but also never rely on the agent's explanation of terms that you do not understand. You can understand the jargon by referring to a good insurance dictionary. If you are still confused about certain terms, ask the agent to explain it in writing and get it signed by him.
To explain why it so important to read and understand all terms and conditions, I will cite an example. A person who worked in an MNC in a big city had bought a term policy coverage of 50,000. The policy offered an additional benefit for accidental death, which entitled the beneficiary to double that amount if the insured died in an accident. All was good till that person actually met with an accident and died when he was on a vacation in a remote corner of the country. His wife's claim was turned down under the plea that the insured was not in his “natural habitat” when the accident occurred. In fact, this term was there in the policy document, which the poor man had never cared about.
Obvious and Not So Obvious Charges
If you have ever bought an insurance policy, I need not explain this point to you. Almost all insurance policies have charges beyond what is obvious. For an insurance-cum-investment policy, there might be charges under several heads: mortality charges, administration charges, fund management charges, miscellaneous charges, etc.
In many cases, these charges are deceptively low. For example, in one market-linked policy a friend had bought, the administration charge was mentioned as 15 per cover per month. He thought that was negligible, considering he was getting covered for 100,000. Later he came to know that “per cover” meant per 1,000, which meant the administration charges were too high.
Insurance companies keep inventing new ways to fleece the customer. Make sure you understand how much it costs you to be insured. In most cases, you lose when you combine insurance with investment. Contrary to what they claim, most companies sell market-linked policies that will make you poorer and make themselves richer.
Late Payment and Surrender Terms
Harsh! Yes, that's what late payment and surrender terms are for most policies. If you are buying insurance, you should be pretty sure that you would not default on premium payment and you aren't going to surrender the policy before its maturity.
Late payment is a dangerous thing because your insurance cover is in void starting the last date of your premium payment till the company receives and acknowledges your payment. In certain policies, when you default, your insurance cover remains suspended for a month even after the company has received your payment. Besides, the penalty for late payment is usually very high. For some market-linked policies, your agent may claim that you don't have to pay any penalties for late payment, but make sure you know the truth. In such cases, usually the company deducts some money from the investment part of the premium you have paid before.
Once bought, you should keep a policy till it matures, unless you badly need the money. Surrender is really very costly in most cases. If you surrender a 20-year insurance-cum-investment policy after 5 years, you may realize only 30% of the money you had paid over the period. Yes, that is a loss of 70%, and I am on the optimistic side.
