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5 wrong reasons for buying insurance

August 31, 2004 10:29 IST

Insurance products have conventionally been very popular among investors. Unfortunately most products tend to be picked for the wrong reasons; the stated reason i.e. to indemnify against losses never seems to be the top priority. Instead extraneous factors play a vital role.

We list 5 reasons which you should be wary of while opting for insurance cover.

1. To avail of tax benefits
Insurance policies and tax benefits have become virtually synonymous. Income tax benefits under Section 88 for the amount invested and Section 10 (10D) for maturity proceeds make insurance policies attractive propositions.

However decisions which are driven solely by tax benefits can be misleading. The right insurance policy is one which can satisfy a need for protection, the tax benefits should be treated as incidental gains.

For example, let us take an individual whose insurance needs are best served by a pure risk cover (term plan). Instead he chooses to go for a money-back policy with a higher premium amount to maximise the Section 88 tax benefit. This is a perfect case of choosing the wrong plan only for higher tax benefits.

2. To generate returns
Investors must realise that their investment needs are distinct from their insurance needs. To clock attractive returns investment products like mutual funds, bonds and fixed deposits are available.

When insurance products are expected to generate returns, there is a conflict in the objectives which can prove to be detrimental for the investor.

3. To invest surplus funds
Taking an insurance policy to gainfully utilise surplus funds is not the right strategy. Insurance policies generally run over a long-term horizon, inadequacy of funds to pay premiums in the subsequent years may lead to the policy being forfeited or surrendered.

In either case the policy holder is at the receiving end. Investment products like short-tenured fixed deposits are likely to be smarter choices for parking one time surplus funds vis--vis insurance products.

4. Because your relatives/friends asked you to do so
Don't let your investment decisions be driven by what your relatives/ friends recommend. An insurance policy which was right for them need not be suitable for you.

Understand the given policy and its implications thoroughly before opting for it. Unit-linked insurance plans present a classic example of misguided investments; a large section of investors got invested without being aware of what the product entailed.

The result: most investors aren't even aware of how their monies got invested or even how much their policies are worth at the moment.

5. Because your insurance agent offered you a rebate
Insurance agents offering a rebate to their clients is a common practice; however this practice has been explicitly prohibited under Section 41 of the Insurance Act.

More importantly an agent who tries to lure you with rebates is probably pitching for a policy which will serve his interests rather than yours. Steer clear of such agents and their offerings.

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