Common mistakes when buying insurance: Smart investors often make common mistakes when buying insurance — such as underestimating the importance of term insurance, relying solely on employer-provided cover, or prioritising lower premiums over policy features and claims support — which can result in inadequate coverage and financial vulnerability.
If you think that, as an Investment Advisor, insurance is something I should be indifferent to — or view as an inefficient or unsuitable product to be advised against — you would be dead wrong. And the reason is simple.
Insurance, at its simplest and at the very core, is about building a safety net for risks that can put an unplanned dent into your investment plan and derail your financial future. Hence, as an Investment Advisor, this becomes an important conversation for me even when I am building a pure investment plan for a particular customer (as compared to a comprehensive financial plan).
Simply because the last thing I want to see is a well-thought-out investment plan that didn’t reach its successful culmination as it became collateral damage to a sudden crisis that the customer hadn’t adequately planned for, and advising on which was beyond the scope of my engagement.
Interestingly, you could also think that investors themselves would be largely on top of this – after all, who wants to see their precious investment plans fall by the wayside due to a sudden unplanned eventuality? And even if there are gaps in their coverage, they would be amenable to plugging those gaps on priority.
Instead, this is about some not-so-commonly known errors that smart investors make when they are making decisions about insurance, both life and health.
You will be surprised to know that, in general, this is not the case.
In this column, I am not going to talk about the two most common mistakes that people make when they are buying insurance:
Instead, this is about some not-so-commonly known errors that smart investors make when they are making decisions about insurance, both life and health.
Please note that I am not saying here that investors do not know the importance of life and health insurance. But there are several wrong decisions that they end up taking, which are a result of biases in some cases and incorrect understanding in others. I will try to put down below some such cases that I have come across in the past many years.
Life insurance errors
My premium gets wasted every year
The reluctance to buy term insurance (Why do I need it? Nothing will happen to me!) is something that is completely unexplainable, since the same person would have no qualms insuring his or her vehicle, and doesn’t question the need. Having adequate life insurance is like having a safety net below you while walking the tightrope that life is. Am sure circus artists never ask why they need a safety net.
Let me take a return of premium option
As a corollary, because you feel the premium you pay is wasted, you sign up for the return-of-premium option. This not only inflates the upfront cost of the insurance that you are buying, but the return-of-premium is not inflation-adjusted and hence, after a period of 25 or 30 years, what you get back has eroded in value many times over.
Health insurance errors
I have company cover
You will not always be in a job, or if you are in between jobs, you are left vulnerable with no cover. You might think you can take personal cover once you are close to retirement. There, you run the risk of not being covered for certain ailments that you already have (exclusions). Hence, always have a personal cover, and take it early.
Live abroad, have good coverage there
We have seen that many non-resident Indians (NRIs) who work abroad (or even those who live abroad and make yearly trips to India) baulk at keeping a local policy here. Their take is that they have the best coverage abroad, and hence don’t need to have a separate cover here. What we have seen, especially in the case of long-drawn illnesses, is that their support system in India is much better, hence, when it comes to actually taking a call, they decide to come down here to get themselves treated and recuperate. Hence, for NRIs, while it may seem like an unnecessary duplication, it is a good idea to keep a health policy active in India.
Buy it online, it is cheaper
In the case of an insurance policy, the rubber hits the road only at the time of a claim. And I have seen that trying to get the claims done without an agent to help is quite cumbersome, and importantly, something you will not have time for if you are ill. Hence, while there may be options to pay cheaper premiums, my advice will be to find an agent who gives you the confidence to be by you and your family at the time when there is a claim.
How does it matter which insurer it is, buy the cheaper premiumThis is a variant of the earlier one, except it is for a different reason. Policies between insurers are not identical, by any measure, and can even vary wildly. The reason a policy may be cheaper is that it has fewer features. Similarly, like the airline industry, there are the equivalent of full-service and budget insurers as well. Hence, comparing premiums alone may not be the right approach. Buying a policy without reading the fine print in terms of exclusions, as well as eligibility, means you are setting yourself up for unpleasant surprises later.
It's okay to not disclose
Similarly, this is something that is obvious, but still needs to be said. Always tell the whole truth to your doctor, lawyer, financial advisor and insurer. The urge to get a policy or a lower premium may lead to buying a policy that will be null and void when the truth comes out – after all, the truth is going to come out at that moment when you are admitted in the hospital and health disclosures need to be made. Make doubly sure that every detail in your proposal form is accurate. Fill it yourself, never delegate it to the agent, however trusted he or she is.
Just because something didn’t happen doesn’t mean the risk didn’t exist. This seems fairly obvious, and hence the need for Insurance is understood. But just buying some insurance doesn’t necessarily mean that all the risks are adequately covered. In case you think you have insurance and are covered, run your insurance through the above checks, to know whether there are not-so-obvious risks that you are still carrying.
