Buying insurance is an important financial decision, but many people fall prey to misleading promises or half-baked advice while selecting a policy. Mis-selling by agents and insurance companies is a growing issue, with concerns even raised by Finance Minister Nirmala Sitharaman and IRDAI Chief Debashish Panda. Let’s break down how to make informed choices while buying insurance and avoid falling into common traps.
Promises of Tax Benefits and FD-Like Returns: Are They True?
Many endowment policies are sold as a “safe” investment with guaranteed returns, especially to elderly customers. While these products may seem attractive, the actual return on such policies is often only 4-7%, far below what is promised. These policies require paying premiums for many years, and exiting early can lead to losses.
Instead of buying an endowment plan for returns, it’s better to:
- Opt for term insurance for life protection.
- Invest in instruments like fixed deposits or mutual funds for better returns.
Always remember, insurance is primarily for financial security, not investment growth.
Life Cover, Tax Saving, and Investment: What’s the Catch?
It’s common for insurance agents to sell policies as a tax-saving tool, especially at the end of the financial year. While it’s true that life insurance premiums qualify for tax deductions under Section 80C, this shouldn’t be the sole reason for buying a policy.
Here’s how to avoid this pitfall:
- Consider your overall tax planning strategy, including contributions to EPF, PPF, or tuition fees for children.
- Plan investments systematically throughout the year instead of rushing in the last few months.
- Don’t buy insurance just to save taxes.
ULIP vs. Mutual Fund: Know the Difference
Unit Linked Insurance Policies (ULIPs) are often promoted as being similar to mutual funds. However, the two are very different.
- ULIPs combine insurance with investment, while mutual funds focus solely on wealth growth.
- ULIPs come with a 5-year lock-in period, whereas most mutual funds have no lock-in except ELSS (3 years).
- ULIP charges can significantly reduce returns compared to mutual funds.
To avoid confusion, verify the payment process:
- If you’re paying a life insurance company, it’s not a mutual fund.
- Always research and compare products before making a decision.
Non-Market-Linked Policies: Are They Truly Safe?
Non-market-linked guaranteed policies are popular among risk-averse investors who want stable returns. While these policies promise 4-6% annual returns, the high agent commissions and misleading example charts can make them seem more attractive than they are.
Here’s what to do:
- Check the Internal Rate of Return (IRR) instead of just relying on promised rates.
- Be cautious of marketing claims that overemphasize guaranteed benefits.
- Consider whether the policy meets your financial goals or if better alternatives exist.
Tips to Stay Safe While Buying Insurance
To ensure you’re making the right decision, follow these steps:
- Research the Policy Thoroughly: Understand the terms, conditions, and benefits of the policy.
- Separate Insurance and Investment: Insurance is for financial security, not returns. Keep these goals distinct.
- Verify Marketing Claims: Don’t trust promises blindly. Ask for detailed documents and analyze the policy yourself.
- Understand Fees and Costs: Look into hidden charges, agent commissions, and penalties for early exits.
- Consult a Financial Advisor: Seek unbiased advice if you’re unsure about a policy’s suitability.
By staying informed and cautious, you can secure your future and avoid wasting money on unsuitable insurance products.
