Buying an insurance cover is an important part of financial planning. Therefore it is important that you are aware of all aspects of the policy you are buying. Often it is seen that the insurance agent who approaches you to sell a policy highlights only the positive aspects and does not talk about the defects in the policy design or working. Here are a few facts which your insurance advisor will choose not to disclose to you.
When you purchase an insurance policy, there is a mandatory lock-in period during which you must stay invested. This is because insurance is a long-term play and if you discontinue the policy within a short span of time, the insurance company will not derive the benefits. If you choose to withdraw your money during the lock-in period, you are likely to face heavy penalties and may not even recover the entire premium you have paid till date. The net amount payable by the insurer to you will significantly reduce if you choose to discontinue the policy during the lock-in period. Thus when you buy the policy, you must look at this clause carefully and assess if you can pay the premium atleast for the minimum specified period. This is especially critical if the premium is a high amount.
The fees and charges applicable for each policy will change depending on the type of policy you choose. Usually insurance plans which combine an investment plan and a risk cover come with very high allocation charges and other administrative charges. Your agent will deliberately ignore this bit as he may suspect that you will not take the policy if you know of these charges. This is true as such plans are very expensive and a majority of the premium you pay in the first year goes towards these charges. Many plans have high-allocation charges even during the second and third years of the policy. This means only after deducting such charges, the remaining amount is invested to purchase units. The investor will have to wait for a few years to see the invested money grow, as the NAV grows.
Surrender charge means the fee to be paid by the policy holder if he surrenders the policy before the maturity period. Usually this is not mentioned at the time you buy the policy as the agent conveniently states that you will receive the NAV of the scheme for the number of units in your account. But this is not true in many cases, as you will be required to pay a fixed surrender charge if you do not stay with the policy till the maturity. This can work out to be quite a sizeable amount. It is therefore always important for you to know the maturity period of your policy and what you will have to shell out as surrender charges if you withdraw the amount before the maturity period.
General terms and conditions
Every insurance policy has several terms and conditions attached to it. These terms are generally not given importance by the policy holder and it is not mentioned by the agent as well. However, remember that some of these terms and conditions can actually determine the maturity benefits you receive.
* The writer is CEO, BankBazaar.com