An insurance product is one, where an applicant pays a regular premium to the insurance company for the duration of the policy over a set time frame, and in return the insurance company ensures that you are financially covered in the event of certain contingencies, e.g. medical, travel, risk to life etc.

Insurance is one of the most crucial investments that one can have, especially since medical costs continue to grow at a rapid pace and there are significant financial risk may occur on the happening of the unfortunate event. If one is married and has kids, then one should consider to take a risk cover which will provide financial assistance to the family members in case of unfortunate events like death of the ''Bread Winne''. However apart from covering up the financial loss/risk, an investment in insurance qualifies for tax benefits u/s 80 C, the premium that you pay qualifies for a tax deduction so long as the annual premium is at least 10 times the sum assured or the insurance cover. There are different types of risk cover available - Pure Life cover (Term Plan), Medical/Health plan, travel insurance, personal accidental cover etc. Recently insurance policies have turned to the online channel and one can even hold their life insurance in demat form, leading to less paperwork.

There are many common mistakes made by individuals while buying an insurance policy, so here are a few steps to be followed while purchasing insurance, in order to avoid these mistakes.

Avoid under insuring yourself

While choosing a life cover there are several aspects to consider, especially while deciding on the required sum assured. Apart from the usual ball park of 10 times one's annual income, there are various other factors to be considered. One should first and foremost take into account their situation in life with regard to dependents, the more the dependents (incl. plans to have children) higher the sum assured required, as this money has to be used by your family in case of any eventuality. So whatever insurance cover you are planning to avail, consider this along with your present family scenario and your expected future family scenario.

One should also consider one's career and the future earnings potential that one has. This should be taken into account when calculating the sum assured - the larger the potential earnings, the larger the sum assured should be and vice versa. It is advisable to be very honest during this exercise. Another approach can be to check on the corpus required for goals, to sustain monthly expenses and taking care of outstanding liabilities.

Choosing the right policy

Choosing an insurance policy which offers lower premium payment may not be the best option, as while settling claims there may be many things that are mentioned in the exclusion list. Ideally, don't compare only the insurance premium paid from various insurance providers but also compare their claim settlement ratios and the details of the cover (what is included and what is not). It is advisable for individuals to opt for a company that has a good track record of settling claims.

Insurance is different from investments

Although insurance is a crucial part of your financial plan, it is not an investment but a separate financial asset. An investment is bought in order to build wealth whereas insurance is bought as a part of risk coverage which is helpful in case of any unexpected eventuality of the insurer. One should ensure that investments happen alongside insurance. Insurance is only a tool to hedge the financial risk associated with life.

Although some types of insurance policies offer you tax benefits, while buying insurance your goal should not be for reducing taxes alone. The important factor which some people fail to realize is that not all insurance payments are tax free.

Don't prematurely stop / withdraw premiums

It is not advisable to stop premium payments or withdraw money (in term plans/ ULIPs) during the life of the policy, since you will stop getting any benefit from the insurance company. Also, in some cases, premature stopping of policy or withdrawal is subject to some penal interest rates.

Take optimal insurance

One should ideally take the optimum life cover early on, since although it is possible to upgrade the insurance to a higher amount at a later stage, this is subjective and is not as easy as it sounds. Also, premiums are cheaper when one takes them at a younger age. However, if for any reason you are unable to upgrade your insurance later, one can always look at getting another life policy to add on to the existing policy.

Summary:

> Ensure that one is completely covered for all types of insurance - e.g. medical, life, vehicle, etc.

> Never under insure yourself

> Before opting a particular insurance policy compare that policy with the similar kind of insurance policy offered by other companies - in terms of exclusions and inclusions, conditions, premiums, etc.

(Contributed by Anil Rego, CEO & founder, Right Horizons)