Top 16 Insurance Myths

Insurance Myths

Unfortunately, there are a lot of misconceptions out there regarding insurance, which can be pretty dangerous if you think you’re covered when you’re really not. Insurance is a highly misunderstood product and it's often bought and sold for the wrong reasons.

1. Your friend is not covered to drive you car under your insurance policy.

False. Remember the phrase, “the insurance follows the car.” This means, if there is an in-force (active) insurance policy on your car, you can allow anyone to drive it, unless the individual is specifically excluded on your policy.

2. Your personal belongings are insured by your apartment complex/landlord’s insurance policy.

Wrong. Unless you have a renter’s insurance policy, the odds are you are not covered. Your landlord or apartment complex only insures their financial interests, which are the physical building they own, not your “stuff.”

3. A homeowner’s policy covers your home in the event of a flood.

Flood insurance is only offered by the Federal Government through the National Flood Insurance Program (NFIP). An independent agent can sell you a policy, but they are simply selling on behalf of Big Brother.

4. Auto insurance covers theft of your personal belongings from your car.

Any personal items left in your car are not covered unless you have a renter’s or homeowner’s insurance policy covering your “contents,” or possessions. You may also purchase a Personal Articles Floater (PAF) policy to cover your more expensive items.

5. Your car, damaged while in your garage, is covered by a homeowner’s policy.

Policies specifically exclude damage to automobiles. You would need to have comprehensive coverage on your auto policy to cover damage to your vehicle while parked in your garage.

6. Collision insurance pays for damage to my car if I hit a deer.

The definition of “collision” is not extended to cover a collision with an animal on most auto insurance policies. Again, you need comprehensive coverage to get reimbursed for damages result from hitting an animal.

7. You don’t need to worry about being sued if you have insurance.

This misconception is dangerous because it may lead individuals to purchase lower liability limits for their home or auto insurance policies. If you are sued and lose, your insurance company is only responsible for paying awarded damages up to the liability limit of your policy. Anything a jury awards the plaintiff above the policy limit is your responsibility to pay.

8. If I suffer a property loss (car or home) my property will be replaced by my insurer.

This may or may not be true. The answer depends on whether or not your policy has replacement cost or actual cash value coverage. Many people, in an attempt to save money, will opt for ACV because it’s cheaper. Then when they suffer a loss, they’re upset to find out they’re receiving quite less than is required to go out and buy a new item of like kind and quality.

9. I don’t need life or health insurance if I am young and healthy.

You can save a lot of money by purchasing a whole-life policy when you are younger and the rates are lower. The older you get, the less money the insurance company can collect from you before the inevitable payout, so they charge more per year.

As far as health insurance goes, you never know when you will be seriously injured or develop a life threatening disease, so it’s always best to be covered. However, it is worth pointing out that if you’re injured on the job, you qualify for worker’s compensation benefits. This only covers injuries though; you would need to participate in an employer sponsored health plan to receive benefits if you become ill.

10. Should I buy life insurance on my child’s name?

The answer is No, Nein, Nyet, Nahi, Nako, Vendam, Na. I am a linguist but there ends my vocabulary for the word 'NO'. In any language, and in any part of the world, there is no logic for buying life insurance for a person on whom nobody is financially dependant. I have heard arguments like ‘What if my child is diabetic and cannot get life insurance later on?’ If this argument is taken to its logical conclusion, you should be buying a policy for at least a few crores, if you take inflation into account – and all companies will deny it. So do not bother.

11. Should I buy unit linked policies as an investment?

This is a very difficult question to answer. So I will split the answer into various parts. Find out how much is the amount that is getting invested and far more importantly what are the fund management charges? (also called asset management charges). As a ball park figure, look for fund management charges lesser than 1%. You will find unit linked policies as well as index funds in that category. Choose only such policies immaterial of the upfront charges. If you are not comfortable with index funds, choose mutual fund ‘managers’ with an excellent track record.

12. Insurance is a tax saving instrument

Most salaried people scramble for investments in tax saving instruments at the end of the financial year and insurance comes at top of the list. Section 80C tax benefit is only an added advantage and it should not be the main reason for buying insurance. The primary objective of insurance should be to provide protection to you so that your family and to build a corpus for your future needs.

13. I should buy policy in my wife and child's name. It's for their future

Insurance should always be bought by the person who is supporting dependents. It should never be the other way round. Ask yourself a basic question: What will happen if something happens to me (or the earning member of the family)? Who will take care of dependents (non earning members) like your wife, kids, parents? The answer is insurance. It's a very simple concept - don't complicate it. You should take a policy to insure yourself; not your dependants.

14. I am single without dependents. I don't need insurance

Well in that case you really don't need life insurance but think of medical emergency or health disorders. It can simply wipe out all your savings. It will make a lot of sense to take health policy and some retirement planning product. If you start early you may retire rich. Health policy should be bought by every working person as it cushions your savings against unforeseen emergencies. You could add on a Critical Illness Rider to your policy so that even if you get an illness which keeps you out of action for some period of time, this is taken care of due to this rider. Medical Insurance pays the cost of the hospital/ treatment; Critical Illness Rider pays you the Sum Assured (if the conditions are satisfied) while you recover from that illness.

15. Term insurance is a waste as I am just paying premium and not getting anything in return

No it's not. In fact it's one of the best insurance products ever - Simple, inexpensive and serves its purpose. Each insurance product has this at its core and the cost is a part of the premium you pay. It gives you a peace of mind round the year as you know that you are protected. That's exactly what insurance is supposed to do.

16. Insurance and Financial Planning. Are they related?

Insurance Planning is an integral part of overall financial planning. You should not look at insurance as just another product to buy. Take a more balanced view. Look at your income, expenditure, savings, liabilities and financial goals. It is only then that you will be able to take the best decision regarding your insurance needs.