Insurance should be a straightforward purchase that you aren't left second-guessing in a crisis, yet too many of us still make the same simple errors that undermine it. We purchase the lowest premium policy, ignore the small print, forget to change primary beneficiaries, or think a shiny brochure is evidence of payout eligibility. We allow policies to expire, add in complex and unnecessary riders, or simply follow the advice of their single commissioning agent without shopping around on comparison sites. On the other end of the spectrum is the old belief that one policy covers everything (it generally doesn't) or neglecting to declare pre-existing medical conditions (which will get your claim instantly turned down). This blog is designed to highlight common pitfalls and set you up to do a better job: scrutinise every word of every policy, match cover to real life, not the sales spiel, keep track of what's needed, and review at least annually in light of life changes. Get it right, and insurance is an angel, not a devil.
Why It's Important To Correct These Errors & Why Doing So Is Worthwhile:
Insurance is a promise on paper: pay a premium today, and someone (the insurer) shall pay a defined benefit whenever a defined event comes tomorrow. The promise is only as tough as how you buy it, keep it and will it to the other side of the claim. Small mistakes, a missed renewal, an undisclosed disease or departure, a two-sentence skim of the exclusions make a promise a pain.
Consequences of common mistakes:
1. Never oppose your claims at the direst moment.
2. Having insufficient payout, with the family not being financially protected.
3. Wasted premiums on policies that don't truly fit requirements.
4. Count the stresses and wasted time in the middle of the stressful situation.
This is boring but easy to solve: choose covers that correspond with real risk; browse the details; keep your head; keep track of what you have; keep the paperwork under control; treat insurance as a standing charge and review once a year.
Pro-Tip: Set up a yearly "insurance day" on your calendar to review your policies and check beneficiaries and prices. One hour a year could prevent years of problems.
Mistake 1: Believing That The Least Expensive Policy Is The Best Option
Refers to why people do it: price is a tangible, immediate outcome. Low premium: save money now feels smart.
Why does it backfire:
a. Other cutbacks made by the less expensive policies include: low sums assured, thin inclusions, very long waiting periods, higher copay or exclusions in very small print.
b. A low premium may indicate that an insurance company simply does not have the capacity to pay out on claims. Or it may indicate an inappropriate product offer.
What to do instead:
1. Compare coverage, not only price. Ask what is covered, what isn't, waiting times, copay/excess, pre-existing conditions, do they have claim limits.
2. Ask to see sample policy wordings or ask for the Product Brochure and the Policy Document before you buy.
3. Consider a renowned insurer, which possesses above-average claims-settlement ratios and whose (administration) procedures are crystal clear, even if the premium is a wee higher.
Pro-Tip: Think total cost of risk. If the extra Rs X of the premium today is not going to cause you substantially higher payout or substantially less claim friction down the road, don't bother paying up.
Mistake 2: Underinsurance
What it means: the size of the sum assured or limit of cover is inadequate for the level of risk or the value of the asset.
Where it happens:
a. Old houses... Insured by homeowners (especially low insured amount, replacement value higher).
b. Health policies with low room rents and low annual limits during times of high medical inflation.
c. Term can be good if the sum assured is just a few years' salary, but your family would need more than that.
Why it matters:
Dependents are left with the same financial issues a policy was to have provided for, if there was a small payment after a critical illness or death: loans, school fees, and cost of living.
How to avoid:
1. Run true-to-life calculations (mortgage remaining, plus 510 years of your family's expenses, plus your children's education fund for life): for insurance, for health, see what most bills in your city look like; ICU stays, surgeries, and expensive critical care accounts for quite a bit of a healthcare bill, make sure your yearly/individual limits are high enough.
2. Index link to inflation and arrange for a regular top-up. Don't underinsure in order to save a few pounds each month.
Pro-Tip: Research recent hospital bills or the average cost of surgeries in your city, and include that as part of your minimum health coverage. If an average major operation costs ₹6–8 lakh, then a ₹2 lakh policy isn't a cover, it's a theatre.
Mistake 3: Disregarding Waiting Periods & Policy Exclusions
What people ignore: the "exclusions" page and the waiting period clauses. They think the cover is comprehensive.
Why does it backfire:
1. Certain conditions, cosmetic conditions, or pre-existing conditions are often excluded for a period of time (e.g., 2-4 years), so if you take out a policy with a 2-year wait, for example, and decide to use a policy immediately and make an early claim, then you'll be leaving money on the table.
2. Critical illness plans typically define the criteria precisely (e.g., precise determination of what is classed as a 'heart attack'). This is not always the case, and not all clinical events will necessarily fulfil the individual definitions.
How to fix it:
a. Pay close attention to the exclusions and waiting period sections before purchasing. Find out if something important is excluded and why, and if riders can add it.
b. For pre-outpatient conditions, gather even more detailed timelines and the reports needed to confirm. No one said, "I'll claim everything." learn the timeline.
Pro-Tip: When you buy health insurance, have the agent write down 'what is not covered' and get you to initial or sign an acknowledgement of it, and insist on it. This helps you get clarity and prevent surprises down the line.
Mistake 4: Failure To Reveal Important Information (or Conceal It)
What they will say: drugs, past diseases or operations (no matter how small) and leisure activities with an identified risk are never written down.
Why it's risky:
1. Nondisclosure can allow a claim to be rejected or a policy to be voided. An insurer may also treat nondisclosure as a lack of misrepresentation.
2. You will not be protected if, at the time the statement was made, it was a misrepresentation, and made by the Agent with the intent to deceive you (e.g., if made verbally and you relied on unauthorised "shadow underwriting").
How to act:
a. Tell the truth. Make sure you list all your health problems, large or small. The insurers may want more info, so get evidence (medical notes) and obey the rules.
b. If a condition was present and you forgot to include it, state it at renewal, and have it documented.
Pro-Tip: keep a short (preferably, one-hand chronologically listed) medical timeline document (dates, diagnoses, doctors, medicines) in your insurance folder. This makes accurate disclosure easier.
Mistake 5: Failing To Renew Policies or Letting Them Expire
Reasons for this: life is busy; feeling the pinch from premium increases; the 'artful' prompting of insurance agents to switch deferred until the end.
The fallout:
a. Lapse means the loss of continuity. For example, existing conditions may recommence waiting periods when you purchase again. Many health insurance companies consider the reentry as a new policy. For a life insurance policy, lapsing may result in charges of surrender or benefits loss.
b. May require new medicals for reinstatement after lapse and be repriced or refused.
How to prevent:
1. Whenever feasible, make use of auto-debit or standing instruction for recurring premiums.
2. In case of an inability to pay, get in touch with your insurer for a paid-up option, a premium holiday or for a temporary cut back in cover: do not just lapse informally.
3. Mark the renewal dates in your calendar and revisit that date with your insurance on your annual insurance day.
Pro-Tip: If you're paying premiums, try to treat these as a household utility set on autopay if you can, and check your bank statement to avoid the dreaded debit failures.
Mistake 6: Purchasing Conflicting Policies Without Coordination
Examples of what 'it' looks like: Several policies covering similar risks but not optimised, e.g., two critical illness plans with the same cover but each with different exclusions, or two term plans with overlapped periods.
Why it's inefficient:
a. You pay again for the same exposure, and you may still be underinsured if the various policies have gaps.
b. Claim handling becomes a chore: more policies, more coordination and more paperwork.
How to do it right:
1. Consolidate where feasible. Use primary policy+ rider or top-up for needs above base.
2. If you require more than 1 policy (e.g., employer group and individual cover), understand which is the primary policy & keep copies of both.
3. Secondary policy takes precedence over the primary policy in case of a change in circumstances.
Pro-Tip: Create a cheat sheet "cover map" spreadsheet: risk >what cover is needed>what policies currently cover it>what the cover gaps are. If two rows say "the same thing", merge them.
Mistake 7: Selecting Intricate Investment: Insurance Hybrids Without Fully Comprehending Costs & Returns
The trap: purchasing life insurance policies that are also "investments" (endowments, ULIPs, moneyback plans) simply because everyone else is doing it or there is a tax advantage.
Why it's often bad:
1. These hybrids have commissions, charges, and surrender penalties to eat into the returns. For pure protection, term life is both much cheaper and more effective. For investing, mutual funds or PPF often will best the net return after charges.
2. ULIPs and other savings plans can carry fees and lock-ins that are too complicated and not as easily accessible should an emergency arise.
What to do:
a. Differentiate protection from investments. Purchase term insurance, which will provide you with insurance cover for living expenses and invest the rest for growth (e.g., Index Funds, ELSS, PPF)
b. If you want an insurance-linked investment, then have a good look at the charges schedule, fund options and switching costs.
Pro-Tip: Enquire from your insurer about the illustration of net returns after all deductions on ULIPs, and compare it with a straightforward investment approach. The figures will reveal all.
Mistake 8: Failure To Align Policy Characteristics With Life Stage Requirements
Why it matters: insurance needs change. For example, the needs of a 25-year-old single graduate are different from those of a 40-year-old with a mortgage and children.
Common mismatches:
1. Young parents cut back on term covers and siphon off on small savings schemes.
2. Older people continue to pay for child cover they no longer require.
3. People still have riders that made sense a 5years ago (critical illness), but now have employer cover or other financial ability.
How to manage:
Review the policies at important stages of life; Marriage, children, loans, job change, pension planning, and modify the sum assured, tenure, and riders accordingly.
Pro-Tip: At marriage or first child, do a "needs analysis" map obligations (mortgage, living costs, education) and check that cover is adequate.
FAQs:
1. What should I be focusing on, the sum assured or the riders?
You will want to focus primarily on your sum assured as it relates to life/term insurance (sum assured) to cover your liabilities and provide for your family's future needs. Riders can add value (critical illness, accidental death, etc.), but they should not be your only type of insurance. The usual mistake people make is to pile on too many riders instead of making sure they have sufficient base coverage.
2. I don't like my insurance company's service; can I change companies?
Yes! However, you should be very careful when changing insurance companies. The portability of your health insurance will vary by country; always check with your local regulatory agency to see the portability rules in your area. Typically, life insurance will involve purchasing new insurance and surrendering old life insurance (this may be an expensive process). Always compare the total benefits and net costs before you contact the new company.
3. How much health insurance should I carry in India?
There is no one answer; it is dependent on where you live and how much of a health risk you and your family are. As a general guideline, you should have at least ₹5–10 lakh of insurance coverage for each member of your young family in large cities (urban centres) and a greater sum assured if the hospital is very expensive for you. If your parents are elderly, they will most likely have greater medical coverage than you, so ensure that they also have a separate amount specified by you. In your calculations, also include ICU and critical care as a possibility.
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