Pitfalls in Purchasing Insurance

From Financial Literacy Wiki

Common Pitfalls in purchasing insurance is to have the insurance policy purchased primarily for investment purpose. One should always keep in mind that the purchase of insurance is to offer financial protection to your dependents. Investments should always be a secondary goal. This is particularly true for Investment Linked Policy where the protection value is subject to risk and returns are usually eroded by a lot of charges.

Instead of purchasing a Investment Linked Policy, one may be better off purchasing a term policy and investing the premium saved in an independent unit trusts. One can then diversify their investment portfolio better since they are have the whole universe of unit trust available to them instead of being restricted by the Investment Linked Policy.

Buying a whole life policy involves a lifelong commitment, a point that is often overlooked. Most whole life policy do not acquire any cash surrender value in the first few years. Such policies also take time to break even. Therefore any early surrender of whole life policy will result in substantial loss of premiums. In addition replacing the surrendered policy with a new one will costs you more premiums than the existing one due to age. Therefore, one should consider carefully the possible scenarios before committing to long term insurance policies.