When the insurance advisor approaches a prospective customer to sell a policy or plan, his persuasive tone might drown the doubts that are critical to a wise investment. Only features that provide a feel-good factor are disclosed to the customer and the aspects that may discourage the customer are conveniently hidden by the agent.
A careful inspection of the fine print in the policy document will reveal many loop holes that may actually prevent you from getting all the promised benefits of the policy.
It is a good idea to get all your doubts clarified right from the beginning to avoid unpleasant surprises later. One may also approach the branch manager or the training manager of the insurance company in order to get all the details simplified whenever there is any confusion regarding the terms and conditions or the features of the plan.
Depending on the type of insurance and the nature of the plan the fee and charges will vary. If you are opting for an insurance plan that combines investment and insurance your agent might casually overlook any mention of the allocation fees and administrative charges that the insurance company is going to take from the amount deposited. The first aspect through which the buyer will lose money when taking an insurance policy is the allocation fees, which comprises the administrative charges and the risk premium charges. This implies that when you buy a policy there will be a considerable amount deducted from the money paid towards allocation fees and only the balance amount will be used to buy units for your insurance account. The allocation fee is typically highest in the first year and thereafter reduces proportionally. Thus, in order to recover the basic amount that has been invested the investor will have to wait till the NAV of the remaining amount grows to make up for this amount.
The lock-in period is another aspect that the advisor is usually shy to explain. This is the mandatory period for which the money must stay invested with that company in order to derive benefits. In case the investor wishes to withdraw during this period there are likely to be penalties which will significantly reduce the net amount payable to the investor. Up to 4 per cent of the amount paid may be lost in case of withdrawing before the completion of the minimum prescribed lock-in period. Thus, while making the decision to buy a policy one must look at the possibilities of any requirements for withdrawing in before schedule and only then invest the money.
The surrender charges are never mentioned to the buyer at the time of purchase. The agent will usually promise that the entire NAV of the plan will be paid out to the customer in case the policy is surrendered before its maturity. However, this is not the case in most instances. All companies do levy a fixed surrender charge if the policy does not reach maturity. This charge can be quite an amount considering the fact that the plan is held for 10 years or more and surrendered before maturity. Thus, while buying a plan it would be wise to carefully consider the maturity period specified for that plan.
Terms and conditions:
There are several other factors that the terms and conditions of any insurance policy mention to which most buyers do not pay any heed at the time of purchase. However, this slip up may actually render the policy invalid or make it extremely difficult to claim the full benefits at the time of requirement. It is in your own interest and the interest of the family members whom you are trying to protect, which warrants a careful study of all the clauses that is mentioned in the fine print of the policy before actually signing the deal.
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