Although buying an insurance cover is a critical part of financial planning, only a few of us make an effort to read the nuances of the policy document. Not all insurance agents inform you of the shortcomings in the policy working and design, and many highlight only the positive aspects. Therefore you realize that you have not bought the right policy only after you purchase it. Here are a few aspects you must definitely look for in a policy before you buy it:

Hidden charges: Different insurance plans have different fees and charges. Plans combining investment and risk cover like ULIP plans have high administrative charges and allocation charges. Details about these charges are normally not divulged by your agents as well, because you may end up not buying such a policy resulting in him losing out on commission. When allocation charges are high, it means this amount is first deducted from the investment amount and the remaining is only invested to purchase the units in your account. Always remember to check for such charges and avoid policies with high fees and charges. This is because you may sometimes end up losing some of your principal amount as well if you have chosen a bad scheme.

Lock in period: Insurance policies come with a lock in period, during which period you must stay invested in the scheme. Failing to do so can result in penalties and sacrificing some part of the premium as well. Therefore always remember to look at this clause carefully and find out the minimum specified period for which you can pay the premium. This becomes even more important to assess if the premium amount is high. For example, if you take a policy with an annual premium of Rs. 1 lakh and a lock in period of 5 years, you may find it difficult to continue paying the premium if you face sudden emergencies after 3 years of the policy commencement.

Surrender Charges: When you surrender the policy before the maturity period, insurance companies usually charge a fee known as surrender charges. Remember to check for this detail carefully. Many people assume that they will get the current NAV of the scheme for the number of units accumulated in the account, even if they withdraw at any time of the policy. However, you may sometimes have to pay fixed surrender charges if you discontinue the policy before maturity. So find out about the maturity period of the policy you will be purchasing as well as the surrender charges you will have to pay if you discontinue the policy before this period.

Other Terms and Conditions: Insurance policies have several terms and conditions, which sometimes determine the maturity benefits you will receive. These terms are generally ignored by many policy purchasers, who do not find out such details from their agents. It is advised to analyse all terms and conditions carefully.

An insurance policy is very important for all individuals and therefore you must be aware of all the aspects of the policy you wish to purchase. Remember that it is your money which goes out as premium and it is your life you are insuring; therefore you have the right to question both the insurance company as well as the agent who sells you the policy.

Summary:

Insurance is a vital part of every financial plan. It is therefore important that you are aware of and understand the following aspects of an insurance policy before you purchase it:

• Hidden charges
• Lock in period
• Surrender charges
• Other terms and conditions