An insurance policy acts as a safeguard mechanism for an individual/organization to reduce the effect of loss caused by various risks. There are different ways for buying an insurance policy. For example, some may call agents for buying insurance or may buy it themselves online. However, buying insurance is a critical decision to be made on the part of an individual or organization.
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Prerequisites for Buying an Insurance Policy
The following are the prerequisites for buying an insurance policy:
- Judging the actual need
- Examining the claim settlement record of the insurer
- Deciding the type of policy
- Assessing previous purchase experience
- Deciding whether to buy insurance online or offline
Judging the actual need
It is one of the crucial decisions that an individual/organization needs to make while buying an insurance policy. The sum of the insured amount should be defined by the individual/organization as per his/its needs and capacity to pay.
Examining the claim settlement record of the insurer
After deciding whether to buy an insurance plan, the individual needs to shortlist the best insurance companies to buy insurance from. There are several insurance companies or insurers in the market. However, depending on the need, the individual should carefully select the insurer. In addition, the claim settlement record of the insurer should be checked while buying an insurance plan.
Deciding the type of policy
The next important decision while buying an insurance policy is to decide the purpose of purchasing the insurance policy. For example, if an individual needs an insurance plan for protection purposes, he/she may go for a term plan.
However, if he/she needs to buy an insurance plan for both investment and protection purposes, he/she may use various other policies, such as money back, endowment, whole life, annuity, ULIP, etc. In this way, an insured should buy a policy that is according to his/her need.
Assessing previous purchase experience
If an individual had already purchased life insurance earlier, he/she must consider its usefulness. Previous experience helps in making better purchase decisions in the future.
Deciding whether to buy insurance online or offline
Deciding the source of purchasing insurance is also one of the important points of consideration. The online insurance industry is emerging speedily in the last few years due to advancements in technology.
People are becoming aware and instead of taking the help of agents, they prefer online buying of insurance policies on their own. In addition, an individual can opt for an offline route to buy an insurance policy. He/she may take the help of agents that not only help in buying a suitable insurance plan but also assist the insured at the time of claim settlement.
Common Errors in Buying Insurance
Buying the wrong insurance policy may bring financial loss to the insured. Some common errors while buying an insurance policy are:
- Not assessing multiple companies
- Not comparing agents
- Not understanding the policy
- Not buying enough insurance
- Not updating coverage
- Not choosing a reputable carrier/insurance company
Not assessing multiple companies
The rates of premium differ across insurance companies as premium rates are usually based on statistical data collected by insurance companies to predict the likeliness of a claim. An individual, by analyzing the market carefully, can find multiple companies that may save a significant amount of money for him/her. Therefore, it is necessary to assess multiple insurance companies and their offerings before purchasing an insurance policy.
Not comparing agents
Agents are the front-line people who help individuals in finding the best policy. However, not all agents are equally capable of assessing risk and providing desirable guidance to individuals.
Therefore, an individual must ensure that the agent is properly licensed to give insurance advice. In addition, an agent should also have a good market reputation and sound experience in the insurance field. Therefore, while selecting an insurance agent, an individual must consider all important factors related to the agent.
Not understanding the policy
An insurance policy may consist of several technical terminologies that an individual requires to understand before purchasing a policy. For example, full tort or limited tort, uninsured and underinsured motorist, etc., are some terms that may appear confusing to an individual who is not aware of such terms.
A lack of clarity on these terms can make it ambiguous for the individual to understand the terms and conditions of the policy. Therefore, an individual needs to understand every term clearly before purchasing any insurance product.
Not buying enough insurance
Insurance is often considered an extra financial burden as it includes spending money to cover a risk that has not happened yet. Therefore, most people do not spend much on buying insurance, which is not a sensible practice. Insurance works as a financial safety net and therefore, an individual needs to spend a proper amount to purchase a policy that can cover all potential risks.
Not updating coverage
It is another mistake that people make while buying an insurance policy. An individual must assess his/her present conditions from time to time and make changes in the insurance policy accordingly. This is necessary because, with the changing phases of life, the circumstances of an individual’s life also change.
For example, the insurance needs of a college-going student must be different from an aged professional, having a wife and children to take care of. However, people often underestimate their insurance needs and try to escape from buying enough insurance policies that could cover their changing needs. It may prove to be country productive. Therefore, an individual, while buying an insurance policy, must estimate his/her current insurance needs and purchase a policy accordingly.
Not choosing a reputable carrier/insurance company
The insurance industry falls under the service industry wherein customer satisfaction plays an important role in the profitability of the industry. An individual, while purchasing an insurance policy, should perform proper research to identify the best insurance service provider in the industry.
For this, an individual consults people who have already purchased the policy of a particular carrier and asks them about their experience with that carrier. He/she may also take the help of the Internet and check for customer reviews about a specific carrier. In addition, it is important to check the financial stability of the carrier to ensure that it would settle the claims in the event of a loss.
Need for Insurance Plan
A person needs insurance to cover unforeseen risks and ensure financial security. In the primitive age, security was all about getting protection against environmental factors. The need for protection has evolved by multiple folds now. In the era of technology, it is about getting security against various types of risks, be it a life or any asset with an insurable interest. An individual buys an insurance policy to protect him/her against unforeseen risks.
The following points show the requirements of insurance for society:
- It brings a protection element
- It brings a disciplined saving approach
- It supports risk-taking capacity
- It brings social stability for individuals
- It assembles resources for economic development
It brings a protection element
The prime purpose of insurance is to protect against unforeseen financial contingencies for businesses and humans. Insurance brings a sense of security. It helps to hedge against the uncertainties of life.
It brings a disciplined saving approach
Acquiring insurance coverage calls for a fixed amount to be invested regularly by the policyholder. This develops a disciplined approach to saving as the policyholder is required to compulsorily pay a particular amount as a premium, at regular intervals. It thus cultivates a habit of savings, which ultimately helps in accumulating wealth over some time.
It supports risk-taking capacity
Insurance coverage, be it for personal or for commercial purposes, supports the risk-bearing capacity of individuals and organizations. It enables them to focus on constructive activities with the hope that any kind of financial loss will be taken care of by the insured.
Insurance companies provide certain plans, which focus on the well-being of communities through group schemes. Group schemes are provided to employers for their employees, to people below the poverty line, and various associations and societies. This strengthens the relations between business entities and their employees and brings several benefits to society as a whole.
It assembles resources for economic development
Insurance fund available with insurance companies plays a significant part in economic development. Money is used to fund projects that can enhance basic amenities about transport, housing, electricity, water supply, and communication. Insurance companies channel a vast pool of savings contributed by organizations and individuals and employ it for productive purposes, which further ensures social well-being.
Selection of an Agent
After understanding insurance needs, an individual needs to select a competent agent who could help him/her in finding policies as per the requirement. The selection of an agent can be done in the following ways:
Referrals from family and friends: As per a National Association of Insurance Commissioners (NAIC) survey, 79% of the insured take help of their family and friends to select an insurance agent for insurance advice. Family and friends give reliable advice and information regarding why they like the agent, what is the expertise of that agent, whether the agent is reliable, and whether the company that the agent represents is good at handling a claim. Such information may help an insured in selecting an agent.
Internet: The internet is another important source for finding and selecting an agent. It provides almost all the required information about prominent companies dealing in the insurance industry and their licensed agents. Therefore, an individual can easily find the required information about an agent on the Internet.
However, while selecting an agent, an individual must consider the following aspects of the agent:
Credentials and knowledge
An individual must check the designation or credential the agent has earned from various insurance groups or associations. In addition, an individual must have a conversation with prospective agents. It could give him/her a fair idea about the knowledge and expertise of the agent.
Licensing
An individual must ensure that the agent and the company he/she is representing are licensed as per the country’s law.
Complaints
While selecting an agent, an individual must check whether he/she and the company he/she represents have complaints filed against them.
Financial stability of the company
While selecting an agent, an individual must check whether the company that the agent is representing is financially stable to pay the claims.
References
The reliability of an agent can also be checked through references he/she has provided to the company at the time of applying for the job. An individual may talk to those referrals while selecting a credible agent.
