I am convinced that there are a whole lot of people out there who don’t have accurate information about insurance. They operate on certain myths that float around, and these myths can cost them heavily. Such individuals may buy too much or not enough of insurance. They are misguided by huge increases in their premiums, and get mad about insurance instead of getting smart.

Listed here are some of the common myths, and the realities people should be thinking about instead:

Myth: If I am Alive, I Need Life Insurance.
Reality: Life insurance is designed to take care of the dependants after the insured person’s death. If you have no dependants, then you probably don't need life insurance. For example, children and retired people may not have people that depend on their income, so life insurance is usually unnecessary for these groups.

Myth: Your benefits should roughly equal the premiums you have paid.
Reality: Many people feel cheated if they aren't ‘using’ their insurance – in other words, if they pay premiums for years and never make a claim. That, however, is exactly what you will want to happen with most types of insurance. Sounds insane? It's really not.

Most of the time, insurance should be thought of as protection against serious financial catastrophe, not as a buffer against the normal ups and downs of daily living. You will want your home protection insurance to be a safeguard if your house ever burns down, for example, because you probably don't have enough savings to rebuild your home or pay off your loan otherwise. On the other hand, you can easily bear the cost of replacing a window pane.

Myth: Insurance should be bought and used for every accident and disaster.
Reality: Insurance is designed to protect one from catastrophic disasters. You must follow a rule of thumb for insurance which says: If you can pay for the loss or damage without financial hardship then pay for it, otherwise expect your insurance premium to eventually show an increase.

Also, buying every type of insurance is absolutely unnecessary. Sometimes, it is worth taking the risk rather than paying a premium.

Myth: Whole Life and Universal Life are the best life insurance policy choices, since I can get my money back.
Reality: Term life insurance is probably the best choice for most. Term life is set for a specific term, like 10-30 years, with a much lower premium than whole and universal life insurance. So what’s the best bet? Buy term life insurance, and invest the premium difference in equity-related instruments.

Myth: Life and medical covers are provided by employers.
Reality: Life and medical covers are provided by employers only until you are in a particular company, or till retirement. Also, life insurance provided by employers may not adequately cover the living expenses of your family in case of your untimely death.

It is advisable to buy medical insurance when you are young, as the purchase of fresh medical insurance just prior to retirement could be refused on medical grounds. Critical illness policies help meet additional living expenses of the family in case of a critical illness.

Myth: Life insurance is for the purpose of saving taxes.
Reality: This ends up being a selling point for agents. Of course, tax-saving is one of the many benefits that life insurance offers. However, do not lose sight of the main benefit of life insurance, which is the provision of finances in case of the policyholder’s death. Taxes can be saved with other tax-saving instruments like mutual funds, tax-saving bonds and government bonds, post-office savings schemes and the Public Provident Fund (PPF) scheme.
 
Myth: Very young people don’t need life insurance.
Reality: This is a wrong notion. The common understanding that people die when they are old may be true to a large extent. However, having the risk of death covered is definitely better than leaving dependants financially bereft in case of untimely death. Besides, it is a smart move to take the benefit of the lower premium rates offered to younger policyholders. Also, you may find it difficult to purchase a life insurance policy when you are old due to higher premium rates or refusal because of ill-health.

Myth: Pleasing relatives/associates is important when purchasing an insurance policy.
Reality: Insurance policies need to be purchased based on your need. Avoid opting for policies just to satisfy acquaintances who are insurance agents or to maintain relationships with business associates. These days, online term insurance plans are available, which are 50 per cent cheaper when compared with term policies purchased through agents or brokers.

Myth: ULIPs for a limited period seem attractive.
Reality: Most insurance products are so designed that the major costs are incurred in the first few years and deducted from the premium. Hence, very little is actually invested in units. It is therefore, best to look at unit-linked insurance plans with an open mind and consider a periodic investment commitment for the whole tenure of the insurance policy. Paying for a longer tenure is more profitable.