The Wrong Reason to Buy Life Insurance!

Wrong Reasons to Buy Life Insurance Explained

Discover 5 wrong reasons to buy life insurance & learn about smart choices like term plans for comprehensive protection.

Written by : Knowledge Centre Team

2025-09-03

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10 minutes read

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Many buy life insurance solely for tax savings under Section 123 of the Income Tax Act, 2025 (previously known as Section 80C of the Income Tax Act 1961) (up to ₹1.5 lakh deduction), but this misses its core purpose: financial protection for your family. This leads to poor policy choices, high premiums, and inadequate coverage. In this blog, we expose 5 common mistakes that sabotage your financial goals and reveal how to select the right life insurance policy with proper checks.

Key Takeaways

  • Buying life insurance just for tax savings can leave you underinsured and financially vulnerable.

  • Always assess your personal needs instead of copying others’ insurance choices.

  • Understand your policy's coverage, riders, and payout structure before investing.

  • Choose tenure and coverage based on your life goals, retirement plans, and liabilities.

  • Term plans offer strong protection at a low cost, and tax benefits are simply an added perk.

Real-Life Example: Tax-Driven Insurance Trap

Let's understand the concept with an example: Abhinav is usually saddled with work and unable to find time to get a handle on his finances. Every year, around tax planning, the Relationship Manager from his bank pitches him a great tax-saving life insurance plan that will help him save tax. All he has to do is sign the ECS forms, while he leaves the planning to the expert.

He takes out a new life insurance policy every year, in addition to renewals from previous years. He doesn't know the cumulative cover he has, the types of policies he has invested in, or the premium he is paying. All he knows is that these investments help him save tax.

The Indian insurance markets witness a huge surge in business in the January-March quarter as salaried taxpayers rush into the tax-saving mode. Almost 40-50% of the annual sales of insurance companies are achieved in this short span of time.

Unfortunately, there are many like Abhinav who opt for an insurance policy just to save some money on taxes. While life insurance is a powerful tax-saving tool, treating it only as a tax deduction is a dangerous gamble. Using insurance as a last-minute tax shield often leads to "leaky" financial plans where you pay high premiums for coverage that doesn't actually protect your family’s future. Below, we break down the five most common reasons people buy the wrong insurance and show you how to build a policy that actually works for you.

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5 Common Life Insurance Mistakes: Why Buying for Tax Savings Isn't Enough

Life insurance is a long-term commitment. If you buy it for the wrong reasons, you might end up underinsured or wasting money. Here are five common mistakes you should avoid:

  1. To Save Only on Taxes: Many people buy life insurance just to claim deductions under Section 123 of the Income Tax Act, 2025 (previously known as Section 80C). While tax savings are a benefit, they shouldn’t be the main reason. The real purpose of life insurance is to protect your loved ones financially. Choosing a policy only for tax benefits often results in low coverage and misplaced expectations.

  2. Just to Match What Others Are Buying: Life insurance is not one-size-fits-all. Your financial goals, family needs, and income are unique. Buying the same policy as your colleague or friend may not give you the right cover. You should assess your personal situation before selecting a plan instead of blindly copying someone else’s choice.

  3. To Get Quick Returns: Life insurance is not a get-rich-quick tool. Many buyers assume it’s like an investment that gives big short-term returns. However, term insurance offers no maturity benefits, whereas other policies typically last longer. If your focus is on immediate profits, you’ll likely be disappointed and may exit the plan too early.

  4. Family Pressure: Sometimes people buy insurance under pressure from a friend, relative, or agent without understanding the policy. This often leads to poor choices or inadequate coverage. You should always research the plan, understand its benefits, and ensure it fits your needs before committing.

  5. Without Understanding the Policy: A big mistake is buying a life insurance plan without reading the fine print. People often sign up without knowing the policy term, exclusions, or payout structure. This leads to surprises at the time of claim. Always read the details and ask questions before you buy.
Do you know

Did You Know?

India ranks as the 10th largest insurance market globally, with just 1.8% share
 

Source: Business Standard

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How to Do it Right?

Here are some points that  you should keep in mind when purchasing a life insurance policy: 

  • Consider The Primary Objective of Life Insurance: The primary objective of a life insurance policy is to safeguard the financial future of your family and dependents from uncertainties in life. In case something happens to you, your life insurance policy should not only help cover the immediate financial emergencies, but it should also help supplement loss of income, help the family stay on track for future goals and events, and assist with expenses towards your child's education or marriage.
  • Don't Buy Insurance Only to Save Tax: When investing in a life insurance plan, you need to weigh every single aspect of the investment, rather than blindly buying an inadequate or ill-advised insurance plan to save tax.
  • Calculate the Right Coverage and Add Riders: First, you need to calculate the coverage you require to meet your current and future needs using tools like a term insurance calculator. The amount should be enough to provide your family with a comfortable lifestyle, meet their financial goals, and also pay for major liabilities such as loans and mortgages.

    Life insurance policies come with various riders such as accidental death benefit, permanent disability, critical illness, etc. Understand these well and add the ones relevant to you and your lifestyle to your policy. If you are prone to certain lifestyle diseases and ailments, your family can mitigate risk by being prepared for the eventuality.
  • Choose the Right Tenure, Add Spouse Cover if Needed: Think through the right tenure for you. This depends on how much premium you can comfortably pay today and how long you wish to work. Choosing a 30-year tenure when you plan to retire in 20 is not wise, as it will add stress to your golden years.

    Also, look at whether you need a spouse's cover or not. Many policies offer optional spousal coverage that covers your spouse under the same policy. Not only does it help mitigate risk, but it is also cheaper than buying a separate policy for them.
  • Consider the Ideal Payout Option for Your Family: Next, check the payout option that is most ideal for your family. Would you need a lump-sum payout, a monthly payout, or a combination of both to ensure that your family's expenses are taken care of?
  • Prioritise Protection Over Tax Savings: While prioritising tax planning might save you some money in the present time, it could prove to be an expensive mistake in the future. Therefore, don't worry about saving until you are sure that you have secured your family's financial future. And if you don't wish to spend a huge amount on premium every month, you can consider opting for an inexpensive life insurance policy, such as a term plan.

How Does Term Insurance Beat Tax-Saving Plans?

A term plan provides a safety net for your family at a reasonable cost. It is a pure protection plan that comes with benefits such as multiple payout options, built-in and optional covers, increased coverage, and riders.  

Here are four key reasons it outperforms tax-focused policies:

  • Higher Coverage at Lower Cost: Term plans deliver 10-20x more coverage than endowment plans for the same premium, ensuring genuine family protection without wasting money on low returns.

  • Pure Protection Without Mis-selling: Unlike tax-saving plans, by blending insurance with investments, term insurance eliminates maturity benefits that reduce death payouts, keeping focus on risk coverage, not returns.

  • Flexibility in Tenure and Riders: It offers the option to customise tenure, choose from different payout options (lump sum or income), and add riders for critical illness or disability- features often limited in rigid tax-saving endowment policies.

  • Same Tax Benefits, Better Value: Tax deductions under Section 123 of the Income Tax Act, 2025 (previously known as Section 80C of the Income Tax Act 1961) are just the cherry on top.

Conclusion

Life insurance thrives as protection, not a tax gimmick. Avoid common pitfalls like chasing returns or peer pressure to ensure meaningful coverage. Prioritise term plans for maximum sum assured at minimal cost, enhanced by riders and flexible payouts.

Ready to protect what matters? Calculate your ideal coverage today and choose wisely for lasting peace of mind.

Glossary

  1. Term Plan: Pure protection life insurance for a fixed period. Pays a death benefit only if the insured dies during the term.
  2. Sum Assured: Guaranteed amount paid to the nominee upon the policyholder's death.
  3. Riders: Optional add-ons enhancing base policy coverage, like critical illness or accidental death benefits.
  4. Policy Tenure: Duration for which insurance coverage remains active, typically 10-40 years based on life stage needs.
  5. Section 123: Offers up to ₹1.5 lakh deduction on life insurance premiums under the Income Tax Act, 2025.
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Uncertain About Insurance

FAQs

Yes, premiums qualify for deduction up to ₹1.5 lakh under Section 123 of the Income Tax Act, 2025 (previously Section 80C), plus tax-free maturity/death benefits under Section 10(10D).

Term plans offer 10-15x higher coverage at lower premiums with a pure protection focus, avoiding low investment returns that dilute death benefits in endowment policies.

Use the Human Life Value method: Annual income × 15-20 years (working years left) + outstanding loans + future goals, like a child's education. Add 10-20% buffer.

  Accidental death benefit (2x sum assured), critical illness (pays on diagnosis), permanent disability (income replacement), and terminal illness (early payout).

Yes, many plans offer return-of-premium or life-stage boosters, allowing coverage increases without medical tests as responsibilities grow (marriage, kids).

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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