Abhinav is usually saddled with work and is unable to find time to get a hold on his finances. Every year around the tax planning, the Relationship Manager from his bank pitches him a great tax saving life insurance plan that will help him save tax. Abhinav gets an excellent door-to-door service. All he has to do is sign the ECS forms, while he leaves the planning to the expert.
He picks up a fresh Life insurance policy every year in addition to the renewals from the previous years. He doesn't know the cumulative cover he has, the type of policies he has invested in, and the kind of 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 tax-payers rush into the tax-saving mode. Almost 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 in tax. Life insurance is undoubtedly a great tax-saving tool, but that benefit should not be the only reason to opt for it.
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 were to happen to you, your life insurance policy should not only help cover for the immediate financial exigencies, but it should also help supplement loss of income, help the family stay on track for future goals and events, expenses towards your childs education or marriage for instance.
Therefore, when you are looking to invest 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.
Firstly, you need to calculate the coverage you require to meet current and future needs. 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 mortgage.
Life insurance policies come with various riders such as accidental death, permanent disability, critical illness etc. Understand these well and add the ones relevant to you and your lifestyle to your policy. If you are susceptible to certain lifestyle diseases and ailments, these can help your family mitigate risk by being prepared for an eventuality.
Think through the right tenure for you. This depends on how much premium you can comfortably pay today, as well as how long you desire to work. Choosing a tenure of 30 years when you plan to retire in 20 is not a wise thing to do as it will add stress to your golden years.
Also, look at whether you need a spouse cover. Many policies offer an optional spouse cover 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.
Next, check the payout option that would be the most ideal for your family. Would you need lump sum payout or monthly payout or a combination of both to ensure that your family's expenses are taken care of?
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.
A term plan provides a safety net for your family at a reasonable investment. It is a pure protection plan that comes with benefits such as multiple payout options, built-in and optional covers, increased coverage and riders
These are far greater incentives to invest in a term insurance policy; tax deduction is just the cherry on the cake.
The iSelect Star term plan is one of the cheapest, most comprehensive life insurance plan available today. It provides life insurance and terminal illness cover along with cover against accidental death/disability. Also, if opted for at the start of the policy, you also get the option to increase life cover just as your life's responsibilities do. What's more, it offers complete flexibility when it comes to selecting the terms of the policy to ensure they are in line with your financial needs and aspirations.
So, the next time you are about to opt for a policy just to save tax, make sure to reconsider and think about the other benefits you could be missing out on.