Analyse insurance need before buying a scheme

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Premium towards your life insurance and health insurance policies qualify for deductions under Section 80C and 80D of the Income Tax Act, but that should never be the objective of buying an insurance plan nation of insurance and investment.

Insurance company invest the premium in different assets like stocks, bonds or government securities after

AS WE reach in the last quarter of the financial year, life insurance companies are projecting different objectives of insurance targeting individuals who fail to do their tax planning earlier and start investing in tax-saving schemes without keeping any goal in their mind. As earlier insurance companies were asking you to buy life insurance to protect your family and helping you to achieve your financial goals, suddenly they have shifted their focus on saving your tax.

When they say that they want to save your tax, they actually mean to say that they want your money.

Other day, somebody asked me that because it is proposed in the new direct tax code (DTC) that the limit of deductions towards premium of life insurance, health insurance and children tuition fee will be Rs 50,000 and as he is already paying more that Rs 50,000 towards his children school fee, should he surrender his life insurance policy? I thought, is it really a reason for people to continue or surrender their life insurance policy.

Usually people buy insurance without a real understating of why they do so. In my financial planning practice, when I ask people the reason for buying multiple life insurance policies before they approach me, some common answers received are, that it was recommended by a colleague, they learnt about it through a TV commercial as best tax-saving instrument or bought it under obligation from friend or relative. Study confirms that life insurance policies bought just for tax planning and without keeping any financial goal in mind are surrendered before its due maturity.

Basic objective of insurance is to manage financial risk. Different kind of risks can be personal risks like premature death, poor health and old age without having sufficient income or property and liability risk. There are various forms of insurance to manage these risks, and the objective of all is to protect people against unexpected loss. Most common type of insurance are life insurance, health insurance, critical insurance, personal accident and property insurance like motor or home insurance.

Premium towards your life insurance and health insurance policies qualify for deductions under Section 80C and 80 D of Income Tax Act, respectively, but that should never be the objective of buying insurance policy. If tax-saving is your objective, then there are much better schemes that provide you higher liquidity and returns. Insurance policies are not good investment options as they fail to create wealth due higher cost involved in them.

Objective of life insurance is to provide financial support to the family in case of untimely death of the life assured and therefore, life insurance should be bought on the life of the bread winner and not on the life of spouse or children. If spouse is also an earning member and is contributing to household expenses then he/she may buy life insurance policy on his or her life. Money received through life insurance claim can be used for repaying the debt, can be invested to manage household expenses of your family members and to achieve your other financial goals like children education and marriage. Pure term insurance policies best serve this purpose.

Term insurance plans do not offer you any maturity benefit, but these are the best plan as they offer high death benefit against the small premium you pay.

There are also other type of life insurance plans like endowment plan and unit-linked insurance plan (Ulip). Endowment and Ulips are basically combi life insurance policy.

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Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

HDFC TaxSaver
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IDFC Tax Advantage (ELSS) Fund
SBI Magnum Tax Gain Scheme 1993
Sundaram Tax Saver

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