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Posted by Shyam as Insurance
Investment in life insurance policy helps you save taxes up to Rs. 1lakh as per Sec 80C of Income Tax Act. Choosing life insurance policy just for the purpose of saving taxes is something to which I totally disagree. Life insurance is a must but should not be used just as a saving instrument. Life insurance agents do promote such products by highlighting factors like tax benefits, savings and market-linked investments which actually sometimes misguide investors.
Why, life insurance policy?
The most important reason behind choosing the life insurance policy is the financial security of your dependents in coming years. It’s vital to know how much insurance is required and which product best serves the purpose.
How much you require?
Your life insurance needs varies with the different stages of your life. Few factors like age, number of dependents and your standard of living has be kept in mind before arriving at the sum assured. Life insurance needs of an individual with dependent parents, children, home loan, etc would be much different from an individual who just have his housewife as dependent. The middle stage of your life brings much added responsibility in comparison to other stages of life. Looking after the sum assured amount of at least 5-8 times of your salary will help to protect the dependents. Revisiting your life insurance needs in every 4-5 years is advisable.
Products you can look for?
1) Traditional v/s term: Traditional plan basically invests bigger chunk of your corpus in debt instruments and its cost structure is not transparent. Whereas, term plan offers only insurance and no investment.
2) ULIPs v/s term: ULIPs doesn’t sound feasible for short period of time. They work better when done for longer term.
3) Term plan: Term plans are most preferred just because of the fact that you got to pay just the cost of insurance. If you die during the tenure your beneficiary would be getting the sum assured and if you survive till the completion of the term you end up getting nothing. As of now the premium paid towards policy qualify for tax deduction as per Sec 80C. However, as per proposed DTC, a deduction of up to Rs. 50,000 is available only if the sum assured you opt for is al least 20 times of the annual premium paid by you.
Which term plan to choose:
1) Plain vanilla: You got to choose the sum assured and the insurer accordingly finalizes the premium to be paid every year. The sum assured as well as the premium remains the same during the term. It’s not much preferable as you pay for years together and end up getting nothing.
2) Return of premium plans: If you survive till the term period you get back all the premiums. It seems to be bit costly as you won’t be getting any interest on the premium paid.
3) Decreasing term plan: Choosing this plan when you have opted for home loan would be quite feasible. The sum assured is equivalent to the loan amount. With the decreasing loan liability your premium amount also decreases.
4) Increasing term plan: Increasing term plans surges up the cover by 5% every year, till your sum assured increases by 50% or till its values doubles itself. The premiums are high as the liability increases every year.
5) Online version: Life insurance policies done through online platform is quite cheaper as the intermediary cost gets eliminated.
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