If by any chance it has escaped your attention that the tax-planning season for this year is reaching its peak, there's no need to worry.
If by any chance it has escaped your attention that the tax-planning season for this year is reaching its peak, there's no need to worry. The inevitable adverts and sales calls encouraging you to buy tax-saving products such as insurance plans, will serve as constant reminders, at the same time annoying you and helping you to remember to save tax.
But the obvious flipside is that if you go for the first product you are offered, you are likely to be misled into buying something that is not suitable for you.
There's no doubt that insurance products rank among the most aggressively sold products during tax-planning season. And therein lies the root of the problem. Insurance products continue to be largely sold (not bought) for the tax benefits they offer. For those of you who may not be aware, contributions towards life insurance premium are eligible for deduction from gross total income under Section 80C of the Income Tax Act.
The 'insurance' aspect itself is often overlooked or just incidental.
Why do you need insurance?
The primary purpose of insurance is to indemnify the insured's dependents from loss of income, in the event of the insured's demise. Hence, the decision to buy insurance should be solely based on the individual's needs for protection; the tax benefits must be treated as incidental. But more often than not, things are done the other way around. Insurance must find a place in an individual's portfolio irrespective of the tax sops.
The Insurance Rush
Waiting for the end of the financial year (read tax-planning season) and then making a hasty investment decision is not a good idea. Insurance should be bought when the need arises and not simply because it's the tax-planning season. Furthermore, buying insurance in a rushed manner at the end of the year deprives investors of the opportunity to conduct a thorough evaluation of the available options. By opting for the wrong policy, one runs the risk of not only buying the wrong thing, but still being underinsured.
The Head-in-the-Sand Approach
Then there are individuals who tend to ignore buying insurance all together. Instead, they count on things like investments or the presence of friends and relatives to provide for their dependants, if an eventuality occurs. Such an approach is fraught with risks. In dire circumstances help from all quarters is always welcome; however, relying solely on the same is not prudent. Hence, having a sound life insurance policy in place is a must. Investments and a support system (family) can always play a vital, but secondary role.
Don't be a sucker
Investors, who are convinced about the importance of insurance and decide to buy the same, have another obstacle to face in the form of mis-selling. Mis-selling is a rampant practice in the insurance segment. Over the years, several insurance advisors have been guilty of mis-selling products that were right for them (helped them earn higher commission income), rather than the investor. Also, concealing relevant facts about the product, leading to misinformed decisions isn't entirely uncommon. In fact, last year things were so desperate, one salesperson from a prominent bank blatantly lied and said the founder of a related group company himself looked into the portfolio of a particular insurance scheme sold by another one of the same group's companies. However, not all mis-selling is blatantly a lie and you do need to be careful.
Unit linked insurance plans (ULIPs) would easily qualify as both the most popular and mis-sold products. So having a competent and ethical advisor is vital; also, investors should acquaint themselves with adequate information before zeroing in on any product.
So how do you proceed?
The process of buying insurance can be divided into two simple steps.
First, decide how much insurance is required. How much insurance an individual requires can be determined using the concept of Human Life Value. It refers to the monetary value of all the 'yet-to-be fulfilled' needs of the dependents plus all the outstanding liabilities. Use our HLV Calculator to see how much life insurance you need.
Second, decide the type of insurance product that can help meet your requirement. Broadly speaking, three popular variants of life insurance policies are available i.e. term plans, endowment plans and ULIPs. At PersonalFN, we advise our clients to keep their insurance and investments separate, and when seeking life insurance to opt for a straightforward term plan.
Types of life insurance policies
One Last Word… Finally, buying insurance is a continuous activity. Every individual's needs change over a period of time. This in turn necessitates a review of your insurance portfolio. Over a period of time, most people do need to buy additional insurance to ensure that they remain adequately covered. Your insurance advisor or financial planner can play an important role in reviewing your insurance policies and recommending how to increase your cover.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm