Insurance + investment + tax = bad combo

We could follow this mantra for other purchases as well. Life insurance for instance. Marketers have made us believe that we are buying great value for money when we buy life insurance as a device for protection + investment + tax.

But hold on a minute! Our approach to buying junk food cannot possibly be the same as our approach to buying security for our family!

Talk to any financial expert and the first thing he will tell you is you should never buy insurance for investments or to save tax. Buy insurance only to insure yourself and to give your dependents financial freedom and security.

Don't mix insurance and tax

The tax-saving spiel is particularly over done because under section 80C of the Income Tax Act the premium on your policy is deductible. Statistics reveal that on an average 30% of annual premiums of life insurance companies come in the month of March. This is a clear indication of the fact that people buy insurance to save tax.

Tax should probably be the last consideration while buying life insurance. Amount of life insurance that a person requires should depend on his income level, total expenditure, the number of dependents and debts outstanding but definitely not the tax to be saved.

Shailesh, 35, has a taxable salary income of Rs 5 lakh (Rs 500,000) per annum. His tax saving instruments till date included investments in provident fund, postal savings and pension policy of up to Rs 75,000.