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Last Updated : Jul 21, 2016 05:13 PM IST | Source:

Why we are a nation of underinsured tax savers

Tax saving and not the risk cover is the sole influencer on the insurance buying in India.

Amit Trivedi

Benjamin Franklin said, “In this world, nothing can be said to be certain, except death and taxes.” Someone added, “… but you don’t have to die every year”.
We seem to have taken it to heart. Since death is one time and taxes are annual, we worry more about the more frequent event.

It is important to ponder over the line you just read. It is written in the context of a normal behavior of many Indians, who buy a life insurance policy not as a risk cover against untimely death, but for the purpose of saving taxes.

That is why we see a rush of activities towards the end of the financial year to grab tax saving instruments. Sometimes, the hurry is so much that there is not enough time to do any kind of evaluation – whether the product is right, whether it is required, whether it serves any useful purpose (of course, other than saving tax).
One such tax saving avenue is buying an insurance policy. When one buys a life insurance policy, the premium paid is eligible for deduction from taxable income under section 80C of the Income Tax Act. This seems to be one of the most popular of the various options under the said section.

Look at the sales of life insurance policies and the link becomes very clear. Majority of Indians buy life insurance policy in the last quarter of the financial year.

So many Indians start looking for tax saving options in the last quarter of the financial year. Media is full of articles on the subject. The sales targets of insurance salesmen are increased during this period and of course, lot of advertising budget is also allocated for this particular period. “Strike the iron while it is hot” – as they say. Apparently, the sales of life insurance products go up during the months of January, February and March each year.

I have come across many individuals who do not know the risk cover offered by the policy they have bought. However, when asked how much insurance they have, they are quick to respond with an amount. This amount incidentally happens to be the premium they are paying every year and not the risk cover. They remember the premium amount. My hypothesis is that they know this amount for two reasons: (1) this is the amount of money they have to pay every year, and (2) they get a tax break linked to this amount.

While saving taxes would keep more money in your pocket, it is important to understand where we are saving. It is important to understand our priorities. First and foremost, it is important to understand one’s needs – be it those of the individual or the family.

In case of any family, the sustenance depends on the income earned. This income stops when the breadwinner dies while in the earning years. With the loss of this income, the family’s financial situation is adversely affected. Their dreams, their financial responsibilities, and even their survival is at stake. There is a huge risk to the families in case of untimely death of the main breadwinner. The family needs protection against this risk.

Life insurance is designed to serve this purpose.

However, for some weird reason, the main reason for buying a life insurance policy is not discussed or is given a low priority. Due to this, many Indians end up buying a life insurance policy not as a risk cover against untimely death of the breadwinner, but for the purpose of saving taxes.

In the process, we have become a country of underinsured tax savers.

So buying a life insurance policy should be high on the agenda of any earning person if there are others dependent on this income. Get help, if needed to assess how much insurance cover or risk cover would be needed. The premium you pay for buying such a policy would be eligible for tax deduction, anyway. So your purpose of saving tax would be served, but don’t let that be the starting point. Instead, start with your requirement for risk cover.

The author runs Karmayog Knowledge Academy. The views expressed are his personal opinions.

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First Published on Jul 21, 2016 05:13 pm
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