Spend, Save and Invest Smartly
One remembers the phrase oil and water never mix. So is it a good idea to buy insurance just for tax saving purposes? The word mis-selling of insurance comes to the fore when it comes to using life insurance as a tax saving instrument. One purchases a life insurance policy even if one does not need it. This works to the advantage of life insurance agents who make a killing in the tax season.
Insurance agents are very clever in stating returns offered by endowment policies .Never trust the returns promised by the insurance agents but do the math yourself. Study the insurance policy document and understand the terms and jargon used in it. An endowment policy offers a sum assured which is a guaranteed amount or a coverage provided by the policy. This also translates to the death benefit of the policy. One gets a guaranteed bonus for the first 5 years of the policy. One may get a reversionary bonus or an additional bonus after the guaranteed bonus out of the profits of the insurance Company. Maturity benefits are the sum assured combined with the bonus amounts offered by the insurance policy when it matures or completes its term period. One would definitely get the guaranteed bonus on maturity of the policy but it would do good to remember that reversionary bonuses are not obtained if there are no profits for the insurance Company .A terminal bonus is paid out on maturity of the policy.
Purchasing an endowment policy just to get a tax deduction of INR 1 Lakh under Section 80 C is never a good idea as these are generally low return policies even though insurance agents promise inflated returns.
Many a time one just purchases an insurance policy without checking its compatibility to his needs. If one has just started his career and is not married does he need a term insurance policy? One has no family and no dependents and this policy does not serve his needs .Wouldn’t a health insurance policy be the need of the hour. Imagine if one were to suffer a serious illness costing many thousands what purpose would his term life policy serve much less an endowment policy or a unit linked insurance policy.
Remember paying a high premium on a unit linked insurance plan or an endowment plan just to save tax and getting negligible returns or even suffering a loss on investments is never a good idea. One would needlessly over insure himself at no real gain.
One must never mix insurance with investment and always keep the two apart. Endowment plans give very low returns over long periods of time. Unit linked insurance plans are not great on mortality cover .It would be wise to take a term life cover to cover insurance needs and invest in an equity mutual fund if one is an aggressive investor.
There is a famous saying "Two is Company and three is a crowd". Taking an insurance policy to save on tax would just compound the issue. Would it not be wiser if one were an aggressive investor to avail tax benefits by taking a term insurance policy to cover insurance needs and take an equity linked saving scheme to avail tax deductions under Section 80 C which also gives good returns over time rather than an endowment life insurance policy just to save on tax?
If one is a conservative investor he can invest in a tax saver fixed deposit or a public provident fund and take up a term policy which has very low premiums. One can avail deductions under Section 80 C save on tax and also meet insurance needs.
The greedy insurance agents make a huge commission especially if one churns his ULIP policy for a traditional endowment plan which has a huge upfront commission. It is always wise to put oneself in the shoes of the opposite party such as the life insurance agent in order to understand the situation and make a wise decision.
Remember insurance is for mortality cover and not tax benefit .If one is newly married or has young children then a term insurance plan is a must have if one wants to transfer wealth to his spouse or children as he is young in his career and if he were to die then his dependents would find it very difficult to meet living expenses. Health insurance or a family floater is a must not just for tax saving under Section 80 D but also for a health cover or protection against costly diseases. Hospitalization is very costly and a serious erosion of wealth results if one and his family are not covered by a health plan.
Personal accident policy has no tax benefits yet it is a policy one cannot do without .It provides compensation if one were to lose a limb in an accident or if one is disabled and cannot work. A death benefit is included if one were to pass away in an accident.
Home insurance is a must have even though these policies provide no tax benefits. Householder’s protection policy provides compensation for the structural damage to one’s home and also for replacement of costly assets under content insurance in case of a theft. This prevents one from falling into serious financial difficulty in case of unfortunate circumstances.
Auto insurance has no tax benefits but a third party liability protection policy is compulsory by law .A comprehensive policy can compensate for serious financial loss in case of a catastrophic accident and severe damage to one’s car. There is a famous saying “You have succeeded in life when all you really want is only what you really need”. It is great if tax benefits are gained along with a needed insurance policy. But taking a life insurance policy just to save on tax is a foolish idea. Remember never mix insurance and taxation.