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Life insurance is one of the strongest pillars of personal finances and
deserves consideration by every person. The good news is that almost all
taxpayers have some kind of life insurance, but ironically 90% of these buyers
would have bought insurance for the wrong reasons, i.e., just to avail tax
benefit and do not provide sufficient coverage and security.
All financial gurus agree with one voice at this point that insurance should
never be just used either as a tax saving or an investment tool. This has been
iterated so many times that life insurance should be purchased solely for
insurance purpose.
Even after spreading awareness by financial experts regarding the importance of
insurance product as an only protection tool, people end up purchasing them as a
tax saving
device. No wonder why January to March quarter observes a slant rise for
insurance distributors as taxpayers make the same mistake of purchasing
insurance for tax savings. Some of them end up buying high-cost policies they
don’t even need, some couldn’t align their financial goals with the right
investment product. In either case, they make a bad choice.
Here is why?
Insurance is a long-term commitment
Insurance is meant to create a safety net for you and your loved ones. No matter
what kind of policy you choose, life insurance is a multi-year commitment. As an
investor, your financial priorities change over time. A life insurance is not
sufficient to fulfill your monetary need at every stage of life. It may give you
instant relief as a tax saving scheme, but it is a long-term contract that needs
a financial commitment for years to come. For example, suppose you want to buy a
home loan 4-5 years later. In that case, a large chunk of your section 80C will
be taken care of by the principal home loan repayment. However, as you have
already purchased insurance, you are bound to continue paying the premium and
putting money in the policy even though you no longer need this tax saving tool.
Lower returns
Using insurance as an investment tool is another mistake investors often make.
There are multiple investment options available under Section 80C that offers
better returns including PPF, ELSS, many of which come with the flexibility of
investment where you can invest at any time of the year with any amount in that
is okay with your pocket.
So, what is the right way? Should you stop purchasing insurance products? Of
course, not. The value of life insurance can never be underrated. It is an
indispensable pillar of a person’s financial plan. However, insurance should be
purchased solely for protection for rainy days, not as an investment or tax
saving tools.
The right way to choosing the appropriate insurance product.
Term insurance policy
Often dubbed as the mother of all insurance policies, term insurance is a pure
insurance product. Though it doesn’t give you a return, it offers the most value
in comparison to any other plan in the market. They are pure protection plans
that give you highest coverage at the lowest premiums. The best of both the
worlds! Other perks of a
term insurance plan – critical illness and disability
rider – a boost to your existing plan that offers coverage against multiple
critical illness and disability.
Insurance plans with maturity benefits
They are traditional life insurance plans that come with maturity benefits and
help you achieve your dreams to the fullest. Some plans like Aviva Wealth
Builder double the total amount of premiums paid and return it as a lump sum at
maturity.
Maturity benefit – It signifies the claim of the policyholder once the policy
matures. Generally, the maturity sum is a multiple of the premiums paid up to
that time along with the additional perks insurance company offers to the
policyholder. A life insurance policy with maturity benefits is highly popular
with investors as it enables them to plan ahead, build wealth over time to
fulfill their dreams, like buying a new home, saving for child’s education or
planning for retirement. Moreover, investors choose a secure option that allows
their loved one’s dreams fulfill even they are no longer to oversee the
proceedings.
ULIPs
ULIPs are an attractive and balanced blend of insurance and investment which
help you achieve specific monetary goals in life, for example, your child’s
education. ULIPs come with multiple benefits that make them fit for every
individual, depending on their financial goals. Some of the unique attractions
of ULIPs are:
- Protection – They are specially designed to protect the monetary needs of the
insurer in case of the loss of life. For example, if a person purchases a child
plan to ensure the education of his/her child; this need will be taken care of
even when s/he is not around. Complete protection to the child will be given by:
- Paying sum assured – to address immediate financial concerns
- Paying all the future premiums as a lump sum
- The policy with all the investment benefits will be intact for the child till
maturity
- Attractive investment returns – It comes with the choice of different linked
funds – balanced fund, growth fund, protector fund, etc.
- Loyalty additions – It enhances the fund value
Right reasons to purchase a life insurance
You have dependents – If you have spouse, parent or dependent
children, life insurance is a must. It ensures that your loved ones are
financially taken care even in your absence. However, if you are stably retired
or financially independent, no one would financially suffer if you are no more
and so you don’t need a life insurance policy. In either case, wealth builder
plans, ULIPs and child plans make more sense.
In a nutshell, life insurance is a crucial part of a person’s financial
planning, but only when it is purchased wisely. Buying it for tax benefits is
not a smart financial step. Be armed with the right information so that you can
arrive at the appropriate choice for your family and provide a financial safety
net to guard their future.
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