Life Insurance is Not a Tax Saving Tool

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.