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Duck that insurance hard sell

If saving taxes is what draws you towards insurance, think again. You should consider more serious questions, such as whether you need insurance at all, and how much would be enough for your dependents. Deepti Bhaskaran writes.

india Updated: Jan 19, 2010 22:50 IST

This insurance policy will give the best returns and, of course, tax benefit,” is what most calls selling insurance right now will promise. If it was any other time of the year, you would hang up. But, with the deadline to make tax-saving investments inching closer, you will pause a bit. Chances are you will succumb.

Premiums that you pay towards an insurance policy qualify for a deduction up to Rs 1 lakh under section 80C. But that’s not the reason why you should buy insurance. Here are three questions you should ask before you succumb to such sales pitch.

For whom am I buying the insurance policy?

Agent spiel: You will get insurance, market-linked returns as well as tax benefit.

You need to ask: Do I need insurance at all?

The agent will never tell you that you don’t need insurance. But, believe it or not, not everyone needs insurance. You need insurance to provide for your dependents in case of your untimely death. If you have no dependents, you don’t really need insurance. Also, if you have enough assets, you can give insurance a miss.

Says Satish Mehta, managing director and CEO, Quantum Information Services Pvt Ltd, “A person needs insurance only if he has dependents or liabilities, such as a home loan. Somebody having assets that can take care of the expenses, financial goals and liabilities of his dependents need not buy insurance.”

If you are young, have just started working and have working parents, you don’t need insurance just yet. On the other hand, if your parents are retired and do not have sufficient pension income, a non-working wife or children, you must buy insurance.

Are my risks covered adequately?

Agent spiel: Pay a premium of Rs 1 lakh for this Ulip and save Rs 30,000 in tax.

You need to ask: How much insurance do I need?

Your sum assured — the amount your dependents would get in case of your death — depends on the premiums you pay. Therefore, the premiums should not depend on how much tax you need to save but on your dependents’ needs.
Decide your sum assured on these four parameters: income, expenses, financial goals and liabilities. Says Pranav Mishra, senior vice-president and head (product and sales), ICICI Prudential Life Insurance Co Ltd: “As a thumb rule, take a cover equal to 12-15 times your annual expenses or 8-10 times your annual income. Those with debts should factor in that, too.”

Your savings can bring down your insurance liability. Says Mishra: “A young individual may need a higher cover as compared with somebody in their late 30s or early 40s, who may have some savings to provide a cushion to dependents.”
By that logic, insurance becomes redundant when you retire, as by then, your earning capacity would become zero and you would have accumulated enough assets to provide for your dependents.

You should review your insurance needs every year to factor in your income and expenses.

Increase in income: Most of us get an annual salary hike. This would mean an upgrade in lifestyle.

Evaluate whether your dependents will be able to sustain the same lifestyle on the income from your current investments and insurance policies till the time they are able to manage on their own.

Financial goal: It is essential to choose an investment vehicle that helps you reach a particular goal most efficiently. But, you need to ensure that this vehicle is serviced appropriately even after your death.

Taking on debt: After your death, your lenders can lay claim on your assets. So, if you have a house on loan or have credit card debts, ensure these are serviced through your policy and your assets are left untouched.

Am I getting value for my money?

Agent spiel: This Ulip has outperformed the market and is the best in the market.

You need to ask: Is it cheap? If you are paying Rs 20,000 as premium for a sum assured of Rs 2 lakh, you have bought one of the most expensive insurance policies.

Money Matters recommends that you buy a term plan — the cheapest and the simplest insurance product. It is a pure insurance cover, which has no investment component. Under this, you pay only for the sum assured. There are no returns at the end of the tenure.

Shop for the cheapest term plan through insurance portals like Policybazaar.com. While insurers like ICICI Prudential Life Insurance Co Ltd have their term plans online also, Aegon Religare Life Insurance has launched iTerm, which is specifically designed for online sale. It is the cheapest term plan.

Between the simplicity of a term plan and the complexity of a Ulip, lies a third variety —traditional insurance-cum-investment plans. They range from endowment plans, which return the sum assured and the bonus, if any, to whole-life plans that cover you for life. These are very expensive products, but that’s not the only reason why we don’t recommend them. In these plans, the costs are not mentioned upfront and there is no way to track them. Since these products invest primarily in debt instruments, the returns range is 3-6 per cent.

At 30, for a Rs 10 lakh sum assured over 30 years, you pay Rs 2,912 for a term plan against Rs 31,368 in a traditional plan.

Ulips are relatively more transparent and offer better returns, but their insurance component is minimal. Says Mishra, “On an average, a Ulip offers 70 times your annual premium as the sum assured. But, most people buy Ulips offering 7-10 times their annual premium as the sum assured.”

Ulips have improved recently with the Insurance Regulatory and Development Authority capping their costs. However, Money Matters will wait before it recommends Ulips due to transparency and portability issues.