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Saturday, Sep 21, 2019

3 wrong reasons to buy an insurance policy

You should never buy an insurance policy to just save tax. Insurance is for protection and tax is only an added benefit to it and not the other way round.

business Updated: Mar 25, 2019 09:58 IST
Revati Krishna
Revati Krishna
Hindustan Times, Mumbai
One should never buy an insurance policy to just save tax.
One should never buy an insurance policy to just save tax. (HT Photo )
         

It is quite common to see a growth spurt in the sale of life insurance policies during the last three months of a financial year. This happens mainly because most tax payers will be doing the last minute tax-saving by buying policies. For instance, new business premium in February for retail policies grew 12%, as per an Insurance Regulatory Development Authority of India data. According to the same report, there was an increase of 33% in the overall new business premium numbers. It indicates that usually tax payers wait till the end of the financial year to carry out tax-saving investments. “The growth has also happened owing to various other factors, notably, vast young population, the projected strong GDP growth and rising income and wealth accumulation,” said Bharat Kalsi, head of strategy, analytics and marketing at Tata AIA Life. However, it is not advisable to buy insurance policies just to save tax.

Here are the three wrong reasons to buy an insurance policy:

Buying insurance policy to save tax

Insurers say it is a season growth due to the tax filing season. “The driving force behind an increase in new business premiums during the on-going quarter is actually a seasonal growth and it is because of the tax filing season,” said Ashish Vohra, chief executive officer of Reliance Nippon Life Insurance. But is this a wise decision? Experts think otherwise. According to Suresh Sadagopan, founder of Ladder7 Financial Advisories, your investment portfolio should match with your goals. “Insurance is supposed to be a product for long-term commitments hence it is not a product that is supposed to align with your tax saving goals,” he added. You should never buy an insurance policy to just save tax. Insurance is for protection and tax is only an added benefit to it and not the other way round.

To use it as a savings instrument

Individuals look at insurance as a savings instrument. “Long term savings are becoming a growing trend because of the fast rate of increase in life stage related costs and investments such as education. For instance, 20 years ago, an MBA course cost about around Rs10,000 to Rs 20,000. Today, a similar course can cost as high as around Rs 20-25 lakh and could be significantly higher in the next 20 years, thus mandating a savings plan for future,” said Vohra. However, insurance is not for savings. “By keeping your investment and savings in a single investment product you lose out on the flexibility. If the need for one of the two diminishes, just because both investment goals are packaged in one product for you, you will lose out on both of them,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors. “Also, had you invested in another product for savings purposes, you will have the option of shifting to another fund manager which may not be available when it comes to an insurance product,” he added.

Blindly trusting your bank executive

In February, the market share in new business premium of private life insurers has also seen a growth of 33.24%. “This growth can be attributed to the growth in bancassurance products. Customers are seeing a lot of value in banks because banks now are dealing in all kinds of financial products and customers tend to find comfort in the same,” said Karthik Raman, chief marketing officer and head of products and strategy at IDBI Federal Life Insurance. When you are buying insurance products from your bank executive, you should not blindly by the insurance policy. Understand the insurance plan in detail. You don’t want to get locked into a bad product just because you didn’t ask enough questions.

What should you do?

Since the new financial year is round the corner, it would be prudent for you to start planning your tax saving investments in the beginning of the year itself. To begin with, if you have dependents, you should have a life insurance cover that is at least 10 times your annual income. “You should also get a health cover of at least Rs 5-10 lakh if you live in a metro city. You could also get a base cover of Rs 5 lakh and take a super top-up plan of Rs 5 lakh,” said Dhawan. If you are looking to save and invest your money, you can opt for fixed income instruments and mutual funds. If you want to buy insurance on your own, there are multiple web aggregator platforms which you can use to compare and buy. If are confused about which insurance policies to buy, you can also seek help from a financial planner.

First Published: Mar 25, 2019 09:58 IST