This post is for those who still don’t feel the need for life insurance and a correct life cover amount. And more often than not, for them, insurance is just a way to save some tax. Buying insurance to save taxes is still one of the most popular (but wrong) reasons to purchase insurance.
So how does one end up being underinsured if they try to quickly save taxes using insurance?
Let me tell you.
There are two types of life insurance products – Pure Life Insurance (like simple Term Life Plans) and Insurance-cum-Investment Products (like traditional insurance plans like endowment plans, moneyback plans and also Ulips).
Now suppose you wish to save some taxes under the Section 80C which has an upper limit of Rs 1.5 lakh. Let’s assume that your EPF contributions have been around Rs 50,000 and hence, you need to save another Rs 1 lakh to fully utilize your limit.
With regards to insurance, what options do you have:
- Term Plans are very cheap. It is possible to get Rs 1 crore life cover for just about Rs 10-15,000 annual premium depending on your age.
- Traditional Endowment and Moneyback plans are a lot costlier. Let me give you an example – If you check the premium for Rs 20 lakh coverage for a 40-year old male for a 30-year policy tenure, one of the popular endowment plans (LIC New Jeevan Anand details) quotes a premium of Rs 1.02 lakh per annum. So since, your requirement is just Rs 1 lakh premium, you can estimate that the life cover would be about 20 lakh.
- Ulips generally are structured in a way that they provide life cover which is 10 times the size of annual premium. So, you can calculate that for Rs 1 lac premium, you can get a cover of Rs 10 lakh.
Let’s not try to be judgmental about into why term plans are cheaper and other ones are costlier. It is simply because these products are structured that way. Only a part of the premiums of traditional plans and ULIPs goes towards providing life coverage. The remaining is utilized for investment which is eventually paid out at maturity.
But point here is not about returns and more about proper coverage.
So, what may happen is that in a hurry to utilize the Rs 1 lakh to save taxes, you may decide to choose traditional LIC plan that has an annual premium of Rs 1.02 lakh but gives life cover of just Rs 20 lakh. And that is not enough at all if you consider what is the right life insurance cover amount that you should purchase.
Usually, the traditional insurance covers you get are neither great nor sufficient for the policyholder’s dependents. So even though your tax-saving requirements may be fulfilled, you may end up being underinsured.
Term insurance is a pure risk cover and a product which is an absolute must for every individual who has any dependent relying on their income. In term insurance, if you die, your nominee gets the sum assured. In case you survive the policy term, nothing is paid out to you. They are by far the cheapest form of cover. Life insurance safeguards the livelihoods of numerous households every year. Provided you as a policyholder are committed to paying a small premium each year, life insurance is the best financial tool to help you safeguard your dependents and future of your entire family. This is true not just in India but world over. You can even check other country’s popular websites like https://purecover.co.uk/ to see how life insurance works on similar principals in other countries as well.
Coming to the next question – So how much life cover should you buy? This is one of the most important factors in the buying process. For arriving at a more realistic figure, use any of the tools available on the insurer’s website. You can also use the life insurance calculator available on this site.
Also, your insurance agent may try to tempt you to buy endowment plans but don’t give in. You must avoid putting your hard-earned money into tax-saving products which are either very expensive or are not right for your financial goals. And traditional endowment insurance policies are a good example of such unsuitable products. Don’t mix insurance with investment. You don’t have to depend on an insurance agent to buy a term plan as most life insurance companies now offer term insurance online.