Most people wait for the tax season to set in to buy insurance policies in a bid to save tax. That's, however, not a good idea. Here's why.
Despite all the efforts made by regulators, the media and financial experts to spread awareness about the importance of insurance as a tool of protection, insurance has attained much of its popularity as a tax-saving instrument. January-February-March remain the busiest months for insurance distributors and that is when most people buy insurance, primarily driven by tax-saving motives. This often leads to bad buys, paying more for less, premature policy surrenders, and ultimately the buyer ends up underinsured. The solution to this is to buy insurance for the right reason: to safeguard your family’s finances in case of your untimely death. Let’s look at some of the reasons why you shouldn’t wait for the tax season to set in to buy insurance.
Your insurance needs may be unmet
When tax saving becomes the core objective, your insurance needs take a back seat. On the other hand, if you focus on getting adequate insurance, say a term cover of Rs 1 crore, your premium size will be Rs 10,000 – Rs 12,000 if you are 35 years of age and your tax deduction will be worth Rs 3000- Rs 3,500, if you are in the highest tax bracket. That’s a small number but that shouldn’t drive you away from the product because the primary objective of insurance is to safeguard the financial future of the family if something untoward were to happen to the breadwinner. In order to pick the right product, you must assess the risk that may come your way, the financial goals that need to be met in your absence and other money needs that are supported by your income. Start your insurance plan early, so that you have sufficient time to assess your needs, and compare and select the right product as per your requirement.
Delay can keep you exposed to risk
The risk will hover around you until you get the appropriate insurance product to mitigate it. If you were to meet any unforeseen circumstances all of a sudden, your dependents would be left with no financial stability. So, prioritize your insurance needs and don’t wait up for the tax season to come.
Buying single premium policy may cost you more money
Single premium policies may seem more tax effective, but the premiums are typically more expensive than regular premium policies. So you might want to do a cost and benefits analysis before you get swayed by the tax benefits offered through single premium policies. So again avoid focusing on the tax effectiveness when shopping for insurance. There are many investment options under Section 80C such as PPF and Sukanya Samridhhi Scheme which offer better return than insurance at a lower cost.
Buying early will allow you to make use of the ‘free-look’ period
Insurance companies offer a ‘free-look’ period with most products. A free-look period allows buyers to return the policy within a permissible time-frame. There may be charges applicable, but it comes handy to get rid of a policy if it doesn’t fit your needs. And this may not be a viable option for you if you delay the purchase to last minute (tax season), you will lose out on the tax benefits associated.
(The writer is CEO, BankBazaar.com)