In order to avail tax deduction under Section 80C, many individuals buy life insurance which they do not necessarily need and fall into the trap of misselling by agents. As a life insurance policy is for providing financial protection to loved ones, you must look at adequate cover and not just another tax saving tool and earn some returns.
As insurance agents hardsell guaranteed plans or a whole life insurance policy, especially during January to March, you should consider them only if these meet your financial needs. Experts say it is always better to opt for a pure term plan along with a few riders for financial protection of the family.
Before buying a life insurance policy, analyse the needs and do not go just by what an agent suggests. Very often a traditional policy is sold as a fixed deposit, especially to those who have got a lumpsum either from superannuation or sale of real estate.
There are three important categories where investors can invest or save —pure term plans, endowment plans and unit linked saving schemes (Ulips). Rakesh Goyal, director, Probus Insurance Broker, says there will be several traps by various people who would sell some of these policies in a different way. “One may say that Ulips are only investment plans. But in reality they offer insurance too along with insurance. Other traps are insurance policy offers, life cover, tax benefits and investments. But endowment plans and Ulips offer all the three benefits,” he says.
Guaranteed plans
Life insurers are launching a host of guaranteed savings plans, which provide guaranteed, regular, tax-free benefits and guaranteed death benefits. Policyholders even have the flexibility to customise their plans with a choice of income benefits, multiple income variants, premium payment terms, policy terms and deferment periods. While the investments in these plans are protected from market fluctuations, policyholders must note that the guarantee returns are typically 5-6%, which may not be ideal in a rising inflation regime.
Goyal says opting for a guaranteed life insurance policy completely depends on the policyholder’s risk profile. “If they do not want to take undue risk and are conservative investors, they can certainly look at investing into guaranteed plans. However if investors want to get higher returns and also have insurance cover, they can have a look at investing in Ulip,” he says.
Whole life policy
Often people buy a whole life that covers them for 99 years. In a whole life policy, the insured will have to pay the premium throughout his life. Insurers offer limited or regular premium payment terms of a whole life policy. It is ideal for those with financial dependents who would stay dependent on him for a long period, such as children with special needs or a dependent spouse. The payouts can help them for the expenses and even medical costs if the policyholder dies.
The premiums remain fixed for the entire term of the policy. A policyholder must assess the amount that the dependent will need to cover the living costs and future expenses.
Policyholders can opt for optional riders attached to a whole life policy. However, policyholders must keep
in mind their income to service a whole life policy as paying the premium may be a burden, especially after retirement.
The fine print
- Returns on guaranteed plans are typically 5-6%, which may not be ideal in a rising inflation regime
- In whole life plan, you will have to service the policy your entire life
- Very often a traditional policy is sold as a fixed deposit, especially to those who have got a lumpsum amount