Embedded Value: Buy insurance for long-term protection, not just to save tax

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January 27, 2021 12:45 AM

Exiting a policy contract, after the cooling off period as provided by the insurance regulator, is almost impossible though one can surrender the policy after keeping it in force for a certain number of years.

By investing in a life insurance policy one commits to a recurring payment for a fairly long time.By investing in a life insurance policy one commits to a recurring payment for a fairly long time.

Life insurance is a major component of financial planning as it is a wonderful tool for providing financial protection to oneself and to one’s loved ones. An investment or savings gives assurance when the targeted amount is assured for the dependants with the very first instalment of the savings paid as premium. If unfortunately he or she leaves them behind, the insurer steps forward to provide them financial support.

Buying and maintaining a life insurance policy is a serious business. All the steps taken in this regard require serious attention. Life insurance is purchased throughout the year. But during the last quarter of the financial year it is sold mostly as a tax saving investment. Traditionally life insurance has been the most prominent among the savings listed along with other savings schemes that qualify for tax deduction under Section 80C of the Income Tax Act. But rushing to invest in a life insurance product with the prime motive of saving on tax is fraught with serious implications.

Long-term contract
By investing in a life insurance policy one commits to a recurring payment for a fairly long time. Exiting a policy contract, after the cooling off period as provided by the insurance regulator, is almost impossible though one can surrender the policy after keeping it in force for a certain number of years. But that is possible only with a very heavy discount on the amount paid or deposited till the date of surrender. Hence surrender of a policy or terminating an existing commitment to invest every year for saving on taxes will never be a wise option if one comes across a more attractive tax saving instrument. Therefore before entering into a policy contract one should spend time to evaluate all other tax saving options and allocate one’s fund to two to three such schemes.

Individuals must make a clear plan for investing in schemes such as tax saving fixed deposits, mutual funds or PPF. After due consideration of all options if someone decides to invest only in a life insurance policy for the purpose of saving tax under Section 80C, in view of his or her family responsibilities, such a decision may prove to be correct as well as prudent. However, those vast majority of people who get trapped by unscrupulous intermediaries in their anxiety to maximise saving of taxes need to be careful.

Diversified portfolio
Insurance serves a unique purpose but for achieving that purpose one need not for sure invest all the eligible amount for tax saving in life insurance only. By buying a bouquet of different insurance plans with far less premium, one can achieve similar long -term protection or benefits. Ideally one should have a diversified portfolio of savings schemes for maximising growth of one’s disposable fund and also for achieving different life goals.

The life insurance companies also need to act responsibly while promoting their sales during the last quarter of the financial year. They need to train their sales force not to encash on the anxiety on the part of the people to save on taxes. Covid-19 has taught enough lessons to people on the importance of life and health insurance. The industry is poised to achieve accelerated growth if sensitivity to insurance impacting the market today is not allowed to fritter away. But this would require unconventional thinking at the top while setting strategies for marketing life insurance to almost all the segments of the society. Encashing on people’s anxiety or even on their ignorance for selling policies in the last quarter, popularly known as the JFM, is not only an irresponsible act but also an immoral business strategy.

The writer is former MD & CEO, Star Union Dai-ichi Life

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