Every year young people find employment and at least 15-20% of those who join the organised sector earn taxable income.
Life insurance companies earn around 50% of their annual premium income in the fourth quarter of the financial year. This is not just because insurers become more active during the last quarter but the demand for life insurance and health insurance also picks up during January to March every year. The reason is that individuals look for suitable investment options for saving income tax under Section 80C of the Income Tax Act, which provides rebate on amount of premium paid to up to Rs 1.5 lakh among other options.
Every year young people find employment and at least 15-20% of those who join the organised sector earn taxable income. Again, a large chunk of population enter the tax bracket by virtue of increase in salary/income and other taxable compensations. Such segments are most vulnerable to miss-selling or uninformed buying of life insurance products.
Rush in buying insurance
Many a youngster would be anxiously looking for a product for investing around `1 lakh a year to save taxes. In such a scenario what happens is the irrational selection of life insurance products, sometimes just the opposite of what somebody really needs as a tool of life insurance protection.
There are several instances when they are sold Ulip products promoted as an “excellent investment instrument”, without sharing knowledge of the expense ratio, mortality cost and the appropriateness of time for entering the market. Many a time a large chunk of money is spent for buying very little insurance cover whereas the young buyer needed to have a large sum assured term insurance plan for protecting the financial needs of his dependents, a young wife and children or the old parents without income of their own.
Life insurance is a long-term contract. It may appear easy to enter into such contract with an insurance company but traditionally exiting a life insurance contract is very difficult. If someone unilaterally terminates the contract then most of the time he forfeits a large share of the amount deposited as premium or sometimes the entire amount. They file complaints with the Ombudsman or the consumer forum only to learn that as per the terms and conditions of the policy only a small sum or no sum is payable. In their haste and anxiety to save tax under Section 80C which provides for several alternative avenues also, many people take wrong decision or get misled by unscrupulous intermediaries. In the process they lose more than what they gain as 20 to 30% of the premium paid as income tax relief.
Insurance for financial planning
A person who buys a wrong policy in haste cannot just blame an insurer and keep away from life insurance for the rest of his life. He will continue to need life insurance and will once again buy a policy. But the second time he is expected to be wiser. The terms and conditions of each product must be fully understood before signing the proposal form. If need be, more than one plan can be bought and the sum assured, premium and tenure of policy could be so adjusted as to maximise tax savings. For adequate evaluation of life insurance requirement and systematic planning in respect of products the time available for anyone is the entire year. Hence one should avoid getting swept away by the deluge in the last quarter.
The writer is former MD & CEO,
Star Union Dai-ichi Life Insurance