This insurance policy will give the best returns and, of course, tax benefit,” is what most calls selling insurance right now will promise. If it was any other time of the year, you would hang up. But with the deadline to make tax-saving investments inching closer, you would pause a bit. Chances are you will succumb. Premiums that you pay towards an insurance policy qualify for a deduction up to Rs1 lakh under section 80C. But that’s not the reason why you should buy insurance. Here are three questions you should ask before you succumb to such sales pitch.
Agent spiel: You’ll get insurance, market-linked returns as well as tax benefit in this Ulip.
You need to ask: Do I need insurance at all?
The agent will never tell you that you don’t need insurance. But, belive it or not, not everyone needs insurance. You need insurance to provide for your dependants in case of your untimely death. If you have no dependants, you don’t really need insurance. Also, if you have enough assets, you can give insurance a miss.
Says Satish Mehta, managing director and CEO, Quantum Information Services Pvt. Ltd, a financial advisory firm: “A person needs insurance only if he has dependants or liabilities, such as a home loan. Somebody having assets that can take care of the expenses, financial goals and liabilities need not buy insurance.”
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If you are young, have just started working and have working parents, you don’t need insurance just yet. On the other hand, if your parents are retired and do not have sufficient pension income, a non-working wife or children, you must buy insurance.
Agent spiel: You will get a cover of Rs2 lakh by paying a premium of Rs20,000.
You need to ask: How much insurance do I need?
You can decide your sum assured on the basis of four parameters: income, expenses, financial goals and liabilities. Says Pranav Mishra, senior vice-president and head (product and sales), ICICI Prudential Life Insurance Co. Ltd: “As a thumb rule, take a cover equal to 12-15 times your annual expenses or 8-10 times your annual income. Those with debts should factor in that too.”
Illustration by Jayachandran/Mint
Your sum assured or life cover would depend on the premiums you pay. Remember that the sum assured is the amount your dependants would get in case of your death. Therefore, the premiums you pay should not depend on how much tax you need to save but on the amount your dependants would need.
Your savings can bring down your insurance liability. Says Mishra: “A young individual may need a higher cover as compared with somebody in their late 30s or early 40s, who may have some savings to provide a cushion to his dependants.”
By that logic, insurance becomes redundant when you retire. Typically, by then, your earning capacity would become zero and you would have accumulated enough assets to provide for your dependants.
You should review your insurance needs every year to factor in your income and expenses. The idea is not to over-insure, but to appropriately insure yourself at all times.
Increase in income: Most of us get an annual salary hike. This would mean an upgrade in lifestyle. Evaluate whether your dependants will be able to sustain the same lifestyle on the income from your current investments and insurance policies till the time they are able to manage on their own.
Financial goal: It is essential to choose an investment vehicle that helps you reach a particular goal most efficiently. But you need to ensure that this vehicle is serviced appropriately even after your death.
Taking on debt: After your death, your lenders can lay claim on your assets. So, if you have a house on loan or have credit card debts, ensure these are serviced through your policy and your assets are left untouched.
Agent spiel: This Ulip has outperformed the market.
You need to ask: But is it cheap?
If you are paying Rs20,000 as premium for a sum assured of Rs2 lakh, you have bought one of the most expensive insurance policies. If you have Rs20,000 to spare, chances are a Rs2 lakh cover is just a fraction of the total insurance you need. So, look for the cheapest cover.
Money Matters recommends that you buy a term plan, the cheapest and the simplest insurance product. It is a pure insurance cover, which has no investment component. Under this, you pay only for the sum assured. There are no returns at the end of the tenure.
Shop for the cheapest term plan through insurance portals such as Policybazaar.com. While insurers such as ICICI Prudential have their term plans online also, Aegon Religare Life Insurance Co. Ltd has launched iTerm, which is specifically designed for online sale only. It is cheaper than most term plans.
Between the simplicity of a term plan and the complexity of a Ulip, lies a third variety—traditional insurance cum investment plans. They range from endowment plans, which return the sum assured and the bonus, if any, to whole-life plans that cover you for life. These are very expensive products, but that’s not the only reason why we don’t recommend them. In these plans, the costs are not mentioned upfront and there is no way to track them. Since these products invest primarily in debt instruments, the returns are in the range of 3-6%. This means, that for a 30-year-old opting for Rs10 lakh sum assured over 30 years, a term plan would cost Rs2,912 against Rs31,368 in a traditional endowment plan.
Ulips are relatively more transparent and offer better returns, but the insurance component in these is minimal. Says Mishra: “On an average, a Ulip offers 70 times your annual premium as the sum assured. But, most people buy Ulips offering 7-10 times their annual premium as the sum assured.”
There has been a marked improvement in Ulips recently with the insurance regulator, the Insurance Regulatory and Development Authority, capping their costs. However, Money Matters will wait before it recommends Ulips due to transparency and portability issues. But if you already have a policy, keep funding it.
Graphics by Ahmed Raza Khan/Mint