The size of insurance cover, surrender value, repayment process and returns on investment-linked policies should be considered when buying a life insurance policy.
Most taxpayers would have one or more insurance products, but a vast majority of them would have bought insurance for the wrong reason, that is to save tax. In fact, the last quarter of every year—January to March—is the busiest season for all insurance companies as they get maximum business during this time. This is when taxpayers make the mistake of buying insurance just to save tax. Eventually, they end up with expensive policies which actually they do not need. Thus, every policy buyer must check the following aspects before buying insurance products.
The term ‘life insurance’ is a broad term used for different kinds of policies. So, before buying you should know that the life cover portion in all insurance policies is not equal. If you are buying life insurance for protection, getting a big cover at the given premium should be the top priority and not the tax savings element. The thumb rule is to go for a life cover equal to 10 times of annual income or the total of your assets and 300 times of your monthly expenses. If any unfortunate incident happens, the life insurance policy will act as a financial life jacket for the family.
Check the return
It is essential to check the return in case of an insurance-plus-investment policy. There are many unit-linked insurance plans which combine insurance with investment. In such policies the objective is to provide market-linked returns and insurance cover is not a priority. There are several such products which are extremely low cost in terms of premium and give you a wide variety of investment portfolios to choose from. Policy buyers should note that the returns are linked to the underlying asset. Further, in the majority of the endowment and money back policies, the internal rate of return does not usually go beyond 5-6% annually even after adding bonuses, guaranteed additions, etc. Policy buyers should note that insurance policies which guarantee a fixed sum on maturity generally charge a higher premium for providing such returns.
Lumpsum payment or in tranches
Before buying the insurance policy, find out the exact time when the policy holder or the nominee will get the money. In case risk happens (death of the insured), then the nominee/legal heir will get the sum assured. If there is no risk and the policyholder survives, then the policyholder gets the maturity benefits.
It is also important to know how the sum assured is disbursed. Check with the insurer if, at the time of maturity, you will get the whole sum assured as a lumpsum payment or, the money will come in tranches to meet major expenses such as child’s marriage, higher education, etc.
Surrender value is the amount which the policyholder will get if he voluntarily surrenders the policy before its maturity. Surrendering could be due to reasons such as loss of job, financial stress, distressing problems, etc. While some types of insurance policies provide some surrender value, not all have the facility. Surrender value differs with every policy and with every life insurer. Be sure to ask about the surrender value and base your decision of buying the policy accordingly.
To conclude, any momentary financial mistakes can affect not just your financial well-being but the rest of your life. Thus, do not look at tax savings alone when buying an insurance policy; rather consider all the above points to arrive at your decision.
LOOK BEYOND TAX
— Go for a life cover which is at least 10 times of annual income or the total of your assets and 300 times of your monthly expenses.
— In Ulips, the aim is to provide market-linked returns and insurance cover isn’t a priority
— While some insurance policies provide surrender value, not all have the facility
— Check when and in what proportion the policyholder or the nominee will get the maturity benefits or the sum assured respectively
The writer is a professor of finance & accounting, IIM Tiruchirappalli.