When you decide to buy life insurance, it should be a conscious choice based on your requirements and what your individual plan can offer you. Moreover, it is important to understand, at the outset, that life insurance may not be purchased as a quick solution to save yourself tax. This may defeat the very purpose for which you are buying life insurance, which is essentially to give your family financial security.
According to several taxpayers, an easy way to save tax is to purchase a life insurance policy.1The proposition becomes even more appealing as you can add riders to your plan, paying premiums, but saving more tax. Furthermore, the purchase of life insurance receives an impetus when taxpayers are scrambling to pay their taxes and trying to meet deadlines. If life insurance is bought for this purpose alone, you may overlook certain aspects. These errors may cost you in the future. However, knowing what they are and ways to avoid them may help you.
Believing your Advisors at Face Value
These days, financial advisors often advise about policies like health insurance and life insurance, much like bank relationship managers do. Instead of blindly trusting an advisor, it is important to research plans on your own.
Thinking All Life Insurance Policies are the same
Individuals assume that various kinds of life insurance policies provide similar benefits relating to tax. So, people could end up purchasing the incorrect insurance policy that doesn’t meet their requirements. It is important for you to know the differences between types of life insurance policies. There are several types of life insurance plans available, three among them are - Term life insurance, ULIPs (unit-linked insurance plan), and endowment plans.
A term plan gives a payout (the sum assured) to nominees in case of the demise of the person insured during policy tenure, subject to payment of due premium. In case the policyholder survives the policy tenure, there is no benefit given except in case where plan with return of premium option is chosen. A term plan is cost-effective as premiums are low. ULIPs and endowment plans represent hybrid insurance products, offering a blend of life insurance and investment. With these plans, the insured gets a maturity benefit in the event of survival of the policy tenure as per plan’s terms & conditions. In case of the policyholder’s untimely demise during policy term, nominees get a death benefit. Regarding tax saving, all life insurance plans offer a deduction of premiums under Section 80C of the Income Tax Act, 1961 and maturity/death benefits are tax exempt under Section 10(10D) of the Income Tax Act, 1961 subject to satisfaction of conditions mentioned therein.
Being Over or Under Insured
Common errors that individuals make include purchasing a number of life insurance plans without considering their own requirements. For instance, a term plan may be adequate for one individual, while an endowment plan may suffice for another. In case you end up buying an excess of life cover, you may waste money on something not needed if you survive. Paying high premiums would be a waste of money. Nonetheless, too low coverage may not be enough financial protection for your family, in your absence.
No Clarity on the Tenure of the Insurance Cover
A correct estimate of your life insurance tenure is very crucial. If you buy a policy for too long a term, you will pay more in premiums. On the other hand, if your term is too short, you may not have cover for the required time period. A preferable plan may be to have coverage till your retirement. By then, major financial obligations would have been fulfilled. Moreover, you would have collected a retirement corpus.
Not Knowing if You Need to Upgrade your Insurance Cover
The kind of lifestyle you lead is dependent on your income. A life insurance plan is bought to ensure that the same lifestyle is maintained until the untimely demise of the family’s income earner. Incomes tend to grow over years, and if lifestyle has improved with it, insurance should be able to cover this change. Insurance policies can be upgraded with better and broader coverage as new family members are added, or important events call for it, subject to policy terms & conditions. You can have add-on coverage with riders too.
Missing Out on Additional Protection
Life insurance plans come with many benefits like cover for additional protection. Most policyholders are not aware of this and miss out. For instance, if you have a basic life insurance policy and have an accident, causing a disability, your insurance will not cover this. With a term insurance you can buy additional coverage in the form of riders, by paying nominal extra premium, for disabilities and critical illness, among others, but only if you are aware beforehand.
Not Disclosing Material Information
While buying insurance, you must provide all your past history and present lifestyle details honestly. If you fail to do this, then the insurance company can refuse to honour your claim in future. Your premiums may be higher if you have a smoking habit, for instance, but you must include truthful facts in your application.
Buying life insurance is vital if you want cover for yourself and your family financially. Life is full of untoward sudden events, and caught off-guard, you may suffer the consequences of inadequate financial protection. Riders can enhance basic plans, and you may consider purchasing different insurance products, like life insurance and health insurance, according to your needs.