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Term Insurance is more than just a tax benefit, you are all the more safer buying it

Dec 04, 2019 | 6 months ago | Read Time: 3 minutes | By iKnowledge Team

Financial decisions are just about the trickiest decisions to make in a lifetime, a momentary mistake could haunt you for the rest of your financial life. One such mistake made by most is buying tax-saving insurance products at the last minute and completely ignoring the very essence of it. People end up buying a term insurance policy simply for the tax benefit that premium payments can fetch them, without considering what this insurance means to them in their life.

Tax benefits

As per section 80C of the Income- tax Act, 1961 premiums paid towards a term insurance plan qualify for a tax benefit. The deducted amount goes up to Rs 1.5 lakh for a fiscal year to include premiums paid for you, your better half and your kids.

While the tax benefit on a term plan does sound attractive, the main reason for a term insurance policy to have it in the first place is to secure your family’s future in the event of your demise. Insufficient coverage here won’t be of any consequence to you after you pass away, but this mistake will surely leave your family financially vulnerable.

Low cost premiums

Yes, low cost premiums make a lot of sense when you know that a term insurance plan does not come with any maturity or surrender value. And, as the premium of a term insurance plan is already low compared to endowments or unit-linked insurance plans (ULIPs), you’d likely be influenced by its pricing and base the decision to buy solely on the premium of the plan. However, while looking around for a term insurance plan, premium should be the last thing to look at.

If you consider the premiums based on the future claim your family will make to stabilize themselves post your death, you’ll likely want them to be insured for as much as they can possibly need. Other costly mistakes to avoid include the following.

  1. How much you need

This is one of the most important factors in the buying process. As a thumb rule, you could either buy a life cover equal to at least 10 times your annual income or the total of all your assets and 300 times you monthly expense. For a more realistic figure, there are many tools available online. One such tool is AEGON Life’s Term Premium Calculator. Most such tools base the calculations on your ‘income’ rather than on the ‘expenses’, and due to these figures will vary.

  • Tenure

The tenure of your term plan depends not only on your insurer but also on your priorities. Few insurers offer terms up to 35 or even 40 years. There’s no point paying higher premium for a longer than necessary tenure. Therefore, insuring for a longer tenure may not be the right approach if your liabilities are over early or by the time you retire.

  • Nomination

Do not leave filling up the nomination for the policy for later. Ideally, for a married couple, nominees are the spouses. For the unmarried with ageing, dependent parents, the nominees are clear. Further, your nominees must be made aware of the insurance cover you are about to buy and should know where the policy documents are kept.

  • Which insurer

The Insurance Regulatory Authority of India (IRDAI) is responsible for the insurance companies registered in India. The authority not only keeps a close watch on their financials but also on their solvency margin. This means that at the time of need your insurer is required to settle the claim if the claim is legitimate in the eyes of the law.

Do not buy a term plan from insurers you are not confident about, irrespective of the sales pitch and the low premium. Rather, go for reputed insurers like AEGON Life as they are list-topping veterans of the industry.

What you should do

With the health-first approach in mind it is appropriate to have a critical illness cover and an accidental death cover/rider to secure you and your family. Buying life insurance merely to save tax could be financially damaging.

Read about Sabse Pehle Life Insurance Campaign, an initiative by IRDA to create awareness on the importance of life insurance.


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