Smart or not: 4 insurance policies to save tax?
IN order to get tax benefits, many a times investors
land up with wrong products. A little bit of research and planning will help
you in not just making tax saving investments but also judicious investment
choices. Here is one such reader who bought four insurance policies to save
tax and is now wondering if he made the right choices.
I'm 37 and have four insurance policies - two endowment, one
moneyback and one pension policy. For the two endowment policies I pay a
total premium of Rs 24,792, for moneyback Rs 3,264 and Rs 10,000 for pension
policy. All the policies are more than four years old. Here are some
questions:
1. I do not have a term policy, should I buy one?
2. If I do so, I will have to terminate the moneyback plan.
Should I terminate my moneyback?
3. Also, is it a good idea to switch from pension plan to a unit
linked pension plan?
1. Term is a must
Yes, buy a term. Don't mix insurance with investment. If you want pure
insurance, go for term plans. A term plan offers high cover for low premium.
In the event of your death, your dependents will get the sum assured. But if
you survive the policy tenure, you will get no maturity benefits. You can
opt for a single, yearly or half yearly premium paying option. In fact if
you have surplus cash, you can choose the single payment option. This will
ease the hassle of keeping track of payments but if you are a careful
spender who budgets your money strictly then you can make premium payments
on a periodic basis.
However, term plans are most profitable if you start as early as
possible. This is because you can get high cover for low premium.
Add on benefits on term plans
A few benefits offered by some insurance companies are given below.
~ Increase/decrease cover: You have the option to increase
the cover of your term plan. This means depending on your lifestyle changes
you can increase the sum assured by five per cent every year. You can even
decrease the cover by five per cent every year if you find yourself tied to
other commitments like loans, monthly installments.
~ Convertible option: This option enables you to covert
your term plan to endowment plan or a whole life plan.
~ Insure your loan: If you have taken a loan during the
term of a policy, you can insure it. In the event of your death, the
insurance company will take care of the pending loan amount.
~ Premium back option. On maturity of the plan, you can
choose the ‘premium back’ feature. However, these plans are more expensive
compared to pure term plans. Besides, with just the premium return option,
it may not be worth to endure higher premium
Four tips to
choose an insurance product that suits you
In a developing
society like India, people have a general idea about Insurance but they seem
quite unaware of the importance of having an insurance policy.
Insurance is important to everybody. Even the Indian Government has planned
a postal rural insurance scheme in addition to the many other schemes they
are running.
Here are some benefits of Insurance.
1. It brings peace of mind as you and your family is protected.
2. With investment linked policies, insurance becomes a tool to manage
future expenses.
3. Medical insurance is a sure cure for any unforeseen medical expenses
on account of an illness or an accident.
4. When Insurance is selected as a retirement investment option, it
becomes tool for wealth accumulation for retirement.
While choosing an insurance policy, ask yourself these simple
questions
1. What is the purpose of insurance?
- The possible answers are: Pure risk cover
or Investment tool. Based on your of answer you can determine the type of
insurance you need.
2. How much insurance I need?
- The answer would vary from person to
person. You can use various on-line calculators to arrive at your insurance
amount.
3. Which insurer should I go for?
- Check the references and not advice of
salesmen.
While taking an insurance policy you should consider existing policies and
the type of policy if you have any. This should be reasonably adjusted to
your insurance need. Customer should also keep in mind his monthly budget,
monthly expenses and approximate insurance premium amount. One should not
over commit on insurance which affects his monthly budget.
When insurance is taken as an investment tool, it should be
matched with future expenses such as
buying home, child birth, child
education, marriage etc. The term and type of the policy are affected
by insurance need. The term should be flexible enough allowing you to
withdraw the money at required time. In case of fund requirement about long
term, customer may opt for equity linked investment as historically, equity
has always given higher return than fixed income.
Customers should also compare premium and the coverage of multiple options.
There are new insurance plans available in the market which allows customers
to buy insurance policies on-line. The market is dynamic and companies are
innovating new products so customer should keep their eyes and ears open to
benefit from such offers.
After considering all such parameters, customer should take proper decision
in not only selecting a good insurance company but also selecting better
insurance plans suiting individual needs.
Insurance: Should you buy from your banker or your agent?
BELIEVE it or not, cream made me realise I might be
being taken for a ride with my investments.
Here's what happened. I was at my local grocer's, buying cream to make dish. The grocer asked me not to buy
packaged cream and that fresh cream was now available a short walk away. I
was touched. This man had given up a sale at his shop in my best interest!
Back home, while relating the incident to my mother, I was given a small
dose of reality. She said the new shop was, in fact, owned by the grocer's
brother.
lesson for the day: There is a vested interest in everything you are
asked to buy. So when my relationship manager told me interest rates on
deposits might fall and I should quickly shift to mutual funds, the new
cynical me was suspicious.
Why was the relationship manager recommending another product in favour of
his own?
Sure enough, I learnt that banks have now morphed into Jacks of all trades.
When they sell products other than their own, they earn a fat commission.
They make more money through commissions than on deposits.
So the next time your relationship manager praises a new insurance policy,
you would best take it with a pinch of salt. But then, since your agent also
earns commission on your purchase and there is no cost change for you, why
not just buy from your bank?
We list some pros and cons if you want to buy insurance from your bank.
The downside
Service: Your banker will not pamper you with doorstep
services like your agent. But if you are a priority customer for your bank,
you can expect the works.
Trust: If you have a child, an agent is more likely than
your banker to know about and advise you how to invest for the little one.
Your agent and you are likely to share a closer relationship of trust.
Variety: Sometimes, your bank may not offer you all the
policies that an insurance company has in its portfolio. Insurance expert
Rajesh Relan says, "Some banks select a few products from the product
basket, depending on the needs and suitability of their customer segments."
Decide whether the policy the bank offers fits your requirements. If it
doesn’t, you are better off with your agent.
The upside
Simplicity: A transactional relationship already exists
between you and the bank, so paperwork and payment processing will be
simple.
One-stop shop: Your bank can offer you the entire range of
financial products instead of buying from multiple places. This gives you a
single window view to your investments.
Specialised products: Some life insurance companies design
a special product to be sold through a bank which does not involve too many
formalities or medical tests. You can opt for this policy only through a
bank, and not through other channels. (You will be asked for many medical
declarations.)
Banks are slowly replacing agents worldwide because they are a one-stop
destination in today's time-crunched world.
My lesson for the day: Even if recommendations are made with vested
interests, they might not be totally wrong for you.
Mediclaim saves life first, tax later
THE idea of making money can make a man move mountains.
If you tell a man to stop smoking for the sake of his lungs, he'll cheekily
blow a smoke ring in your face but offer him a rupee for every cigarette he
gives up, you'll cure him for life! So, it's no wonder that when
well-wishers ask you to take a medical insurance for health reasons you'll
smile at them vacantly. But if tell you that it's going to safeguard his/her
savings and also take home some extra money through tax exemptions, you'll
jump at it.
Whatever your reason - health or wealth, you have no choice but to take
it given the greater vulnerability to stress related illnesses and
escalating medical costs. And if the fringe benefit tax is going to hit the
medical cover from your employer, you definitely need to look at an
individual cover.
Why do I need it?
Health care is a serious concern for most people today. Escalating costs
accompanied by the scare of new viruses being detected every other day makes
us want to run for cover. This is where mediclaim steps in. It is an
insurance that takes care of your medical expenses or treatment expenses.
How much mediclaim do I need?
This depends on several factors such as age, health condition, lifestyle,
etc. Ideally, you would want to cover costs of the big surgeries and
operations. An angioplasty, for instance, can cost anywhere between Rs
50,000 to Rs 1.5 lakh (150,000) depending on the hospital you choose. A
heart valve replacement can cost up to Rs 2 lakh (200,000). So, in order to
decide the amount of cover, you would have to take a good look at your
medical history and check how vulnerable you are to certain patterns of
illnesses.
How much does it cost?
For a person up to the age of 35, the premium per annum for a cover of Rs 3
lakh (300,000) would be between Rs 3,200 to Rs 3,800. Now, that may not be
such a substantial sum considering that you would get cover for treatment
when you were to need it
What are the benefits of mediclaim?
Medical insurance covers almost everything right from the time you step
into the hospital till the time you are discharged. The normal costs that
are covered are room and boarding expenses, nursing expenses, fees for the
surgeon, anesthetist, medical practitioner and consultant, fees for
specialists, charges for anesthesia, blood, oxygen and the operation
theatre, charges for surgical appliances, medicines and diagnostic materials
and charges for X-rays, dialysis, chemotherapy and so on. Even medicines are
covered.
What are the limitations of mediclaim?
The most important exclusions till recently have been pre-existing health
conditions. If a person has had a heart attack previously or has been
operated upon for some other condition, then cover will not be available for
those conditions. There are several other exclusions such as dental
surgeries, cosmetic surgeries for aesthetic purpose, HIV related conditions,
etc. Further, when you take the policy for the first time, any illness that
commences during the first 30 days of inception of the policy is excluded.
What is cashless facility?
Cashless policies eliminate the entire trouble of documentation. In a
cashless facility, the insurer will settle your bills directly with the
hospital and you will be discharged without paying single paise. However,
remember that the insurer will settle your bills only up till the sum
assured of your policy. Any expense over and above that limit will have to
be borne by you. This is unlike traditional policies wherein you would have
to pay the hospital first and then claim reimbursement.
If you've read the above carefully, you'd have realised that health
insurance is not for your health at all. It's to safeguard your savings.
It's actually there to ensure that your hard earned cash does not flow into
hospitals. Maybe if they called it 'wealth insurance' instead of 'health
insurance' it would find more takers
READ:-
Medical Insurance
a MUST
Careful mistakes you make
The mass exodus
As more people realise their mistake, they want to exit from such
insurance policies. Unfortunately, early exit from insurance policies
results in a huge loss. So does it make sense to surrender one's policies
despite this loss? There could be three broad scenarios possible, depending
on how many premiums you have already paid, out of the total premiums
payable.
- Early stage: A policy can be surrendered only if it
has been in force for three years and premiums have been paid for these
years. If you have paid just one or two annual premiums, then you will get
back nothing when you exit from the policy. Even thereafter, you will get
back say only 25-35% of the premiums paid + bonus accrued, if any. This is
for a typical 20-year term policy. The % varies depending on the term and
premiums paid.
Now, if you invest this amount + the future premiums in other investment
options, you will need to generate around 9-11% p.a. returns to recover the
lost premiums and break-even with the insurance policy if you had continued
with it.
If you're confident take a hit and move on!
- Middle stage: If you are somewhere around the middle
of the policy, you can either surrender the policy by taking around 50% of
the premiums paid + bonus; and invest this and the future premiums
somewhere else. But remember that the absolute loss is higher here as more
premiums have been paid and time for recovery is less. So, you need to
generate maybe around 14-17% pa returns to break-even.
Optionally, you can make the policy fully-paid. Your sum assured will be
suitably lowered. And you will back the premiums paid + bonus earned -- but
only at the end of the original term. Also no fresh bonus will accrue during
this period. The net return for this amount works out about 4%. Invest the
future premiums in the other options. Here you may have to generate somewhat
lower returns of around 12-15% p.a. to break-even on overall basis.
- Late stage: If your policy is just about to mature
in three to five years, then it may well be prudent to let it run its
course. You can't do much by saving 3-5 years' of premium payments.
These are only broad numbers purely for indicative purposes. It's important
that you do a detailed working for each of your policies, before taking any
further action.
But, with a GDP growth expectation of 7-10% over the next decade or so, the
returns outlined are pretty reasonable especially if you choose equity. If
you have the capacity for a little risk, go ahead. After all, there's no
gain without pain right?
Last word: Whether you invest in a mutual fund, unit linked
insurance plan or direct equities; you get some rights but you also have
some obligations. The Securities Exchange Board of India (SEBI), Insurance
Regulatory and Development Authority (IRDA), and other regulatory bodies can
only do enough to reach information to your doorstep. The onus is on you to
understand facts and be one up on your agent!
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