Don’t buy life insurance just to save tax, make sure it’s right for you

As April comes your planning starts for the new financial year. With your increment letter in hand, you start strategizing the investment steps needed to minimize the tax load. After all, your toil and hard work need to show up in your wealth. But, spare some time to plan well. Term insurance can help you to save tax but is that all for which you pay the premiums? Does it really cover your needs well?

What is term insurance?

Term insurance covers an individual for a limited number of years. In case of death of the life insured, a pre-determined sum assured is paid out to the nominee. In case the life assured survives the term, there is no refund.

For example, Mr. A is a 38-year-old man, nonsmoker and healthy. He takes term insurance for 47 years to get a life cover of Rs.1 crore by paying a monthly premium of Rs.2056.00. He has nominated his wife in his insurance policy. This means in case of his death at any point in time within 47 years, his wife will receive Rs.1 crore to continue with her expenses in case of his demise. However, in case Mr. A survives for 47 years, he will not receive any money.

Why term insurance?

Considering Mr. A in the above example, was the sole earning member of his family. In case of his death, his family income would stop. The fate of the family would become uncertain in case of his death. As such, Mr. A takes a life cover of Rs.1 crore to minimize the risk of sudden loss of income for his family.

How to choose a term insurance?

Here are a few tips that can help you to choose the insurance you need:

Timing

If you have anyone else depending on you for their financial sustenance, you must take a life cover. For example, an employed young female with dependent parents needs life insurance, a married couple with or, without children need life insurance.

To make sure you are picking the right kind, you can buy insurance from companies who offer the flexibility to increase the life cover at important junctures in life.

For example, life cover can be increased by 50% post marriage or, after becoming a parent or, after taking a home loan etc. This flexibility allows you to start with a smaller cover with lower premiums initially, and gradually increase it as your responsibilities and income increase.

The sum assured

How to determine the sum assured or, life cover is a big question while buying term insurance. The internet is flooded with tools that help you to calculate on the basis of your income. There are hardly any tools that consider your expenses. This makes a big difference.

Ideally, the life cover needs to be ten times your current income.

Single plan or, multiple

You can take separate plans to serve separate objectives. For example, Mr. A takes a home loan. In addition to his original life insurance policy, he can take another to cover his home loan. So, in 20 years time when his home loan gets paid, the liability to pay premiums for the second policy also stops. You need to plan as per your individual need and comfort in paying the premiums.

With or, without a rider

Riders help in difficult situations. However, they are optional, and may or may not be added to the base policy.

For example: If Mr.A takes a critical illness rider with his base plan. His premium would increase slightly, but he would get the sum assured on being diagnosed with any of the critical illnesses covered by the rider. This sum assured is in addition to the sum assured which the nominee would receive in case of his death.

You can buy insurance online or, offline as per your convenience. Online insurance is usually cheaper, but you need to correspond with the insurer for all queries.

Other options to save tax

If tax saving is what you are aiming for, do check out other investment options like Equity Linked Savings Scheme (ELSS) or, Public Provident Fund (PPF) for tax planning.

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