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All you need to know about life insurance
Personalfn.com | January 22, 2009 13:20 IST
If by any chance investors have forgotten that the tax-planning season is at its peak, there's no need to worry! The repeated advertisements and sales calls enticing them to buy tax-saving products will serve as reminders, ensuring that they don't forget and in turn end up paying more taxes than required. But the flipside is that investors also run the risk of getting invested in a product that is not suitable for them.
Without doubt, insurance products would rank among the most aggressively sold ones during the tax-planning season. And therein lies the root of the problem. Insurance products continue to be largely sold and bought for the tax benefits they offer. The 'insurance' aspect is often overlooked. For the uninformed, contributions towards life insurance premium are eligible for deduction from gross total income under Section 80C of the Income Tax Act.
The need for insurance
The year-end approach
The 'ignore insurance' approach
Beware of mis-selling
Also, concealing relevant facts about the product, leading to misinformed decisions isn't entirely uncommon. Unit linked insurance plans would easily qualify as both the most popular and mis-sold products. Hence, being associated with a competent and ethical advisor is vital; also, investors should acquaint themselves with adequate information before zeroing on any product.
How to buy insurance
How much insurance an individual requires can be determined using the concept of Human Life Value. It refers to the monetary value of all the 'yet-to-be fulfilled' needs of the dependents plus all the outstanding liabilities.
The next step will be to zero in on the right insurance plan that will help meet the objective. Broadly speaking, three popular variants of life insurance policies are available i.e. term plans, endowment plans and ULIPs.
Types of life insurance policies
Endowment plans differ from term plans in one critical aspect i.e. the maturity benefit. Unlike term plans, these plans provide maturity benefits under both scenarios - death or survival. Since endowment plans provide maturity benefits in both the scenarios, their premium tends to be higher than the premium on term plans.
ULIPs are innovative products combining both insurance and investments. They are market-linked i.e. they invest in equity/debt markets. They also offer maturity benefits under both scenarios - death or survival. Typically, they have the highest premium structure.
Finally, buying insurance is a continuous activity. Every individual's needs change over a period of time. This in turn necessitates a review of the insurance portfolio. Over a period of time, most individuals would need to purchase additional insurance to ensure that they are adequately covered.
The insurance advisor can play an important role in reviewing the portfolio and recommending which policies should find place therein. Hence it makes sense to be associated with an advisor for whom insurance is the core activity.
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