HomePersonal Finance NewsThink beyond tax savings when buying life insurance

Think beyond tax savings when buying life insurance

Life insurance is a cover that protects your loved ones or you with a financial umbrella. Mistaking it as a mere tax-saver can see you making ill-informed decisions.

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By Adhil Shetty  February 14, 2019, 8:28:44 AM IST (Published)

Think beyond tax savings when buying life insurance
The average investor will always look to include life insurance in their portfolio keeping in mind the attractive tax deductions. This is because, under Section 80C of the Income Tax Act, an investment in insurance can fetch you an exemption of up to Rs. 1.50 lakh. Since only a select number of investments qualify for this section’s deduction in totality, insurance is viewed as one of the top contenders.


Keeping in mind this tax-saving aspect, you may try to add new insurance plans to your portfolio every financial year. However, piling up insurance plans just for tax-saving purposes is not judicious. Often, low premiums with tax-saving benefits may simply entice you to buy a cover that offers a low maturity sum with negligible gains. Instead, it is better that you begin your search for a new policy by evaluating its most important function: of providing life cover for your family in your death.

What Do You Need To Check Before Buying Life Insurance?

The first thing you need to do is calculate the life cover needs for your family basis your income, lifestyle, financial goals, and debt repayment requirements. Keep inflation in mind when deciding on a substantial cover. Life insurance is a long-term instrument and should be planned for a tenure that is ideally as long as your family’s dependence on you. For example, let’s say your child is five years old and is expected to be financially independent in about 20 years from now. Therefore, as your child is financially dependent on you for the next 20 years, your coverage should last at least 20-30 years to cover the financial needs of your dependents. What is the ideal coverage? There are many rules of thumb to calculate the right coverage size. But in the interest of simplicity, try to keep it as at least 10-20 times your current annual income. So if your current annual income is Rs. 5 lakh, aim for coverage of Rs. 50 lakh to Rs. 1 crore.

Tax Benefits Are Secondary

Allow your family’s needs and the cost of fulfilling them guide your policy buying decision. Further, do not buy any and every policy just to claim tax benefits. Compare top insurance providers and their plans in detail to know everything about the policy you are buying. Compare the premium and claim settlement ratio to make an informed decision. Going one step further, here is how you must approach your buying decision in these two scenarios.

If You Are Buying Your First Life Cover

Ideally, insurance and investments shouldn’t be mixed. The primary benefit of an insurance plan is to protect your family financially in your death. Keeping this in mind, prioritise a term cover when buying an insurance policy for the first time. A term insurance plan is a no-frills-attached policy that is just suitable for you if you are beginning your career or have a moderate income in hand. This is because the premium for a term plan is small, but it still offers you hefty coverage. Moreover, just as the name suggests, you can exit the term plan any time you want by putting a stop to paying premiums on your policy. Since you can hike the coverage of your term insurance plan with time, once your income increases, you can further customise it to your needs and your pocket.

If You Are Buying Additional Coverage

In case you already have several life insurance policies to your credit, evaluate the purpose of your new purchase. You may need a policy because you feel inflation has decreased the cover on your existing policies or you are in a position to add an additional cover when you notice a shortfall. You may also have an eye on a policy for wealth creation or you may just want to buy term insurance for tax-saving purposes. Irrespective of the purpose, ensure that you are paying the right amount of premium to fetch yourself sufficient benefits and returns on your insurance policy.

Now that you know how insurance is capable of giving you a lifetime of support, select the right ones to make the most of your finances.



The writer is CEO of BankBazaar.com
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