In most cases, as we start our first jobs, the advice we’re given is to cultivate an attitude of savings and investments to be able to meet our diverse financial goals with little hassle. Tax implications are a crucial concern for many when determining the ideal means of investment. Life insurance too is believed to draw favorability as a probable investment tool, by virtue of offering a significant tax saving benefit, which often becomes an obvious catalyst to purchase an insurance product in the first place. In fact, 40% of life insurance policies are purchased in the January – February – March quarter, further indicating that tax exemption continues to be one of the key drivers of life insurance purchase.
While a logical approach when making any purchase, let alone life insurance policy is for one to adopt a discerning stance and seek information regarding all the long-term returns, the income tax benefit on an insurance policy serves to do just the opposite. As important it is to save taxes, it should not be the primary motivation driving one to buy a life insurance policy, for tax saving is just an incentive, never the principle reason. It is merely an additional benefit to the policyholder, and accounts for little when weighed against some of the core benefits that make life insurance an inescapable avenue to remain vested in.
· Financial protection of loved ones
Life insurance at its core is an instrument designed to help your family reduce their financial burden in the absence of a prime earning member. It empowers them to not only continue their current lifestyle but also attain the goals and milestones planned together. While nothing can relieve the emotional loss, financial security can enable your family to mitigate the liabilities and continue the comfortable life that you provided for them. The premiums across various plans vary but the basic function of any life insurance policy is financial protection. Tax saving is a benefit we reap along the journey.
· Fulfilment of long-term goals
A life insurance policy requires a long-term approach and tax saving is a short-term game.
The true value of an insurance policy is unlocked when you understand the long term benefits it offers. While income tax deduction provides immediate gratification, if 5 years down the line that gratification ceases, the incentive to remain invested in that policy will cease resulting in non-achievement of larger goal i.e. life goal for which the policy has been purchased. This way, you not only ensure the financial future of your family but also march towards a defined goal such as children’s education and retirement planning in a systematic manner.
· Tool to facilitate need-based investing
A life insurance helps cater to a person’s myriad needs depending on the life stage he/she is at. There are a wide range of products available under the life insurance category which help achieve a wide range of objectives. These can be classified into retirement plans, child plans, ULIPs and term insurance to name a few. While a retirement plans offer a wide range of customizations ranging from guaranteed income for a lifetime to a payout of a fixed percentage by a certain age, a child plan includes regular payouts to fund children’s education and financial security in case of an eventuality. Similarly, for wealth creation Unit Linked Insurance Plan serve the purpose of helping build your wealth by dedicating a part of your premium to equity or debt investments, thereby helping you grow wealth through the equity markets.
As we enter the last quarter of the financial year, the general trend is going to be that most consumers rush to buy a life insurance policy. You might have made many purchases too. But this time when you scramble to buy a life insurance policy in the January – March quarter do take a following aspects into consideration before buying a policy, so there are many more reasons to stay invested in it in the next five years than just saving tax:
- Focus on goals – children’s education, retirement planning, wealth creation
- Measure your own Human Life Value – buy adequate cover
- Reassess your cover as life stage needs evolve
It is imperative to first link the reason to buy to life stage goals or security of your family and then view income tax deduction as an additional icing on the cake. For any long-term commitment it is important that at the time of buying the life insurance policy, you are clear of long-term benefits and downside of exiting early. While you will be the best judge of how you would want to manage your finances, it is always recommended that the tax savings objective should be one of the many critical factors while making this purchase, in order to reap the most out of a life insurance policy.
- Aalok Bhan, Director and Chief Marketing Officer, Max Life Insurance