Don’t Buy Term Insurance only for Tax Benefits

Financial decisions are among the most difficult to make in one’s life; a single blunder can leave you financially ruined for the rest of your life. Most people make the mistake of buying tax-saving insurance policies at the last minute and completely overlooking the essence of the product. People often purchase term insurance policies solely for the tax benefits that premium payments can provide, rather than assessing the value of the insurance in their lives. Section 80C of the Income-tax Act of 1961 allows premiums paid toward a term insurance plan to be tax-deductible. You can claim a deduction for premiums paid for yourself, your spouse, and your children up to Rs 1.5 lakh every financial year.

However, while purchasing an insurance plan, the tax benefit should not be the sole consideration. When the principal earner dies, a family’s income is replaced by a term insurance policy.

The premium of a term insurance plan

All life insurance firms offer term insurance. Because term insurance policies have no maturity or surrender value, a buyer is more likely to choose the plan with the lowest premium, given the same age, period, and sum assured. And, because a term insurance plan’s price is modest compared to endowments or unit-linked insurance plans, one may be swayed by its pricing and make a purchase based simply on the plan’s premium. On the other hand, Premiums should be the last thing on your mind when looking for a term insurance plan.

When the earner dies, a term insurance plan with enough sum insured (life cover) and the appropriate tenure will assist the surviving family members to maintain the same level of living. So, if you want to save money on taxes or pay a low premium, don’t just get any term plan without reading the instructions.

When choosing a term plan, there are a few crucial factors to consider.

• Will one plan be sufficient: In an ideal world, a single term insurance policy is adequate. Your insurance needs, on the other hand, do not remain consistent throughout your life. When you get married, have children, and start taking out loans, your requirements rise. However, the need decreases when some goals have been reached, such as children’s education and marriage. Most people are done with their financial obligations by the time they get 60 or retire. Many people are unclear of their financial commitments or have not yet planned for them. As a result, the total amount of coverage can be split across one or more plans. When one’s liabilities have been met, one can cancel a project by ceasing to pay its premium. Purchasing a separate liability insurance policy, such as a home loan, can help and be withdrawn after the loan is paid off. Make sure your plans don’t last too long because after you retire, your income will stop, and you won’t have any money.
• How much you need: This is one of the most crucial aspects of the purchase decision. To arrive at a more accurate figure, utilise any of the tools provided on the insurer’s website or the Internet to determine the amount of coverage you require. Almost all these tools based their calculations on a person’s ‘income’ rather than their ‘expenses,’ and as a result, numbers will change. You should purchase a life insurance policy at least ten times your yearly salary as a general rule.
• When to buy: It’s a common misunderstanding that only married individuals require insurance. Life insurance is, in reality, a must for anyone with financial obligations. As a result, even unmarried children who rely on their parents must have adequate life insurance. In addition to the basic life insurance amount, additional coverage is required as liabilities grow. When a new family member is born or a large-ticket loan, such as a home loan, is taken out, add coverage.
• Type of plan: In addition to a standard term insurance policy, insurers have begun to offer term policies with variable sum assured and a few other features. Basic vanilla with the lowest premium will suffice unless one can review one’s needs every five years and take corrective action.
• Tenure: Fixing tenure is the next major factor. Only a few insurance companies provide terms of up to 35 or even 40 years. A higher premium is associated with longer tenure and vice versa. Also, if your liabilities are paid off early or by the time you retire, insuring for a more extended period may not be the best option.
• Offline or online: Term plans can be purchased directly from insurance companies or through policy aggregator websites such as Policybazaar and Coverfox rather than through an insurance agent. There are two advantages of buying a term insurance policy online. For starters, the plan is substantially less expensive online than it is in offline form. A term plan purchased online can be up to 25% less costly than the same insurer’s offline counterpart. Two, comparing policy features, prices, and availability is simple.
• Filling the form: Rather than having the insurance agent fill out the application form, insist on doing it yourself. This informs you of the information the insurer requires before providing you with insurance coverage. Ensure that you give all relevant information, such as current illnesses and medications, family history, smoking habits, and so on.
• Nomination: Do not leave off filling out the nomination form for the insurance coverage. Furthermore, your nominees must be aware of the insurance coverage you are planning to purchase, as well as the status of the policy documents.