Friday, 22 Mar 2019

The Wrong Reasons for Buying Life Insurance


Life insurance is often bought for the wrong reasons. Here are some of the most common.


This has been said so many times before but still needs to be reiterated: don’t buy life insurance to save tax. There are better, more lucrative investments avenues that can get you tax deduction under Section 80C. PPF gives assured returns and tax free corpus. Fixed deposits give higher returns even though the income is taxable. ELSS gives tax free income and potentially higher returns. If you are only looking at tax savings, these instruments are better options than insurance policies. You get higher returns and are not forced to invest that amount every year. 

With the 31 March deadline coming closer by the day, many taxpayers are in a rush to complete their tax-saving investments. Insurance agents are often perceived as angels in these dying days of the financial year. They offer to fill up forms and do all the other paperwork. All the buyer has to do is sign on the dotted line. This is not a good idea, for you don’t know what he might have ticked on your behalf. Agents are known to fill in incorrect details of the buyer’s health so that the premium is lower and the deal appears attractive. But incorrect medical details can lead to repudiation of the claim. 

Many parents push their children to invest in low-yield insurance policies because these plans had worked well for them. Parents may have the interest of their children in mind, but don’t realise that such insurance plans become millstones around the neck of the buyers. Investing in insurance may have been a good idea in the previous century when there were not too many investment avenues. The stock markets were not very safe and mutual funds were opaque. All that has changed, and more lucrative investment options are now available to investors. 

The first thing a life insurance agent is taught is to go out and sell policies to his friends, relatives and associates. It puts the individual in a difficult situation, forcing him to make a decision he doesn’t really want to. Rather than refuse and sour a relationship, he agrees to buy, thus binding himself into a multi-year financial commitment that offers very measly returns. If you have a relative who is a life insurance agent, be sure that he will approach you with an offer you can’t refuse. How does one wriggle out of such a situation? Unless it is a very close relative who needs help, don’t feel obliged to buy. Even then, it might be a better idea to help that person with cash instead of throwing money for 15-20 years in the policy. 

Agents like to say that endowment or money-back insurance policies offer the twin benefits of insurance and investment. In reality, they fall between the two stools. As an investment, an endowment policy gives very low returns, yielding barely 4.5-5.5% returns. Even very long-term plans of 25-30 years offer around 6.5%. As an insurance product, an endowment plan offers inadequate cover. The life insurance cover is just 10 times the annual premium. You will need to shell out Rs 10 lakh a year to get the Rs 1 crore cover your family would need if something untoward happens to you. 

Many insurance buyers are looking for the guaranteed returns promised by life insurance companies. But this guarantee of returns comes at a high price, forcing the company to invest in safe debt-based options. There are other instruments that give guaranteed returns and offer better yields than a traditional insurance policy. The PPF, for instance, offers assured 8.5% returns with tax free corpus. If you exhaust the annual investment limit of Rs 1.5 lakh, you can invest in the Voluntary Provident Fund where there is no limit. 

If the insurance cover is below Rs 5 lakh, the buyer is not put through a medical test but asked to submit a declaration about his health condition. Don’t buy a policy just because the insurer is being lenient on this count. A stringent medical test puts the onus on the company to assess the buyer’s health condition. If he dies of a health condition, the company cannot claim that he had hidden some facts about his health. However, the declaration shifts the onus to the buyer, allowing the company to repudiate a claim if it feels the buyer lied about his health. Experts say the strictness of the claim procedure is inversely proportional to the leniency of the underwriting.  

ET Bureau| Updated: Mar 14, 2017

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