‘Tax Savings’ always propel most investors to take arbitrary life insurance products. Most of us have taken several life insurance policies without understanding their complete utility. As per my understanding and experience with so many investors over the years, the top reason for taking policies is just for ‘Tax saving’. For most people, saving tax is such a big thing, that they forget every other rule of personal finance and concentrate all their energy on saving tax.Ask yourself; is your sole objective to save tax in your financial life? Don’t make it your primary objective when you buy insurance. What you have to concentrate on is your insurance planning and how to structure your insurance in such as way that you get the maximum tax benefit from them, side by side. By all means, make sure that you save as much tax as you can but not at the cost of your financial commitments in the long term. Insurance planning comes first and tax planning is a by-product or a secondary concern. If you are not able to save tax, it’s fine. Pay taxes. But don’t get into useless products which you regret later. Sounds familiar? Read:Tax Saving is not Tax Planning!

Review your current insurance policies

I am amazed to hear responses like “I have life insurance but I’m not sure of the policy name,” “I think I have 10 lakh of insurance cover”. I have no idea which plan I was sold, it was my uncle who sold to me, let me call and ask him…” If ultimately you find out that its 3 lakh, 5 lakh or 10 lakh you’d better be embarrassed. But don’t be too hard on yourself; most people in our country are as underinsured as you are. In fact, you may be pulling the average upwards.

Imagine, now you are not around from tomorrow onwards. Your family will get some amount of money from your insurance company after a few weeks. Stop and think about how long it can sustain your family’s regular expenses alone. Assume that the insurance amount is kept in a bank fixed deposit and earns a return of 8% per year and inflation is around 6%. Will the resulting amount suffice? Sounds confusing?

How much Insurance do you need?

If you look at the insurance policies of most people, the amount of cover they have is not linked to anything. It is just a collection of random policies bought with premium they could afford at the time. In all probability, the cover is likely to be around Rs 5-10 lakh. They never calculate how much cover they need in a logical manner before they purchase insurance. So how can you calculate how much insurance cover you require? How much is enough?

The best way to find it out is through approach called the “fill in the gaps” strategy. This is very intuitive way of finding out your insurance requirement. It’s the amount required to fulfil all those goals in life which could have been fulfilled if you were around or which you want to provide for. The insurance claim or maturity amount which your dependents receive should be able to provide for regular day-to-day expenses of your family and pay current liabilities and emergency expenses(in case of claim amount) otherwise, save for future goals in life like children’s future and retirement planning etc.

Buying insurance is easy. Buying adequate life insurance is not.

Getting adequate Cover

‘Term Insurance’ provides a cost effective answer for getting oneself insurance adequately. This type of policy does not provide any maturity benefit. You should be glad that it does not! Because if it did return your money, guess what would happen? The premium would shoot up so high that you would not be able to afford it. Read:Term Insurance-True protection for your loved ones!

Imagine you are, now going to buy a traditional insurance plan or any policy which combines investments and insurance and offers its customers money back later. Now imagine that your requirement is to cover yourself for Rs 80 lakh or more. What do you think the premium will be? They would run into a few lakhs of rupees per year… To some it might turn out to be equal to half of their salary! And then what do you do? You would only pay as much premium as you can afford. But that would get you peanuts in terms of insurance cover. Your whole motive of buying life insurance is nullified! Instead of life insurance, now you have an investment product which is merely labelled as an insurance policy. That’s the story of every Indian.

In term insurance, you can take adequate cover at affordable premium. When you ask most people why they are not interested in term insurance, the standard reply is “You don’t get anything back. What a waste!” I don’t back off when I hear this reply. Instead, I simple ask them:

“In case you did not get the money back from your term insurance plan, what would you do with it? They begin to calculate and start to think hard. Now before you to too do it, let me give it to you, all cut and dried.

 Reluctance to buy Term Insurance

Most people who reject the idea of buying term insurance due to the excuse they will “not get any money back” are too attached to the numbers. They look at the numbers so closely that they forget to consider the value it can truly render when it is actually available for use. So right here and now, abandon the idea that term insurance does not pay any money back! It’s just a sentence which does nothing more that discourages you! It does not inspire you to buy security. Rather focus on the security that you will feel once you purchase term insurance.

What makes sense?

Now, let’s weigh your basic choices and see what your options offer; On the one hand you have “Family security for 30 years”, “Peace of mind for 30 years” and on the other hand you have “1-2% of your annual salary’ which can compensate you for not more than 2 months’ expenses after 30 year or afford you a short vacation with your family.” Which will give you more value for money?

Buying adequate life insurance=Buying peace of mind

Conclusion

The first and the most important lesson in insurance: Life Insurance is Life Insurance only and should adequately be covered. Don’t try to squeeze in some investment and tax saving angle. Taking adequate life insurance cover is a sound decision. It takes commitment to and love for the family to accept that life insurance is for them. It is the most important gift you need to present to your family. Buy term insurance. It’s simple and easy to understand. Not getting your money back from term insurance is just a mind block. Make sure you don’t have just life insurance; but adequate life cover.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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