Smart or not , 4 insurance policies to save tax

It is good to have more than one policy as it gives you more options. However, remember that it’s important to choose a policy based on your age, income, need, saving pattern, dependents and lifestyle. Picking up a plan randomly is not a good idea. Moreover, it is not wise to spend all your savings on different policy premium for you may lose out on pure investment options. Your portfolio should have a proper blend of investments, life insurance, health insurance, retirement plans, equity – debt investments etc.

In order to get tax benefits, many a times investors land up with wrong products. A little bit of research and planning will help you in not just making tax saving investments but also judicious investment choices. Here is one such reader who bought four insurance policies to save tax and is now wondering if he made the right choices.

I’m 37 and have four insurance policies – two endowment, one moneyback and one pension policy. For the two endowment policies I pay a total premium of Rs 24,792, for moneyback Rs 3,264 and Rs 10,000 for pension policy. All the policies are more than four years old. Here are some questions:

1. I do not have a term policy, should I buy one?

2. If I do so, I will have to terminate the moneyback plan. Should I terminate my moneyback?

3. Also, is it a good idea to switch from pension plan to a unit linked pension plan?

1. Term is a must

Yes, buy a term. Don’t mix insurance with investment. If you want pure insurance, go for term plans. A term plan offers high cover for low premium. In the event of your death, your dependents will get the sum assured. But if you survive the policy tenure, you will get no maturity benefits. You can opt for a single, yearly or half yearly premium paying option. In fact if you have surplus cash, you can choose the single payment option. This will ease the hassle of keeping track of payments but if you are a careful spender who budgets your money strictly then you can make premium payments on a periodic basis.

However, term plans are most profitable if you start as early as possible. This is because you can get high cover for low premium.

Add on benefits on term plans

A few benefits offered by some insurance companies are given below.

~ Increase/decrease cover: You have the option to increase the cover of your term plan. This means depending on your lifestyle changes you can increase the sum assured by five per cent every year. You can even decrease the cover by five per cent every year if you find yourself tied to other commitments like loans, monthly installments.

~ Convertible option: This option enables you to covert your term plan to endowment plan or a whole life plan.

~ Insure your loan: If you have taken a loan during the term of a policy, you can insure it. In the event of your death, the insurance company will take care of the pending loan amount.

~ Premium back option. On maturity of the plan, you can choose the ‘premium back’ feature. However, these plans are more expensive compared to pure term plans. Besides, with just the premium return option, it may not be worth to endure higher premium.

2. Moneyback can be surrendered
You can terminate your moneyback policy. A moneyback policy is more expensive and you would probably just get back the premiums paid. Since a moneyback policy pays you at intervals and maturity benefits at the end of policy term, it may look like an attractive option to you. But if you get down to the nitty-gritty it has no real value for money!

3. Unit linked insurance plans offer choice

Traditional pension plans will give you guaranteed returns compared to Unit Linked Insurance Plan (ULIP). If you choose to invest in equity ULIP, it promises better returns if you remain invested for a long time.

Traditional pension plans that assure guaranteed returns are not in the control of the policyholder, as the company invests the money according to their investment strategies. That is, they may invest either in debt or in a mix of debt and equity, but as a policyholder you cannot choose the asset class. However, in the case of ULIPs, the policyholder gets to choose the funds he wishes to invest in, which if done judiciously, can yield higher returns.
In a unit linked pension plan, the returns are passed on to the dependents in the event of the death of the policyholder.

End note: Diversification is the key
It is good to have more than one policy as it gives you more options. But remember that it’s important to choose a policy based on your age, income, need, saving pattern, dependents and lifestyle. Picking up a plan randomly is not a good idea. Moreover, it is not wise to spend all your savings on different policy premium for you may lose out on pure investment options. Your portfolio should have a proper blend of investments, life insurance, health insurance, retirement plans, equity – debt investments etc.