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Why You Shouldn’t Buy Term Insurance Only for Tax Benefits?


Apr 27, 2021
Term Insurance Only for Tax Benefits


Many people buy a term insurance policy only to save taxes without even reading the terms and conditions. However, tax-saving should not be the only purpose. Read on to know other important factors to consider.

Many people invest in a term insurance policy with a view to reduce their annual tax liability. The premium paid for the policy is eligible for tax benefit under Section 80C of the Indian Income Tax Act and the maximum benefit available is Rs. 1.50 lakhs. Since there are only a few investments that quality for the tax benefit under this section, a term plan is one of the top contenders.

Knowing that you can get tax-saving benefits, you may be tempted to buy a new policy every year. However, simply investing in more than one policy for tax-saving purposes is not a financially wise decision. The affordable premium and tax benefit may entice buyers to buy a life insurance policy that offers low maturity benefit and negligible returns. Hence, it is vital to start your search for a new policy by evaluating its primary function, i.e., to provide financial protection to your family in the event of your unfortunate demise.

What you must check before buying a life insurance policy?

First and foremost, you must calculate your life insurance needs based on the income, lifestyle, future expenses and financial goals, debts, etc. Ensure to account for the inflation rate when deciding on the insurance coverage amount.

Remember, life insurance policy is a long-term financial instrument and it should be planned for a tenure that is ideally until your family members become financially independent. For example, let us assume your child is now five years old and is expected to be financially independent in the next 20 years. Therefore, the insurance coverage amount should meet their expenses for at least 20-30 years.

What should be the ideal coverage amount? Well, there are many rules to calculate the right coverage amount. But, many experts have corroborated on one simple rule. The sum assured amount of the term insurance policy must be at least 10-20 times your annual income. So, if your current annual income is Rs. 5 lakhs, you must aim to purchase a policy with a coverage amount of Rs. 50 lakhs to Rs. 1 crore.

What to consider if you are buying your first life insurance policy?

Ideally, you must not mix insurance and investment. The primary purpose of a term insurance policy is to protect your family’s financial future even in your absence. Keeping this in mind, you must prioritise getting protection for your family while buying your first insurance policy. A term plan is a no-frill policy, which is an ideal choice of insurance cover if you are just starting your career or have a moderate income.

This is because the premium for a term insurance policy is moderate, yet you get a hefty coverage. Additionally, just as the name suggests, the term plan offers coverage only for a specific period. You can customer your term insurance plan and increase the coverage amount as your income increases in the future or the number of dependents increase.

What to consider if you are buying a term plan for additional coverage?

If you have already invested in a traditional life insurance policy like an ULIP or a whole life insurance policy, you must assess the need for buying a new term plan. Do you want to invest in a term plan to provide an additional financial cushion to your family or do you think that the benefits of your other policy may not be enough to cover your family’s future expenses due to inflation?

Irrespective of the purpose, make sure that you pay the premium and you get sufficient returns from it.

Final Word

Now that you are aware that a term insurance policy is more than just a tax-saving instrument make sure that you invest wisely and make the most of your finances.

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