Smart Or Not: 4 Insurance Policies To Save Tax?
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
Insurance: Should you buy from your banker or your agent?
BELIEVE it or not, cream made me realise I might be being taken for a ride with my investments.
Here’s what happened. I was at my local grocer’s, buying cream to make dish. The grocer asked me not to buy packaged cream and that fresh cream was now available a short walk away. I was touched. This man had given up a sale at his shop in my best interest!
Back home, while relating the incident to my mother, I was given a small dose of reality. She said the new shop was, in fact, owned by the grocer’s brother.
Lesson for the day: There is a vested interest in everything you are asked to buy. So when my relationship manager told me interest rates on deposits might fall and I should quickly shift to mutual funds, the new cynical me was suspicious.
Why was the relationship manager recommending another product in favour of his own?
Sure enough, I learnt that banks have now morphed into Jacks of all trades. When they sell products other than their own, they earn a fat commission. They make more money through commissions than on deposits.
So the next time your relationship manager praises a new insurance policy, you would best take it with a pinch of salt. But then, since your agent also earns commission on your purchase and there is no cost change for you, why not just buy from your bank?
We list some pros and cons if you want to buy insurance from your bank.
Service: Your banker will not pamper you with doorstep services like your agent. But if you are a priority customer for your bank, you can expect the works.
Trust: If you have a child, an agent is more likely than your banker to know about and advise you how to invest for the little one. Your agent and you are likely to share a closer relationship of trust.
Variety: Sometimes, your bank may not offer you all the policies that an insurance company has in its portfolio. Insurance expert Rajesh Relan says, “Some banks select a few products from the product basket, depending on the needs and suitability of their customer segments.”
Decide whether the policy the bank offers fits your requirements. If it doesn’t, you are better off with your agent.
Simplicity: A transactional relationship already exists between you and the bank, so paperwork and payment processing will be simple.
One-stop shop: Your bank can offer you the entire range of financial products instead of buying from multiple places. This gives you a single window view to your investments.
Specialised products: Some life insurance companies design a special product to be sold through a bank which does not involve too many formalities or medical tests. You can opt for this policy only through a bank, and not through other channels. (You will be asked for many medical declarations.)
Banks are slowly replacing agents worldwide because they are a one-stop destination in today’s time-crunched world.
My lesson for the day: Even if recommendations are made with vested interests, they might not be totally wrong for you.
Mediclaim saves life first, tax later
THE idea of making money can make a man move mountains. If you tell a man to stop smoking for the sake of his lungs, he’ll cheekily blow a smoke ring in your face but offer him a rupee for every cigarette he gives up, you’ll cure him for life! So, it’s no wonder that when well-wishers ask you to take a medical insurance for health reasons you’ll smile at them vacantly. But if tell you that it’s going to safeguard his/her savings and also take home some extra money through tax exemptions, you’ll jump at it.
Whatever your reason – health or wealth, you have no choice but to take it given the greater vulnerability to stress related illnesses and escalating medical costs. And if the fringe benefit tax is going to hit the medical cover from your employer, you definitely need to look at an individual cover.
Why do I need it?
Health care is a serious concern for most people today. Escalating costs accompanied by the scare of new viruses being detected every other day makes us want to run for cover. This is where mediclaim steps in. It is an insurance that takes care of your medical expenses or treatment expenses.
How much mediclaim do I need?
This depends on several factors such as age, health condition, lifestyle, etc. Ideally, you would want to cover costs of the big surgeries and operations. An angioplasty, for instance, can cost anywhere between Rs 50,000 to Rs 1.5 lakh (150,000) depending on the hospital you choose. A heart valve replacement can cost up to Rs 2 lakh (200,000). So, in order to decide the amount of cover, you would have to take a good look at your medical history and check how vulnerable you are to certain patterns of illnesses.
How much does it cost?
For a person up to the age of 35, the premium per annum for a cover of Rs 3 lakh (300,000) would be between Rs 3,200 to Rs 3,800. Now, that may not be such a substantial sum considering that you would get cover for treatment when you were to need it
What are the benefits of mediclaim?
Medical insurance covers almost everything right from the time you step into the hospital till the time you are discharged. The normal costs that are covered are room and boarding expenses, nursing expenses, fees for the surgeon, anesthetist, medical practitioner and consultant, fees for specialists, charges for anesthesia, blood, oxygen and the operation theatre, charges for surgical appliances, medicines and diagnostic materials and charges for X-rays, dialysis, chemotherapy and so on. Even medicines are covered.
What are the limitations of mediclaim?
The most important exclusions till recently have been pre-existing health conditions. If a person has had a heart attack previously or has been operated upon for some other condition, then cover will not be available for those conditions. There are several other exclusions such as dental surgeries, cosmetic surgeries for aesthetic purpose, HIV related conditions, etc. Further, when you take the policy for the first time, any illness that commences during the first 30 days of inception of the policy is excluded.
What is cashless facility?
Cashless policies eliminate the entire trouble of documentation. In a cashless facility, the insurer will settle your bills directly with the hospital and you will be discharged without paying single paise. However, remember that the insurer will settle your bills only up till the sum assured of your policy. Any expense over and above that limit will have to be borne by you. This is unlike traditional policies wherein you would have to pay the hospital first and then claim reimbursement.
If you’ve read the above carefully, you’d have realized that health insurance is not for your health at all. It’s to safeguard your savings. It’s actually there to ensure that your hard earned cash does not flow into hospitals. Maybe if they called it ‘wealth insurance’ instead of ‘health insurance’ it would find more takers
READ:- Medical Insurance a MUST
Careful mistakes you make
The mass exodus
As more people realise their mistake, they want to exit from such insurance policies. Unfortunately, early exit from insurance policies results in a huge loss. So does it make sense to surrender one’s policies despite this loss? There could be three broad scenarios possible, depending on how many premiums you have already paid, out of the total premiums payable.
- Early stage: A policy can be surrendered only if it has been in force for three years and premiums have been paid for these years. If you have paid just one or two annual premiums, then you will get back nothing when you exit from the policy. Even thereafter, you will get back say only 25-35% of the premiums paid + bonus accrued, if any. This is for a typical 20-year term policy. The % varies depending on the term and premiums paid.
Now, if you invest this amount + the future premiums in other investment options, you will need to generate around 9-11% p.a. returns to recover the lost premiums and break-even with the insurance policy if you had continued with it.
If you’re confident take a hit and move on!
- Middle stage: If you are somewhere around the middle of the policy, you can either surrender the policy by taking around 50% of the premiums paid + bonus; and invest this and the future premiums somewhere else. But remember that the absolute loss is higher here as more premiums have been paid and time for recovery is less. So, you need to generate maybe around 14-17% pa returns to break-even.
Optionally, you can make the policy fully-paid. Your sum assured will be suitably lowered. And you will back the premiums paid + bonus earned — but only at the end of the original term. Also no fresh bonus will accrue during this period. The net return for this amount works out about 4%. Invest the future premiums in the other options. Here you may have to generate somewhat lower returns of around 12-15% p.a. to break-even on overall basis.
- Late stage: If your policy is just about to mature in three to five years, then it may well be prudent to let it run its course. You can’t do much by saving 3-5 years’ of premium payments.
These are only broad numbers purely for indicative purposes. It’s important that you do a detailed working for each of your policies, before taking any further action.
But, with a GDP growth expectation of 7-10% over the next decade or so, the returns outlined are pretty reasonable especially if you choose equity. If you have the capacity for a little risk, go ahead. After all, there’s no gain without pain right?
Last word: Whether you invest in a mutual fund, unit linked insurance plan or direct equities; you get some rights but you also have some obligations. The Securities Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), and other regulatory bodies can only do enough to reach information to your doorstep. The onus is on you to understand facts and be one up on your agent!