Separate your insurance & investment needs

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Buy insurance for the purpose of protection, whether it’s your life or health. An online pure term plan is highly recommended

It’s January and the tax season has begun. In case you are a salaried employee, your human resource department must have asked you to submit the details of your investment made to save income-tax. While it is ideal to make investments during the start of a financial year, most of us wait till the last minute while some don’t plan at all. In case you are going to make tax-saving investments now, here is a word of caution — don’t get carried away by the various advertisements, emails and messages you get from insurance companies and make wrong financial investments. For instance, life insurers are advertising about how insurance can be a useful tool in not only saving tax but would also in achieving your long-term financial goals, such as child’s education, marriage and retirement. While contributions towards life insurance premium are eligible for deduction from gross total income under Section 80C of the Income-tax Act, it may be an expensive route for wealth maximisation.

Despite the insurance regulator revamping the product regulations (traditional, Ulips and variable insurance) that has helped in bringing down the charges in insurance products that eat into your premiums besides reducing commissions for agents, the overall returns in insurance products are still between 4.5 and 6 per cent.

Remember, you should separate your insurance and investment needs. Buy insurance for the purpose of protection whether it’s your life or health. A pure term insurance plan bought online is highly recommended while invest the remaining investible corpus in tax instruments offering better returns. According to financial planners, as a thumb rule, one should look at a term insurance plan with a sum assured that is at least 10-15 times the annual income. Online term plans are more than 70 per cent cheaper than offline term plans.

Says Pankaaj Maalde, a certified financial planner, “The rate of return on insurance products is not more than 6 per cent per annum, which is unlikely to beat inflation. Therefore, it is advisable to stay away from investing in insurance products.”

“If you are an aggressive investor, you can think of investing in a equity linked savings scheme (ELSS) and of you prefer safety, public provident fund (PPF) is an ideal choice,” added Maalde.

While investing in various tax-saving instruments, consider your risk profile, the risk inherent in the saving instrument, lock-in period, the time horizon you have for reaching your financial goals and the returns that the product offers.

So, if you have the ability to take risk and your financial goals are 10-15 years away, invest in ELSS. But do not invest a lump sum in ELSS when the market is high, instead invest through a systematic investment plan which will help in rupee cost averaging. In case you are risk averse, select PPF or a combination of ELSS and PPF.

Surya Bhatia, a certified financial planner, said, “If you are in the lowest tax bracket, tax-saving fixed deposits are a good option. If you can take risk and have long-term financial goals then opt for ELSS. Those who are risk averse, have long-term goals and are in 30 per cent tax bracket, can invest in PPF as it has a 15-year lock in.”

Buy health insurance: Investments made towards payment of health insurance premiums for yourself or family members qualify for a tax deduction under Section 80D. For those below 65 years, one can use up to Rs 15,000 of health insurance premium paid. A further deduction of Rs 15,000 could be claimed, for buying health insurance policy for your parents (Rs 20,000 if either of your parents is a senior citizen).

In case you are covered under a group health insurance policy bought by your company, it is still advisable to have your own plan. A key reason is that with health insurance premiums rising, companies are opting for lower sum insured, introducing room rents, capping disease cost, introducing co-payment and stopping covering parents to control insurance cost.

An individual should have a minimum cover of Rs 5-10 lakh depending on his affordability. Another alternative would be to enhance the basic cover offered by the employer by buying a super top-up policy.

Top-ups and super top-ups: A top-up health insurance policy is an additional cover for individuals who already have an existing insurance policy, be it an individual plan or a mediclaim from the employer. A standard top-up plan will pay for a claim provided you exceed the sum insured in a single hospitalisation. Just like a top-up, there is something called a super top-up cover. A super top-up plans takes into consideration the total bills in a year and not just the single instance of hospitalisation.

So, in case of three bills of Rs 1 lakh twice and Rs 2.5 lakh once, your total bill is Rs 4.5 lakh. Thus, the super top-up will get triggered (above threshold limit of Rs 2 lakh). The super top-up cover will pay you above your basic cover, whereas a top-up cover will not.


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