Why tax benefit should not be the only motive when you buy insurance?

However, the tax benefit should be incidental and not the main element driving their decision.

Jan 29, 2015 10:01 IST India Infoline News Service

Most of the people buy insurance as they consider it as one of the best alternatives to avail tax benefits. However, the tax benefit should be incidental and not the main element driving their decision. The factors to consider while buying insurance are as under:
The insured amount
The amount of cover holds a lot more significance in insurance. It should be large enough to meet all the financial needs arising due to contingencies. The premium will increase for a higher cover, yet it should be the top most priority.
Thin line between sum assured and death benefit
As per the rule passed in the 2012 budget, the basic sum assured excluding bonus need to be ten times the premium to be qualified for tax exemptions. After the new regulation, the companies started to differentiate between sum assured and death benefit. The single-premium policies, in which the death benefit is not ten times the premium, is meant for NRIs for whom tax benefits holds no significance. When it comes to older people, they can avail the tax benefits, but the high-mortality charges associated with the plan reduces the fund value. 
The other factors
The investors should select the insurance plan based on the personal financial needs. They should also analysis the track record of the company before finalizing the product. The other important factors that cannot be ignored are the premium-paying term, policy term, policy charges and maturity date. There should be clarity and transparency in the benefits structure of the insurance plan.
Tax benefits
As per the Direct Tax Code, the insurance plans offer EEE benefits that is expected to change to EET (Exempt-Exempt-Tax) benefits in the near future. In such a case, the maturity benefits will be taxable. It is already applicable in case of pension plans, where the investors get tax exemption on the premiums but have to pay taxes on the maturity proceeds. 

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