Yes we should save tax and yes we should invest money for a better financial future but not at the cost of insurance. Most of the people buy insurance not because they really want it but because they want to save tax. But these people don't understand the real importance of having sufficient insurance. Though there is no rule as to how much insurance one needs as it depends on many factors like income, expenditure, loan taken, persons in the family etc. but once I heard from an experienced CA that to find out how much insurance you need just multiply your annual income into 8. I cannot argue on this but I have followed his advise till now. First let's understand why insurance should not be clubbed with investment. We buy insurance because we want financial protection for our family. When we buy insurance related investment products (e.g. ULIPs) our prime motive is to invest and also get insurance. It sounds like an ad which says " Buy 1 get 1 free. " But is it free. Certainly not, the ULIPs do not promise large sum assured and if you go for large sum assured in these ULIPs then your return reduces. The reason is that a good amount of your premium is deducted in the form of charges. These charges are highest in the first five years. So you actually you do not get any thing for free. You pay for both the things. Now if you really want an insurance then go for a pure risk cover term policy. This will increase your sum assured and also let you invest remaining amount in property, commodity or stocks for better returns. However there are certain ULIPs in the market which offer a better value for money.
Now let's find out why insurance should not be clubbed with saving taxes.
I have mentioned before also that we should be adequately insured. Consider a healthy 30 year old person earning Rs 50,000 per month working in a good company. His annual premium is 1 lac, invested in an endowment plan for a term of 25 years. He saves 1 lac every year in taxes and he is very happy with it. Generally he should have insurance of 50 lacs. But he would not get insurance of more than 25-30 lacs. So where did he go wrong ? Actually he should have bought a pure risk cover term policy along with other existing insurance policies. This way he might invest more than what is required to save taxes but finally will serve his main motive i.e. sufficient insurance.
Now let's find out why insurance should not be clubbed with saving taxes.
I have mentioned before also that we should be adequately insured. Consider a healthy 30 year old person earning Rs 50,000 per month working in a good company. His annual premium is 1 lac, invested in an endowment plan for a term of 25 years. He saves 1 lac every year in taxes and he is very happy with it. Generally he should have insurance of 50 lacs. But he would not get insurance of more than 25-30 lacs. So where did he go wrong ? Actually he should have bought a pure risk cover term policy along with other existing insurance policies. This way he might invest more than what is required to save taxes but finally will serve his main motive i.e. sufficient insurance.
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