Family’s financial security: Life insurance is not just for saving tax; here’s what you need

IT is commonly believed that life insurance plans are meant for saving on individual taxes. This belief is further reinforced by reports appearing in the media during the last quarter of the financial year when people start thinking about optimising their tax liability through various exemptions allowed by the Income Tax Act.

But the relationship between life insurance and taxation is very different from the picture that it is projected. It is true that life insurance premium is part of the investments up to R1.50,000 which are deductible from the taxable income of an individual under Section 80C. But in our country, every year much more life insurance policies are sold than the number of taxpayers.

In 2014, the government, after a gap of 16 years, released data regarding taxpayers as on March 31, 2013. The number revealed that only 1% of the Indian population pays income tax. While 2.87 crore individuals filed IT returns, 1.62 crore did not pay any tax leaving the number of tax payers at only 1.25 crore. This number has been growing every year by 20-25%. During the same year, total number of new insurance policies sold in India was 4.41 crore as on March 31, 2013. It is therefore apparent that many individuals buy life insurance without being motivated by the consideration of saving on income tax.

My personal experience of marketing life insurance policies to a vast number of people in the hinterland for more than 30 years also reinforces the fact that people buy life insurance because they are made to believe by the foot soldiers of the industry that life insurance is necessary for them and it provides a very systematic avenue for long term savings. It is only the elitist urban mindset that often derides the value of life insurance by linking it to tax saving.

However, it is true that many service class people try to minimise tax liability by maximising savings under the schemes wherein investments are eligible for deduction under Section 80C.

Many tax advisors and investment consultants discourage people from buying life insurance policies citing low return. Some of them reject the endowment policies as if this could be the worst product in the market. On the contrary, I feel that this product is useful to individuals in many ways and it is wrong to despise its utility. The individual endowment policy is an evergreen product which serves the middle class in more than one way. The number of individual endowment type policies, under both traditional and linked platform, still top the basket of products offered by insurers in India.

In fact, term insurance, endowment insurance and insurance-linked annuity plans should be preferred by an individual in this order for comprehensive financial security for himself and his family before resorting to other savings avenues available under Section 80 C. Even if tax saving is not applicable to someone, he must first ringfence himself with these products before jumping to avenues that offer higher return but no financial security when the family or the salary earner needs such support for himself.

I would be happy to see the life insurers in India standing up and protecting their flagship products from being downplayed by those merchants of ‘high return’.

RISKS VS RETURNS

• Do not get influenced by the rate of return while purchasing insurance policies
• Possibility of tax savings should not influence choice of insurance cover
• The individual endowment policy is an ever green product which serves the middle class in more than one way