CA Rohit R Sharma
As we have entered the last month of our Financial Year, a handful of my friends would have their tax saving investments on place but the majority of my friends be it salaried or self-employed is gonna start head hunting for Tax Saving Options and start making calls to one another saying “Yaar Is Saal Kisme Paise Daalu, bohot Tax Cut Ho Raha Hai”.
Yes I agree this is a common problem with each one of us, we have a common belief ki March Takka Time haina, abhi se kya Tension lena and with this conception we waste almost 8-9 months of the Financial Year and then somehow with limited time and limited money at our disposal, we head out to look for Tax Saving Options.
In India the most trusted Tax Saving Option since ages is Life Insurance. People have actually invested money in Life Insurance Policies with blind folded eyes, which they actually realize later on may be at the time of Maturity that they could have planned their sources in a better manner. You may call it lack of education or lack of sources for investment or even wrong selling from some agents as some of the factors for these wrong investments.
But nowadays, with education being of utmost importance and people being more educated and alert they are actually considering evaluating Insurance Policies as well, which is actually a good step ahead.
The First Question which strikes such Investors is:
Is Insurance Important right now, or can I Postpone it:
The Answer is Yes, Insurance is Important and should not be postponed at all. Insurance is One Selfless Act which you are doing not for yourself but something that you will leave behind for the betterment of your family.
If Yes, then which option to choose a Term Insurance or a Traditional Plan:
Now this is a question which hunts almost every person who has somehow overcome the first question and made up his mind in buying Insurance. Most of us, would go for Traditional Plans like endowment plans, money back plans, pension plans, whole life plan, children plan, (all of them are almost the same, it’s like the same product with a different wrapper) as according to them there is a Fixed Maturity Benefit i.ea guaranteed return with safety involvedwhich a person may avail if he survives the entire Insurance Tenure. (It’s like aLife kiJung JeetJaane ka Gift for us :-P) as compared to Term Insurance where you get the Sum Assured only in the case of a casualty happening which is the death of the insured but in case if he survives the entire tenure then you loose out the premium i.e there is No Maturity Benefit in Term Insurance, which happens in case of all General Insurance, Health Insurance and Health Insurance so what’s the fuss about it, don’t we buy general insurance or motor insurance.
The most important factor that we don’t consider is that because of these Traditional Life Insurance Plans most of us are left under insured as almost 75-80% of the population cannot afford the Insurance Premium to fully cover them under a Traditional Plan.
Let us ask our self a question that how much amount of Insurance cover do we actually need: To answer this we will have to factor in our Cost of Living, Debts/ Loans outstanding, children’s education and marriage expenses, health care expenses of parents and spouse etc. The basic thumb rule says that a person should have a life cover which is at least 10-12 times than his/ her annual income. So assuming your Annual Income is approx. Rs.10 Lacs so your life cover should be at least 1 – 1.20 Crore. Now comes the question of affordability, again going by the thumb rule after considering all the taxes, deductions, maintenance expenses a person saves approx. 20 – 30% of his earning which comes to around 2.5 – 3 Lacs in our case but the premium itself for a 20 Year tenure of a Traditional Life Insurance would come up to approx. 4 – 4.5 Lacs. So can a person with a saving of approx. 2.5 – 3 Lacs per annum buy an Insurance with a premium of around 4 – 4.5 Lacs. Obviously not.
Then what will you do in such a case. Buy an insurance with a premium that you can afford,which in our case would be around Rs.50 – 60 Lacs that is almost half of the Insurance cover suggested i.e under insured which also means that in case of untimely death, the insured’s family has to manage with half the amountto survive with.
Let us also consider if you survive the Policy Tenure then you receive a higher sum which will be Sum Assured + Bonus + Survival benefits at an IRR of almost 5 – 6% which comes up to around 90 Lacs – 1 Crore when you are near to retirement and may have no other source of income other than this Maturity Benefit, which you may invest in a risk free investment like Govt Bonds and Bank Fd’s @ a nominal rate of approx. 4-5%, 20 years down the line. Do you think a person who has an average maintenance expense of approx. 7 Lacs p.a now will be able to survive with an income of 4-5 Lacs with increased maintenance & health expenses 20 years down the line. So what do you think, was it a wise investment option? Obviously not.
Now let us consider Buying a Term Insurance and the balance in any other mode of Investment:
If we continue with the same example, then your adequate insurance cover was Rs.1 -1.20 Crore, premium of which would be around 12 – 15K p.a. which leaves you with a surplus of around 2.3 – 2.8Lacs to be invested elsewhere. Let us consider you invest it in options giving you 80C benefits up to the benchmark limit and the balance may be in other investment options like Mutual Funds or Direct Equity. Considering the Current 80C limit of Rs.1.5 Lacs we have a bracket of Rs.1.30 Lacs which can be invested in either PPF which gives us a return of approx. 8% over a period of time or in top performing ELSS funds which has given an average rate of return of around 15-16% and the balance in Mutual Funds which has delivered returns of around 18 – 20% but still to avoid complexity let us consider the same rate of 15% as derived from ELSS. So the Balance of approx. 2.5 Lacs can be invested in ELSS/ Mutual Funds giving us a return of 15% which leaves us with a corpus of around Rs.3 Crores.
So considering both the cases considered above in case of death, your family gets a higher corpus to survive with as compared to the corpus considered in the case of Traditional Plans and if you survive the term which almost every one of us would wish then also we are left with a Corpus which is almost 3 times the Corpus received in the case of Traditional Plan. So obviously more the better and also considering the maintenance cost post retirement then also if the Corpus is invested in Risk Free Investments which we considered to give us a return of 4 – 5% would give us a return of around 12 – 15 Lacs p.a again a comparatively higher and a better figure.
So I assume this solves your very question of Whether to Invest in Traditional Insurance Plans or Term Insurance Plans. In my opinion a combination of Term Insurance coupled with PPF and or ELSS/ Mutual Funds etc is any time a better option than investing in Traditional Insurance Plans alone.
(Author can be reached at firstname.lastname@example.org or on 9920930544)