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This tax season, don’t give in to agents’ calls, buy the life insurance plan you really need

Deepti Bhaskaran
For your life insurance needs, what you need to buy is a term plan that only provides insurance cover

The new year has just begun, but for corporate India this is the last quarter of the financial year with only three months left to meet the year-end target. Companies are on an overdrive and life insurance sector is no exception. In fact, according to Deepak Yohannan, founder and CEO, Myinsuranceclub.com, an insurance web aggregator, nearly 50-60% of the sale for life insurance happens in the last quarter.

For you this means constantly buzzing phones with call centre executives trying hard to sell you life insurance that you may find hard to ignore if you haven't made your tax saving investments and the company HR has handed you a deadline.

The premium that you pay on a life insurance policy qualifies for a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961 and buying a big-ticket life insurance policy-that bundles investment-can take care of the entire 80C limit. But that's a mistake and you are bound to make it if you rush last minute to save taxes. Bundled life insurance plans are products that are complicated and need a lot of clarity on costs, returns and caveats.

What's worse is that you are unlikely to meet your insurance needs through these products as they come with a poor layer of insurance.

For your insurance needs what you need is a term plan that only provides insurance. You don't have to depend on an insurance agent to buy a term plan as most life insurance companies now offer term insurance online.

In fact, insurers have started innovating in term insurance as well. We help you understand the different designs of term plans and what may work for you.

Payout structure

A term insurance policy only carries an insurance cover, so if the policyholder dies during the policy term, the beneficiary gets the sum assured. If the policyholder survives, there is no maturity benefit. The basic structure of a term plan is to pay out the death benefit or the sum assured as a lump sum payment. So if the sum assured is say ₹1 crore, then on death of the policyholder, the nominee gets ₹1 crore in full. But newer policies now break the sum assured into periodic benefits instead of a lump sum payment. The sum assured here is typically broken down into monthly payments for a fixed number of years to provide regular cash flow to the nominee. Then there are plans that offer both lump sum and periodic payouts.

Another type of term plan is like an income replacement plan that offers only periodic income until a goal is reached. For instance, if the goal is linked to retirement-60 years of age-then on death of the policyholder during the term, the insurance cover to the beneficiary will continue till the retirement age of the policyholder. The drawback here is that if the policyholder dies closer to retirement, the sum total of payouts would be less. Buying this plan can be tricky because it may appear to be cheaper but you will need to consider your liabilities and goals before buying this plan.

How to choose

As with most things in life, the basic term plan works well. “Customisation is good but I recommend taking a term plan that pays lump sum benefit. It's hard to predict the kind of financial stress death of the main breadwinner in the family may cause, therefore having the entire corpus helps,” said Yohannan.

According to Kapil Mehta, co-founder, SecureNow.in, taking the money as lump sum payment gives you the opportunity to invest it well and earn a higher return. “Policies that stagger insurance money into periodic income take a conservative view on investment returns. So if you were to invest the insurance benefit, you will be able get a higher monthly payout. Taking the insurance money in a lump sum and a do-it-yourself approach is better,” he said.

But this may not work for all, especially when your spouse is not financially savvy and this is where the flexibility may help. “In such cases term plans that break insurance benefit into periodic benefits works. Even in this case, it's always better to take at least 40% of the sum assured as lump sum,” added Mehta.

Term plans are the cheapest form of life insurance. For example, a 35-year-old can buy a term plan with a sum assure of ₹1 crore for around ₹10,000 per annum for a policy term of 25 years. Of course, buying a term plan means you have a long way off to exhaust the Section 80C limit, but it's worth your while to consider other products in the Section 80C basket and stick to term plan for insurance needs.