This time of the year, most of my friends prefer to go and get Insurance policy just because they have to buy one so that they can save tax. I get calls from various Insurance agents to take up policies from January to March time frame and the prominent reason they give me to buy the policy is “Tax Benefit”. I am not very keen on taking a policy just because I get a tax break. I know that it does not work that way.
I don’t mind taking a insurance cover for the purpose of insurance rather than “Tax Benefit”. But the fact is that most of us prefer to take the policy thinking it will reduce our tax bracket. I have done that in the past. I have taken a policy and I do pay a yearly premium. I did not know much about tax at that time and for tax benefit I did take a policy only to learn that it does not make sense.
Let me explain to you clearly how things work. There are many insurance policies that most of us know about. The basic thing about policy is that in case of death you will get a sum assured and depending on the product you will get money back every 5 years once or 10 years once and on similar lines. Is it worth it?
Most of us think that it is a nice policy. But I don’t think so. The insurance policy is fine. Assuming that there is no mishap that causes death during the term and I pay policy premium yearly, I put forth my thoughts. If I pay a yearly of Rs.5000 for 20 years according to the policy that I have taken I will get a sum assured of 1 Lakh at the end of maturity. If I deposit an amount of Rs. 5000 for 20 years in a savings account at the interest rate of 9% then I would be getting at the end of 20 years, any guesses as to how much I would be getting? It is Rs. 290659.4704.
Isn’t that strange? Sum assured is just Rs. 1 Lakh and if I just deposit in Savings account I get close to Rs. 3 Lakh. Does it make sense to have a insurance policy then? The answer is it depends. If you take a policy and wait till maturity then it does not make sense. If there is a mishap within 10 years of taking a policy then it makes sense. But we can’t predict anything.
If you take up a policy just for Tax saving purpose then I would suggest you to re-think about it. According to me it does not make sense anytime. You will not save up a big deal and in fact you are not getting back what you deserve.