Everyone looks for convenience and easy way out when it comes to complex matters such as claiming tax deduction through life insurance plans. Abhishek Raizada, 38, was no exception. As a sales and marketing director in a multinational company he was earning over 25 lakh a year.
In order to save on tax, he bought a life insurance policy with a premium liability of Rs 1 lakh and ever since he got hold of it, he was paying the premium every year religiously. A year ago, the government raised the tax exemption limit for life insurance premium payment to Rs 1.50 lakh. So, he bought another life insurance policy of Rs 50,000.
Do you think that Abhishek was following the right approach?
More often high-flying professionals are so busy with their work that they hardly get time to think dedicatedly about their investment. Thanks to the exemption under Section 80C of the Income Tax Act that every corporate employee is asked to declare his investment in life insurance products. And everyone takes it very seriously. After all, one can save sizeable tax in the range of 10-30 per cent on his taxable income.
But there is more to it. If you act wisely, you can generate much more from your investment in life insurance plans. Traditionally, life insurance policies are known for their low but secured returns. This is due to the long standing monopoly of public sector life insurance companies which promoted life insurance plans more as a risk coverage tool than return generating investment instruments.
Most people carry this mindset even today – that expecting returns from a life insurance policy is not right and one should just focus on the kind of security it provides to family, and things like that. It is definitely true that the primary objective of a life insurance plan is to cover risk of loss of life. At the same time, it is far from any rationale to not expect returns your investments deserve.
Professionals in the age group of 20 and 45 years should aim for superior returns and not restrict themselves to traditional low yield insurance plans. This is the age when you can generate more income and thus save more. If you invest your savings wisely, you can achieve financial freedom and secure a good life for yourself and your family.
If you are willing to invest Rs 1.50 lakh in life insurance every year, then it is advisable that you go for a combination of various life insurance policies. You can consider 2-5 life insurance policies.
What are the benefits of having multiple life insurance plans?
Well, there are many. You must have heard how companies follow diversification strategy in order to spread their business risks and generate better returns. In fact, many of you must be recommending and working on such plans in their employer organisations. So, why not to follow this approach as an individual, for your own benefit?
Of course, this helps in spreading risks of low returns from low performing companies. You can buy multiple policies from multiple companies. Thus, if one life insurance company is not able to generate good returns, the other one may get you something better.
Also, never stick to one type of life insurance plan. Develop a portfolio with Unit Linked Insurance Plans (ULIPs) and Equity Linked Savings Scheme (ELSS). In the mid to long term horizon of 3-10 years, these plans can bring you much better returns than conventional endowment life insurance plans.
If you research on these plans, the top performing ULIP and ELSS plans have pumped returns of over 20 per cent a year than 5-8 per cent of conventional plans. Further, when we compound the returns over a period of time, the implications are much larger and deeper.
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