Don't buy insurance to save tax

New Delhi: Talk to any financial expert and the first thing he will probably tell you is that you should never buy insurance to save tax. Buy insurance to ‘insure’ yourself and to give your dependents financial freedom and security.

The income tax act of India allows a deduction under section 80C on premium paid towards buying an insurance policy. Yet, India remains a highly underinsured country. Simply because we don’t buy insurance for the purpose it is meant to serve.

Statistics reveal that on an average 30 per cent of annual premiums of life insurance companies come in the month of March. This is a clear indication of the fact that people buy insurance to save tax.

Tax should probably be the last consideration while buying life insurance. Amount of life insurance that a person requires depends mainly on his income level, total expenditure, and the number of dependents, debts outstanding and other savings but definitely not the tax to be saved.

Assume a 35-year-old man with a taxable salary income of Rs 5 lakh per annum. His tax saving instruments till now include investments in provident fund, postal savings and pension policy of up to Rs 75,000. He is willing to invest up to Rs 25,000 in an insurance policy and so he opts for an endowment insurance. And he thinks he has saved the best tax possible as well as got himself insurance.

For that kind of premium, the maximum sum insured on an endowment policy that he will get will be around Rs 5 lakh. That by no standard is enough to support his dependents, unless they start earning on their own.

So how much insurance does he need? Let us assume that he has a monthly expenditure of Rs 10,000 and an EMI of Rs 7,000 on his home loan. Let us also assume that the current value of his other investments is Rs 8,00,000. Now at an assumed inflation rate of 6 per cent, the calculator on moneycontrol.com tells us that he would need an insurance of at least Rs 33 lakh.

Only a pure risk cover term policy will offer him such a large cover at a low rate of premium. By paying a premium of Rs 10,000 per annum, he can get himself a cover worth Rs 33 lakh. Since this is not an investment product, this premium will be expensed and he will not get any returns on it. However, that’s a small price to pay to insure oneself.