Buying insurance to save tax? Beware

Insurance sales shoot up at this time of the year because everyone is trying to meet their Section 80C tax saving limit of Rs 1,00,000.

But, before you sign for a policy, here are some pointers to keep in mind to ensure you don't get conned.

• Insurance terms you must know

1. Understand what type of bonus is being offered

When you are offered a bonus on your insurance policy, don't assume that it is guaranteed. No doubt, there is a guaranteed bonus. But there is also a with-profit bonus linked to how much profit a company makes.

If the company makes a profit, it declares a bonus in accordance with the profits. This bonus will be flexible as it is dependent on the performance of the company and is offered purely at the discretion of the insurer. However, once it is declared, it becomes part of your sum assured.

Reversionary bonus is a bonus that is added to policies throughout the term of the policy. It may or may not be declared every year. When it is declared, it will not be given to you immediately. This bonus can either be in the form of a with-profit bonus or a guaranteed bonus.

Often, agents just take an assumed amount of bonus and add that to your final amount to win you over. In reality, the bonus could be much less.

• Buying insurance? Beware

2. Get exact figures

Agents can be very shrewd and vague when selling policies. "You can expect Rs X, you should get Rs Y," are common statements.

Push them to give exact figures.

For example, sum assured is the amount of money an insurance policy guarantees to pay before any bonuses are added. In other words, sum assured is the guaranteed amount you will receive.

This is also known as the cover or the coverage and is the total amount you are insured for.

Maturity value is the amount the insurance company has to pay you when the policy matures. This would include the sum assured and the bonuses.

So, don't just go by maturity value. Ask them what the sum assured is. To know what is guaranteed to come into your hands, you will need to know the sum assured and the guaranteed bonus.

After that, ask how much the variable bonuses are. After how many years will you get the money? For how many years will you have to pay the premium?

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3. Do your homework

Each insurance company will have its own premiums. Do not trust your agent when s/he tells you that you are getting the best bet with them. This is not necessarily true.

An agent for one life insurance company is not allowed to sell the policies or be an agent for another life insurance company. So they will only sell you their firm's policies and swear by them.

Before you buy a policy, you need to do your own homework. You can even go on the Internet and check some websites and see the policies being offered along with the premiums.

4. Find out if you really need insurance

Are you the bread winner? If something were to happen to you, would it be a big financial problem for the rest of your family? If yes, then you should buy an insurance policy for your dependents.

But why do you need to buy life insurance if you have no dependents at all? It would make more sense to just invest your money.

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5. Don't mix insurance and investment

If you have to provide for your dependents, buy a term insurance policy. It is the cheapest form of life insurance. You pay a premium for a fixed amount of time and if you die during this period, your nominee will get the money. If you live, you get nothing.

If you do opt for an investment-cum-insurance product, your returns will not be much.

You must remember is that the entire amount you pay to the insurance company is not what is invested. The premium you pay has three components: Expenses (agents' commissions, distribution costs), mortality premium (towards the amount that you will get when you die) and investment (the balance).

For normal life insurance schemes, the equity exposure (amount permitted to be invested in shares) may just be around 8% to 10% of your total investment component. So the returns you expect on the scheme cannot be high; it will just be just around 5% per annum.

But if you do want one, then ask these questions.

~ How much am I paying by way of premium?
~ For how long must I pay the premium?
~ What is the exact return that I am getting?
~ What is the assured return?
~ What will be the difference in premium if I take this policy vis-a-vis a term insurance policy of the same amount?