Without doubt, insurance products would rank among the most aggressively sold ones during the tax-planning season. And therein lies the root of the problem. Insurance products continue to be largely sold and bought for the tax benefits they offer. The ‘insurance’ aspect is often overlooked. For the uninformed, contributions towards life insurance premium are eligible for deduction from gross total income under Section 80C of the Income Tax Act.

The need for insurance
Insurance must find a place in an individual’s portfolio irrespective of the tax sops. The primary purpose of insurance is to indemnify the insured’s dependants from loss of income, in the event of the insured’s demise. Hence, the decision to buy insurance should be solely based on the individual’s needs for protection; the tax benefits must be treated as incidental.

The year-end approach
Waiting for the end of the financial year (read tax-planning season) and then making a hasty investment decision is not a good idea. Insurance should be bought when the need arises and not simply because it’s the tax-planning season. Furthermore, buying insurance in a rushed manner at the end of the year deprives investors of the opportunity to conduct a thorough evaluation of the available options. By opting for the wrong policy, one runs the risk of being underinsured.

The ‘ignore insurance’ approach
Then there are individuals who tend to ignore buying insurance all together. Instead, they count on things like investments or the presence of friends and relatives to provide for their dependants, if an eventuality occurs. Such an approach is fraught with risks. In dire circumstances help from all quarters is always welcome; however, relying solely on the same is not prudent. Hence, having a sound life insurance policy in place is a must. Investments and a support system (family) can always play a vital, but secondary role.

Beware of mis-selling
Investors, who are convinced about the importance of insurance and decide to buy the same, have another obstacle to face in the form of mis-selling. Mis-selling is a rampant practice in the insurance segment. Over the years, several insurance advisors have been guilty of selling products that were right for them (helped them earn higher commission income), rather than the investor. Also, concealing relevant facts about the product, leading to misinformed decisions isn’t entirely uncommon. Unit linked insurance plans (ULIPs) would easily qualify as both the most popular and mis-sold products. Hence, being associated with a competent and ethical advisor is vital; also, investors should acquaint themselves with adequate information before zeroing on any product.

How to buy insurance
The process of buying insurance can be divided into two steps. First, decide how much insurance is required and second, decide the type of insurance product that can help meet the requirement.

How much insurance an individual requires can be determined using the concept of Human Life Value. It refers to the monetary value of all the ‘yet-to-be fulfilled’ needs of the dependents plus all the outstanding liabilities.

The next step will be to zero in on the right insurance plan that will help meet the objective. Broadly speaking, three popular variants of life insurance policies are available i.e. term plans, endowment plans and ULIPs.

Types of life insurance policies
Term plans are very straightforward i.e. they only provide an insurance cover. In other words, if the policy holder survives the policy term (i.e. the period for which the policy offers him insurance cover), then he gets nothing i.e. there is no maturity benefit. They have the lowest premium structure.

Endowment plans differ from term plans in one critical aspect i.e. the maturity benefit. Unlike term plans, these plans provide maturity benefits under both scenarios – death or survival. Since endowment plans provide maturity benefits in both the scenarios, their premium tends to be higher than the premium on term plans.

ULIPs are innovative products combining both insurance and investments. They are market-linked i.e. they invest in equity/debt markets. They also offer maturity benefits under both scenarios – death or survival. Typically, they have the highest premium structure.

Finally, buying insurance is a continuous activity. Every individual’s needs change over a period of time. This in turn necessitates a review of the insurance portfolio. Over a period of time, most individuals would need to purchase additional insurance to ensure that they are adequately covered. The insurance advisor can play an important role in reviewing the portfolio and recommending which policies should find place therein. Hence it makes sense to be associated with an advisor for whom insurance is the core activity.