Many taxpayers believe that purchasing a term insurance is one of the simplest ways to reduce their tax liability. For people who want to finish the tax-saving activity before the March 31 deadline, it makes their case stronger.
But if you buy life insurance as a quick way to lower your tax bill, you may end up defeating the point, which is to protect your family’s finances. Here’s a list of frequent mistakes people make when purchasing life insurance, along with advice on avoiding them.
Believing your advisors without question:
It would help to learn about the term insurance tax benefits and drawbacks of the insurance policy they are urging you to get rather than blindly following the agent’s advice.
Every policy has the same advantages:
Many consumers believe that all life insurance policies give the same tax advantages. And because of this misunderstanding, many people purchase insurance policies that are inappropriate for their needs.
The three primary life insurance contract types are term, endowment, and unit-linked insurance plans (ULIP). When an insured person passes away, a term plan pays the beneficiary the amount guaranteed.
It would be beneficial to look at an online term insurance calculator to identify the advantages and add the riders, depending on your budget for the premiums.
Another common mistake can be the buying of multiple life insurance policies without figuring out how much insurance is needed. A higher premium can take money out of your savings, which you could invest in something more beneficial.
No clarity on the duration of the insurance coverage:
Few people can predict how long they may only be able to support themselves with a life insurance policy. As a result, some people purchase unnecessary long-term policies, while others end up with insurance coverage with too short a tenure.
If you choose a longer term, your premium can be higher, but if you choose a shorter term, you might be more financially vulnerable to things you can’t plan for. The ideal way to figure out how long your life insurance policy should last is to plan it until you retire.
No clarity about updating the insurance coverage:
People’s lifestyles depend on their income, and a life insurance policy ensures this continues to be the case even after the main breadwinner passes away.
Suppose your income has increased significantly over time, and your lifestyle has followed a similar pattern. If that’s the case, you’ll need more insurance to ensure your family can keep living the way they do even after you pass away.
Lacking additional protection:
What if you survive a major casualty but develop a disability that makes it impossible for you to work? If you only have a simple life insurance policy, the insurer may not pay you because you survived the casualty. This is a common mistake that many people make while buying a term plan.
Adding riders like “critical illness” or “accidental disability” when you buy your term plan would be an ideal way to get more protection against critical illnesses and disabilities.
Making an offline purchase:
Most life insurance companies offer their lowest-cost policies online. If you buy it offline, you may pay a higher premium. Besides being fully involved in the process, purchasing the policy online helps you plan your finances better.
Advice: Using an online term insurance calculator can help you analyse the right price for your premium that may be both affordable and beneficial.
Not disclosing material information:
When the policy gets issued, the insurance company accepts all the information you gave in good faith. But the company may not pay your claim if any of the information you put in your application needs to be corrected.
People often hide information when they have a severe illness or use tobacco or alcohol. If your loved ones do not get the intended term insurance tax benefit, then the purpose of buying the policy fails. As a result, even if the premium gets higher, ensure you provide accurate information.
You need to pick your insurer correctly:
When you buy a term insurance policy, your primary aim should be that your family gets financial support without hassle. However, while some insurance companies offer good products, they need to improve when it comes to customer service and the claim process.
Therefore, you should be confident about the insurance company selection. Make sure the insurance company has a high claim settlement rate based on the number of policies and amounts, a good reputation for customer service, and an ideal digital platform to access services.
Note: A new tax regime was introduced in FY 2020-21. Taxpayers can opt for either the old or the new income tax regime and file taxes accordingly.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.
Tax benefit is subject to change in prevalent tax laws.