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Avoid Purchasing Term Insurance Online for the Wrong Reasons

Updated on October 16, 2014

Different types of term insurance policies are designed to secure the future of your entire family financially. But, if life insurance purchased for the incorrect reasons, then the same plan can prove a drain on resources and avoid the insured person rom meeting his crucial financial needs. The list of wrong reasons may include tax saving benefit under Section 80C, gifts for children and investment for retirement. Traditional term plans are considered as the main culprits, merging low life coverage with average returns. This cover provided is 15 times the annual premium and the returns are around 7 percent.

Still, online term plans are known as favored investment choice because policyholders can avail triple advantages such as long term savings, life insurance protection and last but not the least, tax savings. Majority of Indian citizens don’t have adequate insurance coverage and traditional policies are the usual suspects. The premiums of money-back policies and endowment plans are too expensive. So, customers are not very keen to buy an expensive coverage. Like, a term cover of Rs one crore for 30 years would cost a 30-year old nearly Rs 20,000 per month in case buyer purchase a traditional life insurance policy. But, if person buys term coverage, the same coverage would cost him around Rs 1,000 per month.

Generally, traditional policies suit to those investors who are searching for tax-free income under Section 10(10d). Investment experts advise that such investors should not combine investment and insurance together. On the other hand, a mixture of a public provident fund and term plan works more beneficial as compared to an insurance plan. In case person has high level of risk appetite, then he or she could invest the saving amount on the premium in mutual funds that have high potential to offer higher returns, though they involve some risks. Sometimes, people may feel that a cover of Rs one crore is just too much.

Usually, most banks offer around 9 percent interest on fixed deposits and a corpus of Rs 60 lac can produce an interest of Rs 45,000 a month for the policyholder’s family. It is completely true. But, people also have to consider the tax limit on this income. Even if the beneficiary is in the 10 percent tax bracket, then tax will cut off Rs 4,500 from his monthly income. Customers need to consider inflation factor while deciding coverage need. Do not forget that family’s monthly expenses will keep increasing with inflation.

If person needs around Rs 40,000 a month to run the household expenses in 2014, then it will need Rs 43,200 per month in the year of 2015 to meet these same expenses. If you consider inflation fact, then Rs one crore won’t be too big. If investment is a choice which offers nearly 9 percent post-tax returns, then a sum amount will sustain inflation adjusted withdrawals. This calculation considers an inflation rate of 8 percent per year. The wholesale inflation rate is not high than this and the consumer inflation rate reflects their consumption basket in a better way.


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