Inspite of the uncertainty over DTC, review your insurance needs this season
February, 29th 2012
With just two weeks to go for the Union Budget 2012-13, discussions around the implementation or deferment of the Direct Tax Code are picking up speed again.
Last year, the finance minister had announced that the DTC will come into effect from April 2012. While the general consensus is that the introduction as per the original schedule seems improbable, stakeholders are, nonetheless, busy contesting provisions of the Code that they consider unfavourable.
Recently, Irda chairman J Hari Narayan made a case for the continuation of tax benefits for low-cover life insurance policies (read primarily traditional endowment policies). Separately, however, Irda has circulated a note amongst life insurers expressing concern over the low sum assured offered by certain traditional plans.
As per the current DTC proposals, only those policies where the sum assured is at least 20 times the annual premium will be eligible for aggregate deductions of up to 50,000. This virtually rules out many regular premium endowment plans where the life cover is quite low, and mainly pure protection policies can meet this criterion.
What's more, the DTC is silent on whether policies purchased before its implementation will be spared the axe. Hence, Irda has appealed to the government to bring down the stipulated ratio to 10 times.
At present, deduction of up to 1 lakh under section 80C is available to policies with a life cover of five times the annual premium.
Assess your protection cover
Irrespective of the outcome of these discussions, the talk around the quantum of protection cover should get you thinking about the adequate sum assured for your family. That, after all, is the main - financial planners would say sole - purpose of buying a life insurance policy, making term plans ideal form of life insurance.
However, it is common knowledge that in India, many prefer insurance-cum-investment policies, as they do not find the idea of 'spending' on premiums and not receiving any maturity benefits appealing. This is one of the reasons, apart from agents pushing these products, why endowment plans and unit-linked insurance have thrived over the years.
And, after the September 2010 regulations making Ulip commissions less remunerative for agents, focus has shifted to endowment sales again. These products, which have been popular in the country for decades, promise returns in the form of bonus and maturity proceeds in addition to the protection component.
In the event of the policyholder's death during the policy tenure, the sum assured is handed over to his or her dependants. The flipside, of course, is that they come with an opaque charge structure and invest predominantly in fixed income instruments, curtailing the return-earning capacity.
This tax-saving season, ending March 31, agents are likely to hard sell endowment products to you, presenting tax benefits as the cherry on top.
But before you lap up their offerings, you need to ask certain questions to yourself as well as the agent. Step one, you need to ascertain the amount your family would need to stay financially secure in the event of your death.