Life Insurance Warning: Beware what your agent tells you

Many individuals purchase life insurance policies to avail tax deductions under Section 80C, even if they don’t need them, and fall prey to misleading by insurance agents. However, life insurance policies must be bought to provide financial protection to loved ones, and one must ensure adequate cover rather than treating it as just another tax-saving tool.

Insurance agents often try to hard sell guaranteed plans or a whole life insurance policy, particularly during January to March. Experts recommend opting for a pure term plan with a few riders for financial protection of the family, after analyzing one’s needs and not blindly following the agent’s suggestions.

Investors can choose from three categories of life insurance plans – pure term plans, endowment plans, and unit linked saving schemes (Ulips). However, investors must be cautious of traps set by sellers who may portray Ulips as only investment plans. Endowment plans and Ulips offer all three benefits – insurance, life cover, and investments.

Life insurers are introducing a range of guaranteed savings plans that offer guaranteed, regular, tax-free benefits and death benefits. However, investors must note that the guarantee returns usually range between 5-6%, which may not be ideal in a rising inflation regime.

A whole life policy covers the policyholder for 99 years and requires them to pay premiums throughout their life. It is ideal for those with financial dependents who would remain dependent on them for a long time, such as children with special needs or a dependent spouse. However, policyholders must assess the amount that their dependents will need to cover living costs and future expenses.

Policyholders can choose from a range of optional riders attached to a whole life policy, but they must also consider their income to service the policy, as paying the premium may become a burden, particularly after retirement. It is essential to read the fine print and not fall for policies that are sold as fixed deposits, especially when one receives a lump sum amount.