The start of the year is the time when most of us are showered with sales calls which provide some unwanted advice on how one can save on taxes with their products. Friendly reps from your bank might also take a chance to pitch in. Most of these suggested products are hybrids which are a mix of both investments and insurance. The sales pitch you would come across can be quite simple where you are told that you would get the insurance, good returns along with tax benefits. It is thus important for professionals to keep themselves away from such products. But why are these not a great option? Let us read on to know more.
Many experts believe that when one chooses a mixed plan, they are compromising on both their investments as well as the insurance coverage. As most of these plans are expensive, one would be forced to only choose a small coverage for insurance. Another disadvantage for the same is that one cannot get in or out of the plan like one does with a badly performing mutual fund scheme as it also has the life insurance cover attached to the same. An investment made for tax saving always need to match one 's investment goal. One should never invest to just save taxes as it can turn out to be a futile move. The tax saving investments always needs to help the investor in meeting financial goals.
More than 9 of 10 people buy insurance for the wrong reason; just to save on their taxes. One has to understand that insurance is a protection tool and not a tax saving product. Let us now have a look at the three reasons as to why choosing insurance as a tax saving instrument is a bad choice.
Insurance policies need commitments of multiple years:
One needs to understand that the investments made for tax saving are not different from the regular investments. Hence, one can apply the same parameters when choosing an investment product for tax planning. Insurance policies involve long-term contracts that come with years of commitment.
Insurance policies cost more and provide lesser returns:
There are quite a number of options for investment under the section 80C that provide better returns than insurance at a much lower cost. One can choose the PPF and ELSS mutual fund schemes that charge less than 2.5 % and provide returns better than insurance policies. If you have a girl child you can as well choose the Sukanya Samriddhi Yojana that has no cost at all.
Deduction of tax is the core objective of Insurance policy:
When a person is buying protection for themselves it is important to consider the factor of tax deduction before choosing an insurance policy. For example, one can choose the term plan of 1 crore, but this is only helpful to secure the financial future of the family when something unexpected and untoward happens to the policyholder.
Financial planning is of utmost importance and the same significance has to be given to tax planning. One has to determine their short and long term goals and create a well chalked out balanced plan that would help them meet the goals established. The first step towards developing a proper tax saving plan is meeting your financial advisor.
Now that you are aware of the reasons as to why one should not choose insurance policies just for tax benefit, it is time to do a little research on the other options available and make your investments wisely.