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Four Forbidden Rules of Life Insurance

Ques. Which is the best Life Insurance Policy?

Ans. The best life insurance policy is one that provides
a) "adequate" financial support,
b) if "required"
c) at "minimum" cost,
d) to the near and dear ones
should the insured person suffer an untimely death.

This answer leads us to the "Important Don'ts" that apply when buying life insurance policies.

Don't buy policies that combine insurance with investment
35-year old Sandeep feels that Rs.1 crore cover would be adequate for his family. He can get a 20-year Term Insurance Cover for around Rs.40,000 only. Whereas, an investment-linked insurance plan e.g. a 20-year Endowment Plan would cost a whopping Rs.4.80 lakhs. Clearly, for the desired cover, term plan is lot cheaper. Even otherwise, how many people can afford to pay nearly Rs.5 lakhs as premium every year for 20 years?

Of course, there is no return at maturity in a Term Plan. Endowment Policy, on the other hand, will have a maturity value. But, as historical trends show, you will get a much higher amount after 20 years in a pure investment product vis-a-vis an insurance plan. Further, in an insurance policy, you have to compromise on flexibility and diversification. This is a big negative on a 20-year time frame. So it makes ample sense to invest the difference between the two premiums in a pure investment.

Don't buy insurance merely to save tax
You get two types of tax benefits with insurance

i.  At the time of investment [u/s Sec 80C which has limit of Rs.1.50 lakhs]; and
ii. On maturity [as per u/s 10(10D) returns from insurance are tax-free]

There are far better alternatives to avail Sec 80C benefit. So, you don't really need to look at insurance (except term plan) for the same.

Not many investments give tax free returns on maturity. But, given that returns from insurance plans are not competitive, it is quite possible that the post-tax returns from pure investment products work out more than the tax-free maturity proceeds from insurance.

Don't buy insurance if you are sufficiently wealthy
Rajesh has a net worth (excluding his house) of around Rs.6-7 crores; invested across a portfolio of properties, mutual funds, bonds and gold. Even if his salary income were to come to an abrupt end, his family could continue to live comfortably with the returns generated by this portfolio. As such, insurance amount, if any, is inconsequential. It would make no material difference to his family's future. So why should Rajesh waste his money on insurance premiums?

Don't insure yourself if you have no dependents
Deepak's spouse Ragini earns a handsome income on her own. Their children too are settled and very well-off. In short, there is no one in this world who is dependent on Deepak's income. Again, insurance, if any, would be a redundant amount for his spouse / kids. They don't need this money. So again... there is no need for Deepak to waste his money on insurance premiums.

(Note: The above discussion pertains to traditional plans. Of late, some ULIPs have become investment-worthy and maybe others too follow soon.) 

The best life insurance policy goes by the name 'Term Insurance'.
In reality, however, this best life insurance policy has very few buyers.
A. Because people are reluctant to buy something where there are no returns
B. Because people are reluctant to sell something where the commissions are negligible.

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