Life for Animesh Ahuja, an accountant in Agra is pretty simple. This 26-year old begins his day reading business newspapers, with a steaming cup of tea. He likes to teach, and wishes to pursue this passion once he retires.
Animesh has been working for the last five years, and has made some investments for tax-saving purposes. Apart from some systematic investment plans (SIPs), he has taken the following two insurance policies from his relative, who is an insurance agent.
His relative told him that he could get insured as well as save tax by taking these policies. Also, since ULIPs invest in the stock market, he would get good market-linked returns.
It didn't seem like a bad deal. And since he was buying from his relative, he could turn to him for help anytime.
Now, despite having two policies, Animesh wants to buy another ULIP to ensure complete financial security for his family and save tax too!
Are Animesh’s investments on the right track?
No. There are two reasons:
1. He doesn't need insurance
He is single and doesn't have any dependents. He hasn't taken any loans either.
Investment advisor Sanjay Matai, explains, "The most common mistake people make is confuse insurance with investment. Worse still, they buy insurance just to save tax. Ideally, you should take insurance only if you are the breadwinner and your family is financially dependent on you or you have liabilities which would devolve on your family."
2. Even if he needed a cover, there are other options
Had Animesh been married or had dependent parents and/or children, insurance would have been indispensable. In such case, a ULIP would not be the best option. Instead a term plan would suit better.
A term plan is the purest form of insurance and insures you for a low premium. For example, for a cover of Rs 10 lakh, Animesh would pay an annual premium of Rs 3,000. In a ULIP, only a small portion of the premium goes towards insurance cover and the remaining is invested in a debt or equity fund, after deducting charges (anywhere between 10 to 60 per cent of premium). For a cover of Rs 10 lakh, the premium would work out to Rs 30,000 every year in a ULIP.
Should Animesh rethink his insurance plans now?
Yes. Here's how:
Step 1: Surrender endowment plan or make it paid up.
On his endowment plan, Animesh has paid premium for four consecutive years. He has these two options before him:
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Option A: He could surrender it. In this case, he will get up to 20 to 30 per cent of the premium paid.
Option B: Make it 'paid up'. This means the insurance company would reduce the sum assured in proportion to the premiums already paid. Animesh would not have to pay anymore premiums but his sum assured would be lowered.
If he dies before maturity, his beneficiaries will get this lowered sum assured plus bonuses if any. If he survives until maturity, he will get the lowered sum assured plus bonuses.
This is a better option for Animesh because he would save the surrender charges and also continue to get insurance cover.
Step 2: Continue paying premiums on his ULIP
On the ULIP, Animesh has paid two premiums and the third one is due in January.
Financial planner, Arvind Rao, says," Animesh should stay invested for at least 10-15 years to get decent returns. If he stops paying premiums, the units from the fund will be used up to keep the policy alive. And once the units are exhausted, the policy will expire automatically."
So it makes no sense to stop paying premiums.
Fast tips:
• Do not buy insurance just to save tax.
• Insurance is ideally need if you have dependents
• Instead of a ULIP, a term plan with a well-performing mutual fund looks better in your portfolio.
• Always ask about charges if investing in ULIPs
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