As a well-aware, net savvy professional, you must be conscious of the need of the life insurance coverage you require to secure your family's financial life. Today, the provisions of the Income Tax Act offer you provisions under which you can buy life insurance coverage, generate returns and save on tax too.
A large number of people today research for insurance plans online and zero-in on a life insurance plan which is providing best returns, at present. Is that the right approach? Well, it is okay to research and come to know about the best possible life insurance plan.
But, here is the trap. Many people just put all of the insurance money into one single policy. Some insurance agents can urge you to do this. They can show you an online account of one of their clients who has generated returns to the tune of Rs 25-40 per cent in a year. Beware - these are mostly fake accounts which are used to dupe customers. Unfortunately, many insurance buyers fall into this trap.
People buy life insurance policies with a premium amount of as much as Rs 1 -1.5 lakh and then expect that this will bring great returns to them.
It is not advisable at all. You must spread your risks and get different types of policies. Since section 80C of the Income Tax Act provides for tax deductions of up to Rs 1.5 lakh, you can easily buy multiple policies. Here are some useful tips to diversify your insurance investments.
Get a mix of public and private sector insurance companies: Public sector insurance companies are known for their good claim settlement ratios. At the same time, they have a notorious image of producing very low rates of returns. Do not be surprised if an LIC policy gets less than 4-5 per cent returns in a year. Assuming that you are a young professional in the age between 25-40 years, you can buy a policy of not more than 25 per cent of your total insurance corpus.
Prefer leading private sector life insurance companies like HDFC Life, ICICI Prudential, Reliance Life, etc. These companies offer Unit Linked Insurance Plans (ULIPs), which can fulfil your need for financial growth.
Select your funds carefully: If you have decided to invest in ULIPs, good. But that is half job done. Under ULIPs, you have to select funds. An insurance company can suggest you default allocation of funds but you can always apply your mind to it.
Broadly, insurance companies have funds which invest in equity markets and debt instruments. Within these two categories, you have several options. Equity based funds generally have blue chip funds, mid cap funds, so on and so forth. Debt funds invest in bonds and government securities, which offer very low returns but do not carry any risks.
There is also a Balanced Fund under which you funds are equally invested in equity and debt markets. Thus, you have three different options to optimise your insurance portfolio returns.
If you have a traditional life insurance policy from a public sector undertaking, you must prefer minimum allocation to bond funds. You can allocate some 5 per cent in bonds and rest in equity based funds.
You can go for a mix of blue chip and mid cap funds. This strategy automatically balances your risks and generates superior returns in the long run.
Buy the policy online: Today, most life insurance companies offer online buying option. What is the advantage? There are several advantages. First, if you buy online insurance, the insurance company does not have to pay commission to sales agent. Thus, you will have an indirect saving since the life insurance company will be able to invest this amount on your behalf.
In the long run, you will realise that your friends who bought the same policy from an insurance agent is generating lesser returns than the one you bought online. Yes, do not be surprised. It is a market reality.
There are thousands of such cases where insurance companies have to shell out commissions in the range of 10-40 per cent. Naturally, this commission is paid out from the premium you pay. The returns are bound to be low in this case because the insurance company will invest less amount and allocate more funds in the name of expenditure.
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