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Make your insurance portfolio Direct Tax Code ready
05-Nov-2011
Source : Economic Times
Endowment plans (or traditional plans, in life insurance
industry parlance)may see some changes soon. Always a crowd
favourite, traditional plans - life
insurance plans that give you insurance cover plus a bonus on
maturity or theinsured amount to your dependants on your death -
have regained their lostglory after the recent changes in the
guidelines on unitlinked insurance plans,or Ulips.
Ulips had stolen the thunder from traditional plans, but that
changed after thenew guidelines were introduced. Insurance sellers
have again startedfocussing on traditional plans for attractive
commissions. However, theInsurance Regulatory and Development
Authority, or Irda, chief J HariNarayan has expressed concerns over
the low protection component in these(traditional) products.
He feels such products may not match the requirements of the
Direct TaxCode (DTC) proposals, which would offer tax breaks only
if the sum assuredis at least 20 times the annual premium. As a
result, the regulator isconsidering prescribing a minimum threshold
in terms of the life cover to beoffered by such traditional
products. Even as the regulator carries on with itsdeliberations,
it is time for you to assess the protection component of
yourendowment policy.
The tax angle
In fact, this is the right time to do the exercise, as you will
be giving finishingtouches to your tax planning investments. You
can also expect calls frominsurance agents, who would try to sell
you policies that offer the triplebenefits of tax-saving, insurance
and investment. And, most probably, theagent will try to sell you a
traditional product.
"Insurance policies entail recurring premium payments and, thus,
thedecision you make this year may have an impact in the future
years, too, ifthe DTC takes effect in its current form," says
Rajesh Srinivasan, seniordirector - tax, Deloitte India. The DTC is
likley to come into effect from April2012.
Ideally, it is best to address the objectives of insurance,
investment and tax-saving separately. However, if you have decided
to choose insurance this yearto reduce your tax outgo, it would be
wise to keep an eye on the annualpremium payable and the other
terms and conditions of the policy Ensurethat the premium does not
exceed 5% of the sum assured. Also, see if theendowment plan comes
with a decreasing cover option, and if it does,whether its likely
to fall short of your requirements any time in future.
Secure your familys interests
Apart from the tax implications, you need to remember that the
primarypurpose of taking a life insurance policy is to provide for
your familyfinancially on your death during the tenure of the
policy. However, due toblind reliance on agents advice and lack of
awareness or research, it is notrare to hear of policyholders being
stuck with multiple policies - for instance
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Ulips, endowment, moneyback and pension policies - and yet being
low oncover.
The total premium payout may run into lakhs of rupees a year,
but theamount that the policyholders dependants may get in his/her
absence maynot be enough to fulfil their needs.
Therefore, the first step while buying insurance or reviewing
your portfolio isto find out if the current policies add up to your
ideal protection requirement.There are various methods of
determining this figure, but as a thumb rule,financial planners
suggest that the sum assured should be at least 100 timesyour
current monthly income.
Weeding o he ndeiable
Now, after a review, if you feel that your portfolio is not
overloaded withpolicies and that you need to boost the sum assured,
you can simply go for apure term life policy - the cheapest and the
most-recommended form ofinsurance.
Buying such policies online will reduce your premium further.
However, ifyou find yourself in a situation where the protection
element is minimaldespite the presence of several policies, the
solution could be a bit morecomplicated. For, it would necessitate
ending some policies, and, if required,replacing them with
requisite term cover.
You need to take into account several factors, including the
cost structure ofyour policies, returns, tenure, number of policy
years completed and the costof acquiring a new policy, before
arriving at a decision.
"Low-yield traditional policies can be converted into paid-up
ones, if it does
not make any sense to continue with them," says Suresh
Sadagopan, certifiedfinancial planner, Ladder7 Financial
Advisories. "One of the things to look foris how much cash a policy
is sucking in and what kind of returns one canexpect if the policy
is continued with. One can figure out based onconservative
estimates what an endowment or moneyback policy has offeredas bonus
in the past."
An endowment policy acquires a surrender value after completing
threepolicy years. "However, the decision to surrender or make a
policy paid-upalso depends on a persons circumstances. There are
certain people who maynot be able to get new policies. In such
cases, we take a call on keeping the
policy on if it does not pose a cash-flow problem," Sadagopan
says.
In case of Ulips, the lock-in period is five years for plans
issued afterSeptember 1, 2010. The accumulated funds of the Ulips
discontinued beforefive years will be locked in and paid out on the
completion of this period.Here, you can look at the increase sum
assured option, too, but you need tobear in mind that even if
premiums do not go up, the amount allocatedtowards investments will
go down, as the mortality charges will certainly seea rise.
In short, you would do well to take a cue from the regulator and
evaluate
your insurance needs and the level of preparedness that your
current policiesoffer, particularly if they are endowment products
with low insurancecomponent.
