Insurance products have conventionally been very popular among investors. Unfortunately most products tend to be picked for the wrong reasons; the stated reason i.e. to indemnify against losses never seems to be the top priority. Instead extraneous factors play a vital role.
We list 5 reasons which you should be wary of while opting for insurance cover.
1. To avail of tax benefits
Insurance policies and tax benefits have become virtually synonymous. Income tax benefits under Section 88 for the amount invested and Section 10 (10D) for maturity proceeds make insurance policies attractive propositions.
However decisions which are driven solely by tax benefits can be misleading. The right insurance policy is one which can satisfy a need for protection, the tax benefits should be treated as incidental gains.
For example, let us take an individual whose insurance needs are best served by a pure risk cover (term plan). Instead he chooses to go for a money-back policy with a higher premium amount to maximise the Section 88 tax benefit. This is a perfect case of choosing the wrong plan only for higher tax benefits.
2. To generate returns
Investors must realise that their investment needs are distinct from their insurance needs. To clock attractive returns investment products like mutual funds, bonds and fixed deposits are available.
When insurance products are expected to generate returns, there is a conflict in the objectives which can prove to be detrimental for the investor.
3. To invest surplus funds
Taking an insurance policy to gainfully utilise surplus funds is not the right strategy. Insurance policies generally run over a long-term horizon, inadequacy of funds
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