Author Topic: Life Insurance – Its Uses and Misuses.  (Read 1319 times)

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Offline jamthoms

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Life Insurance – Its Uses and Misuses.
« on: February 21, 2009, 07:14:14 am »
With the fiscal year 2008-2009 drawing to an end, most individuals are rushing around to make investments to minimize their tax liability. Generally it is seen that the salaried individuals are the ones that end up paying more taxes then they need to do. It is here that you start investing in schemes that term themselves as “Tax Saving Products”. They definitely wind up saving your taxes, but the flip sides of these products is that they might not be the perfect investment module that would suit your needs in the longer run. Undoubtedly Insurance products sale like hot pancakes this season, as they offer a wide range or plans and policies that not only help you to save on your taxes but provide you with long term security and financial gain.

Life Insurance should definitely be an integral part of an investor’s portfolio irrespective of the tax-benefits derived from it. The basic purpose to invest in insurance is to ensure that you are financially secured through out. It could be when you retire; you are bankrupt or running out of a genuine source of income. People generally tend to consider it as a tax saving module, thereby overlooking the prime objective of this investment scheme. When you invest in Life Insurance Policies or Life Insurance plans it is imperative that you choose the ones that suit your needs in the longer run. By paying the Life Insurance premium initially you should reconsider the amount its mode & tenure that you will have to pay the premium. Failure to do so on a consistent basis will only have your policy confiscated by the Life Insurance Company. Hence, the decision to buy insurance should be solely based on the individual's needs for protection; the tax benefits must be treated as incidental.

Waiting till the end of the financial year and then making hasty decisions isn’t a good idea. As a matter of fact it should be procured as and when needed and not only to save on taxes. This practice deprives investors of the opportunity to conduct a thorough evaluation of the available options. By opting for the wrong policy, one runs the risk of being under insured. Another major mistake that is quite prominent in the insurance industry is mis-selling. Over the years, several insurance advisers have been guilty of selling products that were right for them (helped them earn higher commission income), rather than the investor. Basically ULIP’s (Unit Linked Insurance Plans) are the most mis-sold instruments. Hence it is necessary that you are involved with an ace insurance adviser prior to making your investment. The investor should also conduct a through analysis prior before zeroing in on any product.

So when you decide to invest in Life Insurance Policies, you got to consider to important options: a) First, decide how much insurance is required and 2) Decide the type of insurance product that can help meet the requirement. Term plans and Endowment plans are the most common sought after Life Insurance Plans. Term plans provide insurance cover. In other words, if the policy holder survives the policy term (i.e. the period for which the policy offers him insurance cover), then he gets nothing i.e. there is no maturity benefit. They have the lowest premium structure. Endowment plans unlike term plans, these plans provide maturity benefits under both scenarios - death or survival. Since endowment plans provide maturity benefits in both the scenarios, their premium tends to be higher than the premium on term plans. ULIP’s are innovative products combining both insurance and investments. They are market-linked i.e. they invest in equity/debt markets. With their rapid growth Life Insurance Companies are launching new policies practically every now and then. The insurance adviser can play an important role in reviewing the portfolio and recommending which policies should find place therein. Hence it makes sense to be associated with an adviser for whom insurance is the core activity.

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