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Life insurance: Reason to cheer!   Dec 30, 2006

It would be safe to state that 2006 was a good year for investors in the life insurance segment. What made the year special was that the regulations and changes incorporated, have the potential to go a long way in aiding investors make the right choices going forward.

The first impetus was provided in the annual budget. The budget enhanced the overall Section 80CCC limit on premiums paid towards pension plans. Simply put, policy holders can now contribute upto Rs 100,000 per annum (pa) as premiums for pension plans and claim tax benefits on the same. The said limit stood at Rs 10,000 pa in the earlier tax regime. As a result, earlier Rs 10,000 was the defining amount for pension seekers. Instead of trying to figure out the policy amount (and in turn the premium payments thereon), based on one’s needs, most investors were prone to commence their retirement planning exercise based on the Rs 10,000 sum. With the enhanced tax benefits, investors can go about conducting their tax-planning exercise from the right perspective i.e. based on their needs, without worrying about tax benefits.

Another major event was the introduction of some much-needed guidelines for the unit linked insurance plans (ULIPs) segment. ULIPs, powered by the proposition of combining insurance with investments have emerged as popular investment avenues in recent times. Of course, insurance agents have done their bit by aggressively selling ULIPs; the attractive commissions thereon, have undeniably played their part.

The trouble with the ULIPs segment was that there were far too many ambiguous areas and often, the policy holder’s interests were compromised with. The regulator i.e. Insurance Regulatory and Development Authority (IRDA) decided to introduce regulations pertaining to areas like sum assured, tenure and surrender value, among others. In effect, the insurance element in an otherwise investment-oriented product was beefed up.

What investors should do in 2007

For far too long, tax benefits have dominated decisions related to buying insurance. Now that the authorities have amended regulations and made them conducive to decision-making from the right perspective, the onus shifts onto investors for making the right choices. We reiterate our long-held view that each investor’s needs and financial objectives should be the factors based on which the insurance portfolio must be constructed. Tax sops should be treated as add-on benefits at best.

Also with multiple products on offer, the need to make well-informed investment decisions acquires pertinence. Ensure that you are associated with a qualified and professional insurance agent at all times. This will hold you in good stead over the long-term horizon.

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