DTC: How Policy Change Impacts Buying of Insurance Policies
Published On 17 Nov 2011 By
admin. Under:
Useful Tips.
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On an average, a tax payer invests around 60% in insurance premium out of total tax savings year-on-year. In spite of that, most of them are underinsured. In the past, tax-saving avenues were limited, which made insurance premium as the default choice after provident fund. During the last decade, new products like ELSS have emerged. However, their popularity among tax payers remains low due to awareness and availability issues. Moreover, the return on premium is less than inflation, interest on provident fund and gains in ELSS.
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How insurance is being sold
Insurance agents have all the knowledge of the policy he needs to sell, but no idea of the insurance needs of the taxpayer. They are not identifying or computing the need of the customer on the basis of financial status of taxpayers. In fact, most of the agents are not trained to compute the insurance needs.
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The most common questions asked before selling insurance are:
- The money to be invested
- The amount which will be received on maturity
- Income tax benefits on investing in the insurance policy
Most insurance policies are so complex that individuals cannot understand them. And this usually backfires, as buying an insurance policy is a long term contract. One usually continues the policy even if it does not meet his or her financial goals. The commission earned by the insurance agent is based on the amount of premium. Hence, agents push for high premium policies by using financial jargon. Once bought, the chances of rectifying the error are very low and the cost of discontinuing the policy is high. Hence, changes introduced in the DTC were necessary to safeguard the overall financial security of investors. |
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DTC: A Step in the Right Direction
With effect from 1st April, 2012, the direct tax code will compel the tax saver to change the objective of buying insurance policies.
- First, the insurance premium will be eligible for tax saving if the risk cover is twenty times or more.
- Second, the overall limit of deduction under Section 80 C has been reduced from Rs. 1,00, 000/- to Rs 50,000/-.
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This change in tax law will automatically safeguard the taxpayers, who were being sold insurance as an investment for tax saving. Now, the investment in insurance policies will be more in term plans than ULIP or endowment.
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This article has been contributed by Mr Sudhir Kaushik from TaxSpanner. Sudhir brings domain knowledge of income tax laws and their compliance difficulties faced by individuals.
To read the articles written by Sudhir, click here.
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