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When this year's budget laid down new rules for life insurance, it was presumed that mis-selling would lose its sting. Far from it, mis-selling has now become more dangerous for your finances. Till 31 March, if someone was missold an unsuitable life insurance policy, the most he would have lost was the liquidity and the opportunity to invest in a more lucrative avenue. But at least he got the tax benefits—tax deduction of the premium under Sec 80C and tax-free income on maturity under Sec 10(10D).
Now, if a buyer is not careful, he may end up buying a policy that won't offer any tax benefits. Even the money received by his nominee in case of death will be taxable if the policy does not cover the buyer for 10 times the annual premium. Individual agents as well as aggregator sites are happily selling insurance policies that are not eligible for tax benefits. Till last week, a prominent insurance portal was hawking Jeevan Vriddhi, a single premium plan from LIC that covers the buyer for five times the premium. Posing as a buyer, ET Wealth called up the portal and was given the assurance that the policy will offer the tax benefits under Section 80C and Section 10(10D).
Insurance agents also have their hands in the till. They are bombarding buyers with attractive benefit illustrations without educating them on the post-budget tax implications. An agent of a private insurance company approached us with an endowment insurance policy that offered a cover of seven times the premium. It is by itself a good plan because it offers the option of a whole life cover as well as term cover and accidental death riders But the five-year option that he was trying to sell is not eligible for any tax benefits and he was oblivious of the fact. When this was pointed out to a senior official, he mumbled that the company will soon be conducting training sessions on the changes in the rules.
The budget has very clearly stated that policies issued after 1 April must meet the 10 times criteria to claim the tax benefits. "The Sec 80C tax de duction is not as important for insurance buyers as the Sec 10(10D) tax exemption," says V. Srinivasan, chief financial officer, Bharti AXA Life Insurance. For a buyer who is not aware of the 10 times norm, there may be a rude shock waiting when the policy matures or when his nominee gets the insured amount after his death.
To ensure that companies don't design products to circumvent the rules, the budget has clarified that the cover shall not include bonuses and other payments made by the company. Only the basic cover will be taken into account The budget has also mentioned that the cover should remain at least 10 times throughout the tenure of the policy. This means that plans in which the cover comes down from the second year onwards will also not make the cut.
If you are planning to invest in a life insurance policy make sure it complies with the new eligibility norms for tax benefits. The base cover offered by the policy should be at least 10 times the annual premium. For instance, if the premium is 12,000 a year, then the cover should be at least 1.2 lakh.
Two weeks back, Finance Minister Pranab Mukherjee had asked the Insurance Regulatory and Development Authority to take strict action against companies that are mis-selling insurance. The truth is, companies don't mis sell—their agents and advisers do. The problem is that companies don't actively dis courage the mis-selling and er rant agents usually get away with a mild rap on the knuckles. Insurers will have to take stricter action against mis-selling. If they do not take cor rective measures now, in a few years Irda will be inundated with mis-selling complaints from taxpayers who have been denied tax deduction and ex emption on their investments in life insurance.
What to check before you buy
• The cover should be at least 10 times the annual premium of the policy.
• The life cover should not fall below the 10 times level even in subsequent years.
• The sum assured should only be the basic cover and should not include bonuses and other payments.
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