Things to consider before buying life insurance policy

I recently got married and want to buy life insurance for both of us. Which are the essential points to be considered while choosing a life insurance policy?

- Bassetti Deepak, Hyderabad

First and foremost, don't leave the decision part to the intermediaries. Ask yourself what the sole purpose of Life Insurance is? Improve your self-awareness concerning life insurance by doing thorough research and analyzing a few life insurance plans. Find out the right insurance cover and zero in on the best insurance plan that suits your requirement. Please stay away from traditional insurance plans.

Most importantly, do not mix insurance cover and tax saving. In other words, do not consider insurance products that double up as insurance as well as investments. Do not opt for life insurance policies that offer money-back. Take the life insurance cover to mitigate risk rather than getting the money back. You will end up with lower returns without a retirement corpus. Go for the annual premium paying option and do not default on insurance premiums. Insist on the fine print of the insurance agreement and read it thoroughly. Seek calculations such as benefits, returns, and net yield from the policy through email or writing. Pay heed to details, benefits, conditions, and clauses before signing the insurance contract. Don't simply sign on the document leaving the job to intermediaries or agents for filling in your details. Revisit your insurance plan when you enter a new stage of life. Don't overlook the importance of the nominee and never consider it just another formality. Opting for a formal nomination and selecting a nominee for a life insurance policy helps the life insurance company pay the death benefits and assured money after the policyholder's demise. In the absence of a nomination, the deceased's dependents or beneficiaries may have to run from pillar to post to claim the death benefits. This will only lead to increased hassles, paperwork, and other processes that can prove time-consuming. Due to the high premium associated with traditional life insurance plans, policyholders opt for a little cover for an affordable premium. As a result, they not only buy an ineffective policy but also remain underinsured. Many perils are associated with ineffective risk cover. Picking a wrong insurance plan or an insufficient cover may leave a family's financial position in jeopardy.

The stock market crashed again. I want to wait and watch before investing in the stock market. Where can I put my savings for the time being? -

V. Sai Shivram, Bengaluru

Stock markets worldwide are on a slippery slope again due to the new Covid variant, Omicron. You may park your money in fixed-income funds or money market funds, or liquid funds. Fixed-income funds in India are known as Debt funds, which invest money in debt securities. Debt funds invest in corporate bonds, debentures, G-Sec (government securities), and money-market instruments are fixed income securities. Debt funds are a relatively stable investment avenue. Like any other mutual fund investment, returns from debt funds are not guaranteed and are subject to market risks. Debt funds, however, come with a lower degree of risk than equity instruments. Income from the debt fund will be taxed at 20 per cent with indexation benefit under long-term capital gains rules if you redeem your investments after three years. The returns will be added to the investor's annual income and taxed according to the income tax slab if exited before three years.

If your investment time horizon is less than a year - you may opt for money market funds. Money market funds are a category of mutual fund schemes that invest money in treasury bills, certificates of deposits, commercial paper, and other money-market instruments. The risk factor is considerably very low. Money market funds are taxed like debt schemes. If you redeem units after three years, the income will be taxed at 20 per cent with indexation benefit under long-term capital gains rules. Returns will be clubbed with annual income and taxed according to the investor's income tax slab in case of exit within three years.

Invest in liquid funds if the holding period is very short-term. Liquid funds invest in debt securities and money market securities with maturity of up to 91 days only. There is no guarantee of any return, and liquid funds are not risk-free. One can redeem the investment at any point in time, even the next day from the investment date. Most funds houses do not charge exit load on premature redemption if investments are held for more than a week. Also, there is no tax deduction at source in liquid funds at the time of redemption.

(Readers can send questions concerning Stock Market, Investments and Personal Finance to [email protected])

(The author is a Sebi-licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc)