How to avoid Insurance traps?

A new year means new resolutions. Regularly exercising and eating healthy is important for good health. But remember financial wisdom is equally important to keep your money intact and growing. It is also time for drawing up plans for tax investments as well as regular savings so here are some tips to get you started.

• Don’t invest in Ulips for only 5 years
It can be difficult to lock in money for long so if you expect you might need money in 1-3years from now, Ulips is not meant for you. You should look at this investment product only if you leave your money untouched for be-yond five years. A good time horizon would be around 5- 30 years.

To better understand this let us take an instance. If you invest Rs 1,00,000 in a Ulip for 30 years, the first year return will be negative at around 80,000. This is because the investment amount itself shrinks to Rs 75,000 after accounting for charges such as mortality, policy, allocation and fund management.

However, the investor breaks even after the fourth year and doubles the investment in 30 years. Even if the investor locks in for 15 years, he earns Rs 20.5 lakh if he has invested Rs 15 lakh. Ulips are designed in a way that they attract maximum front loading in the first 3-4 years of the policy. So, stay long to reap maximum benefits.

• Try not to take home loan insurance
Everyone would love a home of their own. It has become easier to own one with help of a home loan. But one should always remember that until you pay off the loan it doesn’t become your house in the true sense. The aspiration to own a house comes with a heavy price tag and a huge liability. Hence, you have to cover the liability so that your family doesn’t have to shoulder the burden of EMIs if something happens to you during the tenure of the loan.

Although the home loan insurance policy works similar to a term life insurance policy, term cover is the cheapest option. The risk cover/ sum assured will be equally to the outstanding loan amount at any point of time. But home loan insurance works on a reducing balance principle. As the outstanding loan amount reduces, the size of the cover also decreases.

The biggest advantage of a term plan is that the sum assured remains constant in a term plan over a period of time whereas in a home cover, it is a declining cover.