Tax Saving: Why you should say no to insurance and stick to ELSS

This is the time of the year when you start getting sales calls and unwanted advice on tax-saving products. Friendly souls from your bank would also pitch in. Mostly these calls and advice would be about hybrid products that mix insurance and investments. The sales pitch is very simple: you would get insurance, returns and tax benefits. However, it is in your interest to stay clear of these products.

“Sales representatives often pitch ULIP as a tax saving investment product similar to ELSS with an extra advantage of life insurance,” says Kishorkumar Balpalli, founder and chief financial planner, MyMoneySage.in. Unit Linked Insurance Plan or ULIP is a mixed product sold by life insurance companies.

Insurance companies deduct a part of the premium paid as mortality charges and provide you a life cover. Another part goes towards investments - equities, bonds or money market instruments depending on the investment option chosen by the investor. A small part of the premium also goes towards administrative charges.


Not a great mix
“ULIPs don’t do justice to either insurance or investments,” says Balpalli. Experts like him believe that when you go for a mixed plan, you compromise on both your insurance cover and investments. Since these plans are expensive you would be forced to opt for a small insurance cover. Also, you can't get in and out of the plan just like you would do with a badly performing mutual fund scheme as your life insurance cover is attached to it.

That is why it is always best to keep your insurance and investment needs separate. Buy a term plan to get a life insurance cover and invest in a mutual fund scheme for you investment needs.

“I always advise my clients to invest in ELSS for tax saving instead of ULIPs,” says Pradeep Hattangadi, certified financial planner, Raviram Financial Services. “You should never look at tax saving as a standalone project,” adds Hattangadi.

The point is: the tax-saving investment should always match your investment goal. Investing just for the sake of saving taxes is a futile exercise. Your tax-saving investments should always help you to meet your financial goals.