Random investments in insurance products to save tax can cost you dear in long-run

It is a story that is told innumerable times during the first three months of every New Year. Financial advisors of every hue would recount horror tales of how individuals who rush for 'last minute tax planning" end up with an investment portfolio of "wrong products" that doesn't serve any purpose. However, the moral of the story seems to have had no desired impact on the audience.
Most financial advisors claim that the ancient practice of last minute rush is going on even this year, too. "It seems, most people don't think about tax planning until their finance department asks for details of investments," says Raghvendra Nath, managing director, LadderupBSE -4.87 % Wealth Management. "Typically, they end up buying insurance products, as insurance companies are most active during this period.
In fact, most of their business comes in the period of January to March," adds Nath. As a result, it is not unusual for wealth managers like him to come across clients who have bought 20 to 25 insurance products over the years. A financial planner claims he recently dealt with a new client who had purchased 48 insurance products.
As you might have guessed already, "wrong product" in financial parlance means an insurance product and financial advisors often claim that most buyers are saddled with these products — ranging from term plans to unit-linked products to pension products — forever as they have no idea how to take remedial actions. "The trouble with most of the insurance products is that these are costly and are also long-term products.
Also, it is not easy to get rid of them because they come with front-end charges, surrender charges," says Suresh Sadagopan, principal planner at Ladder7 Financial Advisories. "Getting rid of them is a painful process for us because we have to go through each product and do a cost-benefit analysis to figure out what to do.
It is equally painful for clients because in some cases they will lose money as most insurance products wouldn't make money in the first few years because of charges deducted upfront from the premium, and they also have to forego some more money because of surrender charges," adds Sadagopan.
Perils of the friendly advice
The trouble begins when someone shops for tax-saving instrument in a hurry. If she walks into a bank for a 5-year fixed deposit that would fetch deduction under Section 80C, the bank official would start talking about a product that gives assured returns plus lot of extra things that an FD doesn't offer. If it is not a bank official, a neighbourhood investment expert is always there to sell an insurance product with a very small cover because it would fetch him a better commission.
Investment experts say most individuals go blindly by what the sales person says and they don't even bother to cross-check the basic facts. "Since they are in a rush, they don't actually have the time to get into the details. They are mostly happy that their tax-planning is done for the year," says a wealth manager.