The true meaning of the word Life Insurance made sense to me when my neighbor Raghu suddenly expired one morning.
Raghu met with a sudden heart attack and declared dead on arrival at the hospital. His family had no clues as to what to do in a situation like this. Once his last rites were over the family set and had a look at his investment file.
I started googling and visiting various websites and found some facts which were hitherto not known to me. For the benefit of the readers, I will explain them one by one.
The concept of life insurance is about a century old or more, but its importance is still not felt universally.
We shy away from a life insurance plan simply because we feel that nothing will happen to us and life will continue very easily and comfortably. That is why if you look at the chart below you will find that only 3.30% of India’s population is covered under a life insurance plan.
Provides financial security
A life insurance policy promises to pay a lump sum benefit in case the life assured falls prey to premature death. This promise is very important in the case of individuals who are bread-winners for their families. In the unforeseen demise of the bread-winner,
the family can overcome the financial crisis by getting the claim proceeds. Though the emotional loss is irreplaceable, the life insurance provides the much needed financial loss. Thus, a life insurance policy provides for financial security to the individual buying insurance.
Helps meeting financial goals
The life insurance industry offers a whole gamut of Life Insurance plans designed to cater to the myriad life goals. So, whether you are planning for building a child education fund, a retirement corpus, or want to protect your home loan or personal loans in case of your untimely demise or simply want to create wealth,
there is always a life insurance plan tailor-made to suit these requirements.
While we start working, we must plan for our different financial goals and start saving for it. Life insurance plays a big role in financial planning as it ensures the future goals are met even if the sole bread earner is not around due to his sudden demise
Life insurance inculcates the habit of savings
When you plan for your financial goals, you need to save for it in order to achieve it. Life insurance inculcates the habit of saving as you need to pay the annual premium for the various life insurance plans that you have bought for a long period of time. Life insurance companies even provide you the facility of paying the premiums monthly. Therefore, you can link the premium payments easily with receipt of your monthly salary.
It saves taxes
The unique benefit of having a life insurance plan is that you can avail tax benefits of uptoRs 150,000 per year under section 80C of the Income Tax Act 1961.
Future incomes and claims are also tax-free– The maturity proceeds received by the policyholder or the claim received by the nominee is tax-free under Section 10 (10D) of The Income Tax Act. Therefore, it is one of the few saving products which provide you tax benefits on your investments and also on receipt of the maturity proceeds.
Now that I know what the key benefits of taking life insurance are, I wanted to know how much life cover is adequate as it was haunting me that Raghu had a life cover of only Rs5 Lakhs while his monthly income was Rs 1 Lakh? Was the life cover sufficient? Let us now understand that.
How much life cover is required?
Though Life Insurance provides invaluable financial security to your loved ones, the sum payable is dependent on how much life risk cover you have taken. I find that there is no clear-cut answer to this simply because the life risk cover depends on your financial planning and if you have considered all aspects of your asset and liabilities.
How you have arrived at the life risk cover amount is very important. For example – While deciding your life risk cover, you must take into account your annual household expenses, your home and personal loan (if any), future goals like child education and retirement etc.
Various techniques have been developed which enable one to find out the life risk coverage required. Some experts stress the relevance of the Human Life Value technique to identify the life insurance requirement while others devise a simple income-based approach to this question.
Some financial planners recommend that the life cover should be equal to an amount which, if invested in a safe instrument, can fetch a regular income for the dependants so that they are able to maintain the same lifestyle which they were used to when the life assured was alive. That essentially means that in case there are any liabilities, like home loan, personal loan etc. such amounts should be added to the amount of insurance required.
Therefore, irrespective of the technique applied to arrive at the life risk coverage amount, one thing remains universal and that is, a fact-finding exercise is required which highlights the existing financial position of the proposer, identifies his future and current life goals while analyzing the asset and liabilities and then arrive at the optimum amount of life risk coverage.
Remember, life insurance should be purchased depending on your need and not on the basis of any trend. You must plan your Insurance needs based on the amount you need in future including your short and long-term goals while accounting inflation.
If you want to enjoy life now reap the various benefits which life insurance has to offer and protect your family from the financial uncertainties of life so that they can maintain the same lifestyle in case something happens to you. Get yourself adequately insured today, if you are not already. Believe me, you and your family would thank me later.