My friend Sunil understood the meaning of life Insurance when one of his neighbours, Tridib suddenly expired one morning. Tridib met with a sudden heart attack and declared dead when brought at the nursing home. His family had no clue about his investments and once his last rites were over, they sat and had a look at all his investment papers etc. dumped in a file. Even though Tridib was earning Rs 80,000 a month, he had only one life Insurance policy with life cover of Rs 6 Lakhs!
Sunil found that a small amount of Rs 6 Lakhs was a paltry sum for Tridib’s family as they were used to a certain life style which was impossible to maintain with this sum. The story of Tridib is very common in our society as people underestimate the importance of life insurance. And that is why only 3.30% of India’s population is covered under a life insurance plan (Source: Swiss Re SIGMA study – figure referred for FY 2014-15)
What is life Insurance?
In simple terms, if you buy a life insurance policy, the insurer promises to pay you an amount at least equivalent to your life risk cover on the events against which the policy is taken happens, i.e. your unfortunate death. The company would be liable to pay your nominee the above claim amount. In return of this promise, you are required to pay a fixed premium to the company during the entire policy term or till the date of your death during the policy period.
Why life insurance is needed?
Tridib’s incidence must have made you realise why life insurance is needed? In nutshell, life insurance is required for protecting the financial future of your family.
It provides financial security to your family
A life insurance policy promises to pay a lump sum benefit in case of sudden death of the life assured. In case of unforeseen demise of the bread-winner, the family can overcome the financial crisis as they get the life insurance cover. Even though the emotional loss is irreplaceable, the life insurance compensates for the much needed financial loss. Thus, a life insurance policy provides financial protection to the life assured’s family
Life insurance helps meeting financial goals
There are many life insurance plans designed to cater to various life goals. So, whether you are planning for your child’s higher education, your retirement 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 meet these needs.
At the start of our working career, we must plan for our financial goals and start saving for it. Life insurance plays a big role in financial planning as it ensures the future financial goals are met even if the sole bread earner is not around due to his sudden demise
Life insurance inculcates the habit of savings
To meet your financial goals you need to save for it regularly. Life insurance inculcates the habit of saving as you have to pay the premium for the life insurance plans that you have taken till the plan term. Life insurance companies provide you the facility of paying the premiums monthly through ECS mode. Therefore, you can link the premium payments with the time of your monthly salary credit.
Life insurance saves taxes
The unique benefit of having a life insurance plan is that you can avail tax benefits of upto Rs 150,000 per year under section 80C of the Income Tax Act 1961.
Under Section 10(10D) of the Income Tax Act, the future receipts and claims are also tax free including the maturity proceeds received by the policy holder or the claim received by the nominee.
How much life cover is required?
Now that we know why life insurance is required, Let us see how much life cover we need?
The premium payable is dependent on how much life risk cover you have taken. But the question is how much life cover is adequate for you? There is no clear answer to this question simply because the life risk cover depends on your annual income, your financial planning objectives and consideration of all your assets and liabilities.
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, building a house and retirement etc.
Some experts recommend that the life cover should be a good enough amount which, if invested in a safe instrument, can fetch a regular income for the dependants of the policy holder so that they can maintain the same lifestyle which they were used to. That essentially also means that one should add the liabilities, if any, to the amount of insurance required.
A very basic method also suggests that it should be 15 times your annual earnings.
Now assuming Tridib’s salary was Rs 80,000 per month, therefore, annual is Rs 9.60 Lakhs. He should have taken a life cover (assuming he had no liabilities) of Rs 1.44 Crores i.e. 15times of Rs 9.60 Lakhs! Assuming his monthly household expenses were Rs 60,000.
If Tridib had taken this much life cover his family would have earned around Rs.84,000 per month by investing the claim amount of Rs 1.44 Crores in a Bank FD @7% annual interest and the family would not have had any worries.
Therefore, while deciding how much life cover is required, a fact-finding exercise should be done by the policy holder with regards to his existing financial position, identifying his future and current life goals while analysing the asset and liabilities.
What are the various life insurance plans?
Now that we have understood how much life cover you want, let us now see the types of insurance plans that you can have in meeting your diverse life needs.
– Term Life Insurance plans are the most basic and cost effective plans which provides a large life cover in lieu of a small premium. Term insurance plans are protection plans and designed to protect your family against unforeseen circumstances by providing them adequate financial security. Term plan is the cheapest in terms of premium payable in comparison to other life insurance plans.
Whole life insurance plans
– Whole life insurance plans covers your life till such time you are alive. The maturity proceeds are paid to the nominee on your death and normally there is no term period defined. Some insurers even offer plans till 100 years of your age.
– Endowment plans provide life insurance benefit along with an assured amount to be returned to you on the policy maturity. You can invest in this plan and can expect getting a good lump sum amount for your future needs. These plans normally pay the life cover amount along with accrued bonuses at the end of the policy term.
Money back plans
– Money back plans provide periodic liquidity to the policy holders by paying a fixed percentage of the sum assured at a fixed intervals. For example, your money back policy sum assured is Rs 5 Lakhs for 20 years. The plan pays you 20% of the sum assured after every 5 years. That means you will be getting Rs 100,000 each at the end of 5th, 10th and 15th year. And, at the end of the 20th year the balance sum assured of Rs 200,000 plus accrued bonuses etc. will be paid out to you.
– Child insurance plans are regular life insurance plans and comes with a unique benefit called the ‘Waiver of Premium’. This benefit states that if the life assured dies prematurely, the death benefit would be paid to the nominee immediately. However, unlike other plans, a child insurance plan doesn’t stop here and continues till the end of the policy term and pays the specified maturity benefit again. Thus, the child plan assures that the parent’s financial plan for his child’s future remains intact even if he or she is not around at that point in time.
Unit Linked Insurance Plan
– Unit linked insurance plan or ULIPs are market-linked Insurance plans that offers the very best of both - investments and insurance- in one single plan. It is a plan which offers many investment options like, equity, debt and balanced portfolios based on your risk profile. This exciting feature of ULIPs makes it a preferred choice of the policy holders in current times.
– Retirement plan or pension plans helps you build a corpus to take care of your financial needs during your golden age. On maturity, this corpus is used to generate a regular income called annuity or pension and paid out to you monthly, quarterly or annually.
Life Insurance should be the quintessential part of your investment and savings portfolio. In this article we have discussed what life insurance is and why Life Insurance should be the core of your portfolio following example of Tridib’s life.
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. This amount should be big enough to protect the financial future of your family. Check if you are adequately insured or not.
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