What are the Benefits of Life Insurance?
The concept of life insurance is more than a century old but its importance is still not felt universally. There is generally a tendency to shy away from buying life insurance plans because most of us feel that nothing will happen to us and this is the main reason why only approx 3.30% of India's population is covered under a life insurance plan (source: Swiss Re SIGMA study 2014-15). However, if you know the following benefits of life insurance, you will understand why it is most important for you and your family.
Life cover secures your family
This is the primary and most important benefit of life insurance. The life cover is the amount that insurance company pays to the nominee of the policy holder in case of his or her unfortunate death during the policy term. This amount ensures that family's future is secured, in the event of absence of the policy holder.
However, you must select the adequate life cover amount in order to make sure it is sufficient to take care of your family's well-being in your absence. But what should be the life cover? This is one question which intrigues all of us.
A good thumb rule is to have a life cover which is at least 10-12 times your annual income. For example, if your annual income is Rs 10 lakhs, then your life cover should be at least Rs 1-1.20 Crores.
However, to select the right amount of life cover, you must also keep in mind the following –
- What is your current monthly household expenses
- Have you taken a home, personal or car loan
- What is the amount required for your child's secondary and higher education
Once you can figure out the above, you should increase your life cover to that extent of these expenses or liabilities.
Term Insurance plans are the most preferred plans for having adequate life cover at a nominal cost.
Helps in life stage specific Planning
You have different needs at each stage of your life. Life insurance is the only product which offers tailor-made solutions for various life stages. It helps you plan and reach different life goals while securing the financial future of your family. Some of your specific life stage planning could be following and how different insurance plans can fulfil that -
Just started earning – At this stage you focus on long term wealth creation and take care of your parents. For wealth creation you can invest in ULIP plans. ULIP helps in long term wealth creation as it invests in market linked instruments like shares and bonds etc. And for taking financial care of your parents, you can buy annuity plan for them which gets them regular income throughout their life.
Marriage – At this stage securing financial future of your spouse and increase long term savings is the main objective. You should buy a term plan to adequately cover your life and increase your investment in ULIP plans to grow long term savings.
Buying a home or car – If you plan to buy a house and car, get additional life cover to the extent of the loan amount. You can buy additional term plans.
Once you become parent – At this stage, you should increase your life cover further and protect the future of your child by buying a child insurance plan. Child plans protect the future of your children in case something happens to you, by providing them the life cover amount twice – once, on your sad demise and again when the policy matures without having to pay any premium post policy holders' demise.
Parent with teen age children – At this stage you should plan for child's higher education by saving more in ULIPs. Also, you should start your retirement planning by investing in annuity or pension plans.
Retirement years– During this stage of your life, you should keep some savings, which you must have accumulated through ULIP plans, to meet medical emergencies. Rest of the accumulated amount should be used to buy annuities to get a regular income. This is the time when your pension and retirement plans matures and start giving a regular income to meet household expenses.
Life insurance is ideal for long term savings. Be it planning your retirement or higher studies of your children or simply wealth creation, life insurance has suitable plans for all these requirements. For example – While a ULIP plan can help you build decent wealth for your future, a child plan takes care of your child's higher education.
Under the Income Tax Act, 1961, you can save taxes on the premiums paid (upto Rs 150,000 per annum) for your different life insurance policies. Other than that, following tax benefits are also available –
- Tax benefit under section 80CCC if you invest in pension or retirement plans. The maximum limit is Rs 150,000 which also includes savings under section 80C.
- Under Section 80D you can save additional Rs 25,000 if you buy a health plan.
- No taxes are applicable if you switch from debt plan to equity plan or equity to debt as switches are free in ULIP plans.
- Maturity or claims are tax free under section 10(10D) of the Income Tax Act 1961.