My Wife's friend Ratna understood the meaning of life Insurance when her husband Amit suddenly met with a tragic car accident and died at the accident spot. Amit was driving back from an outstation office tour and declared dead on the accident spot. Even though Ajit was earning more than a Lac a month, he had only one life Insurance policy with life cover of only Rs 10 Lakhs!
Ratna could feel that the amount of Rs 10 Lakhs was a paltry amount for her to run the family and insufficient to meet secondary and college education of her two kids. Ratna's story is very common in India. We as a society underestimate the importance of life insurance in our lives.
What is life insurance in simple terms
Life insurance is the only instrument which helps you secure the financial future of your family. When you buy a life insurance policy, the insurance company covers your life risk to the extent you want or you are eligible based on the insurance company's criteria. On the event of your unfortunate death, the life insurance company promises to pay your nominee an amount at least equivalent to the life risk cover you have taken. In return of this promise, you are required to pay to the company a fixed premium annually during the policy term period.
Why life insurance is needed
The example of Amit's tragic death is a good enough reason for you to realize why you must have life insurance. In simple terms, life insurance is must for you as it protects the financial future of your family in your absence.
Provides financial protection to the family in your absence
The life insurance policy promises to pay a lump sum benefit to the extent of sum assured + accrued benefits, if any (as per policy terms), to the policy holder's nominee on sudden death. This helps the family overcome the financial crisis which arises due to the death of the life assured who may be the sole bread earner for the family. While the emotional loss is irreplaceable, the financial loss is compensated by the life insurance company. Thus, a life insurance policy provides financial protection to the life assurer’s family when it is needed the most.
It helps meet the financial goals
There are various life insurance plans tailored to meet long term life goals. Whether it is planning for your child's higher education, your retirement, building a home, wealth creation or protecting your home loan, there is always a life insurance plan tailor-made to meet these specific needs.
A term plan simply provides high life coverage in lieu of a small annual premium. It also helps you protect against big loans like home loan by offering you additional life cover through a separate policy for the home loan tenure. While a ULIP plan helps you grow wealth as it invests in the market based on your risk appetite, a child plan ensures that the child's dream are not compromised in your absence as it pays the sum assured twice – once on death of the life assured and again on completion of the policy term.
Life insurance inculcates the habit of savings and makes you disciplined
To meet the various financial goals you need to save regularly while earning. Life insurance inculcates the habit of regular saving as you continue to pay the premiums during the plan term through monthly, quarterly, half-yearly or annual installments. This is a habit forming exercise which makes you disciplined and thus helps you reach your investment objectives.
The life protection cost is low
Through a term insurance plans you can take a high life cover by paying a small premium. Term plans are pure protection plan with no added benefit attached to it. You should take a term plan considering your liabilities and earning levels. Your life cover should be good enough so that your family need not worry about finances to run the family expenses and meet their respective financial goal in case something happens to you.
Life insurance saves taxes too
The insurance premiums paid up to Rs 150,000 per year are eligible for tax rebate under section 80C of the Income Tax Act 1961. Under Section 10(10D) of the Income Tax Act 1961, the maturity benefits in the hand of the policy holder (on his survival) or the claim amount, if any, in the hand on the nominee is also tax free.