Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (often the policy holder).
Why Life Insurance
As a result it has become essential these days for you to have one or more insurance policies. Here are some important reasons as to why you should buy life insurance:
- Family’s Financial Requirements – If you are the only person in your family who is earning, then the family’s income will cease when you are no more. With no steady source of income, the standard of living will fall and they may not be able to meet even basic needs like education. Therefore, your life insurance Policy will come to your family’s aid during such phases of life.
- Loans and Expenses Repayment – You may have taken a loan along with your spouse. Or you may have borrowed money from a friend for starting a business. Also, you may have just started your family and your child is still very young. In all these cases it is your spouse who will have to bear the heavy burden of paying off the loan and managing your child’s education. These are major expenses and you can help your spouse by buying a life insurance Policy early in life.
- Draw Loans Against Insurance – Besides using your life insurance Policy amount to repay your loans, you can also use your Policy to draw a loan against it.
- Diverse Investment Options – You can also use your life insurance Policy as a good investment option. There are various kinds of insurance policies and you can use them for different purposes. For example, retirement plans, child insurance plans, whole life insurance plans, Term life insurance plans etc. are all good life insurance policies. Except Term plans, which don’t have an investment component, all others are good investment options too.
- Illnesses and Accidents – Life insurance policies are always a good protection tool against the financial pressure that you will face during a serious illness or accident. You can get treatment from the best hospitals without worrying about the financial burden. Ideally, all insurance policies should be purchased when you are young and free of illnesses.
- Tax Benefits – Life insurance policies are a good way of saving tax too. Under Section 80C of the IT Act, many of the insurance schemes in India including the life insurance schemes offer tax deductions on Premium payments.
How much life insurance do you require?
Your life insurance needs depend on a various factors such as your marital status, age and gender. For instance, when you are young, you may not need a life insurance but as you grow old and your financial responsibilities get increased, you may need the best life insurance policy of high sum assured.
At the most basic level, the amount of life insurance that you need corresponds to your answers of the following questions:-
- What are the immediate financial expenses that your family may require upon your immediate death?
- How much of your salary goes towards meeting present expenses and future needs?
- How long would your dependents need support in case of your sudden demise?
- How much money would you like to save for your child’s education and marriage?
Let’s look at an example:
Gaurav is a healthy 25 year old management professional with an income of Rs. 5,00,000 p.a. Assuming his income increases at a rate of 10% p.a., while the rate of inflation is around 4%;
At 60 years of age, Gaurav’s real income would have been around Rs. 38,43,043 p.a. If Gaurav were to live till 60 years his Human Life Value would have been Rs. 85,00,000 at discounted rate of 6% annually.
However, with a Protection or Term Plan, a mere sum of Rs. 7,090 annually (exclusive of service tax & educational cess) can help Gaurav provide a financial cushion of up to Rs. 85,00,000 for his family over a period of 25 years.
A comparison of some term life insurance policies:
Sum assured – Rs. 1 crore.
