Unexpected events can cause significant disruption to your family and their finances, which is why it is important to plan ahead and be prepared. Without a proper financial plan, the consequences of unforeseen events can be dire and devastating, leaving your family struggling to make ends meet. A contingency plan in place can make all the difference in how well you are able to weather any unexpected storms that may come your way.
This is why you need life insurance.
Life insurance can ensure that the people who matter most to you will be able to continue pursuing their dreams and ambitions, even in the face of tragedy. Investing in life insurance is like wearing a parachute before jumping out of a plane - a crucial safety measure in case something goes wrong. It's an investment that can provide much-needed security and peace of mind knowing that your loved ones will be taken care of.
Let's discuss life insurance in detail.
What Is Life Insurance?
Life insurance is essentially a contract between you and the insurance company wherein the insurer agrees to secure your family’s financial future and also fund your financial goals in exchange for the premiums you pay.
Under this contract, the insurance company pays your family a sum of money in case you pass away unexpectedly during the policy period. If you survive the term, you receive the sum of money. You or your family can use this money to meet short-term goals like utility bills, EMIs, groceries, etc. and long-term goals like buying a house, planning for children’s weddings, saving for retirement etc.
A Basic Overview Of How Life Insurance Functions
In life insurance, you are basically the life assured or insured, i..e, the person whose life risk is covered by the life insurance plan. The sum of money that you or your nominee (the person/s who depend on you financially and requires financial security) receive from the insurer at the time of a claim is called the cover amount or sum assured. This is the amount that your family will need to secure their future without compromising their lifestyle. The amount you pay for this coverage is called the premium.
Why Do You Need A Life Insurance Policy?
A life insurance policy doesn't just protect your finances; it also gives you peace of mind knowing that you've done everything in your power to secure your family's future.
Here are some reasons why life insurance is a must-have -
1️⃣ It Can Protect Your Family Financially
Your primary goal is to secure your family’s financial security. And even if you have savings, it is unlikely that the money would be sufficient to meet their expenses and maintain their standard of living for several years - when you are long gone.
A life insurance policy is the best solution to ensure your family's financial stability. It is an effective tool to safeguard your loved ones from the uncertainties of life. With the right life insurance policy, you can be assured that your family will always be provided for, no matter what life throws at them. The claim amount can help them with major financial goals like paying off debts and funding their children's education, as well as everyday expenses like groceries and utilities.
2️⃣ It Can Replace Your Lost Income
If you are the only breadwinner in your family, your salary is of paramount importance, as it is essential for providing financial security for your family. It is likely that your income is the only source to meet the monthly expenses, which includes food, utilities, housing, clothing, car maintenance, etc. This means that in case you pass away unexpectedly, there should be a financial backup that can replace your lost income in order to ensure these expenses are managed - even in your absence. Life insurance does just that. The death benefit can serve as income replacement for your family - when you are no longer around to support them.
For example, Mahat, 35, is living with his wife and two children. He is the sole breadwinner of the family, and his family members depend on him financially. He wants to ensure a steady stream of income that can secure his family when he is not around them. So, he purchases term insurance with a sum assured of Rs 1 Crore and a policy period of 25 years. He also chooses the monthly income payout option. In case Mahat passes away during the policy period, the insurer will pay the claim amount to the family in the form of monthly instalments for a specific time span. With this money, they can take care of their everyday expenses as well as other financial needs.
3️⃣ It Can Help Your Family Pay Off Existing Debts/Liabilities
You might have taken a home loan, business loan, vehicle loan, etc. In the unfortunate event that you pass away before repaying this debt, your family will be left to bear the entire burden. To ensure that such an undesirable situation does not happen, it is important to have a financial plan in place to cover any outstanding loans - in your absence. The claim amount will provide them with the financial resources needed to pay off the loan and protect them from any financial hardship.
Example: Monica, 35, lives with her spouse and 10-year-old son. Both are financially dependent on her. She has a home loan of Rs 50 lakhs. And, she wants to ensure that the debt doesn't bother her family if she were to pass away. She also wants to leave behind a financial legacy for them. So, she invests in a whole life insurance policy with a sum assured of Rs. 1 Crore that will cover her up to the age of 99 years. She opts to pay the premiums for a period of 20 years. She chooses the lump-sum payout option.
If Monica passes away during the policy period, her spouse will receive a lump sum of Rs. 1 Crore. He can use this amount to cover outstanding debts and use the remaining to take care of his family's needs.
4️⃣ It Can Help Your Loved Ones Meet Their Long-Term Goals
Life insurance can serve as an effective financial tool if you and your family have long-term goals such as saving for your children's college education, buying a home, etc. With the right policy, you can develop a reliable financial base for your loved ones - ensuring they have the resources to reach their long-term goals. For example, if you want to build a fund for your child's higher education, you can invest in a Child Plan. You can also build funds for your retirement with life insurance policies.
If you are looking to build your wealth, you have access to a myriad of options under different life insurance policies. For example, a ULIP may be a good investment option if you want to invest in the stock market and get decent returns. On the other hand, if you want steady returns, you can opt for an Endowment Plan. And so on.
5️⃣ It Can Provide Tax Benefits
Under the Income Tax Act of 1961, life insurance policies offer tax benefits.
?Tax deductions can be claimed on premiums you pay, under Section 80C of the Act.
?Section 10(10D) also exempts the claim amount you or your loved ones receive from taxation.
Remember that tax savings are just an added benefit. The most important thing is to find a policy that meets your personal needs.
Types Of Life Insurance
These are some of the popular life insurance policies available in the market -
1️⃣ Term Insurance
Term insurance is a pure risk protection plan that offers financial protection to your loved ones against life’s uncertainties. It is simple and affordable. In case you pass away during the policy period, the policy will pay a fixed amount to your family. They can settle any outstanding loans/liabilities, cover their daily expenses, etc. with the money.
2️⃣ Whole Life Insurance
In essence, the policy covers you for your entire life until you reach 99/100 years of age. With this plan, you can ensure that your family is financially secure by leaving behind a tax-exempt financial legacy for them.
3️⃣ Child Insurance Policy
A child plan is a combination of investment and insurance designed to meet a child's financial needs.
- The insurance portion provides financial protection for your child in the event of your untimely death.
- The investment portion allows you to grow sufficient wealth to secure the future of your child. This money can be used to pay for their college education, wedding, and other key milestones.
The major benefit of a child plan is that it will remain active even if you pass away - and the insurer will waive all future premiums and the funds will keep growing until the policy matures. Depending on the product, the child will receive a lump sum or periodic payments to meet various milestones such as higher education, marriage, etc.
An endowment plan is a combination of insurance and investment. It provides you with a life insurance cover as well as helps you build a nice savings fund to fulfil any future financial goals like buying a house, vehicle, starting a business, etc.
5️⃣ Money-Back Policy
It is a low-risk investment plan that combines insurance and investment. Under this plan, you invest your money for a certain period of time and then receive the money back as guaranteed returns in the form of periodic instalments which can be used to take care of household expenses and other recurring expenses like EMIs, rent, etc. Regardless of market conditions, you receive a fixed percentage of your sum assured or annual premiums over the course of the plan.
6️⃣ United Linked Insurance Policy (ULIP)
A ULIP allows you to invest in market instruments to reach your long-term goals. Besides that, you'll also receive life insurance coverage to ensure that your loved ones are financially secure if you pass away during the policy tenure. In a ULIP, part of the premium goes to the insurance part, and the rest is invested in several funds of the stock market which have the potential to provide high returns. Your premium will be invested in the funds that you choose. But, keep in mind that the returns entirely depend on how the stock market performs.
7️⃣ Retirement Policy
These plans are designed to meet your retirement needs and help you cover your living expenses despite rising inflation and living costs. There are two main types of retirement plans sold by insurance companies: pension accumulation plans and annuity plans.
- Pension Accumulation Plan
Pension Accumulation Plans are either linked or non-linked.
- Non-linked Pension Accumulation Plan - It is similar to an Endowment Plan. Premiums are payable for a specific period under this plan. As soon as your policy matures, you'll get a fixed sum of money that you can use for your retirement needs.
- Linked Pension Accumulation Plan - It is similar to a Unit Linked Insurance Plan. In this plan, your money is invested in market-linked instruments that accumulate in a fund over time. In the event that the policy matures, you will receive a lump sum amount that will cater to all your post-retirement expenses.
- Annuity Plan
An Annuity Plan requires you to pay premiums for a specific period of time (or in a single go for some plans), which will accumulate into a fund. A steady stream of income will be generated from this fund called 'annuity'. As you move into your post-retirement years, you will begin receiving this income periodically.
How To Choose The Right Type Of Life Insurance Policy?
Life insurance policies are specifically tailored to meet different needs. You need to choose your ideal life insurance policy based on your needs and requirements.
- If you have financial dependents, your top priority would be to make sure they are financially secure. If you have outstanding debts or liabilities, you don't want your family to bear the burden of repayment and you also don't want your family to compromise their dreams and lifestyle - should something unfortunate happen to you. Term insurance provides a death benefit that can help your family maintain a comfortable life and meet their short-term and long-term goals in your absence. It provides a sense of security, comfort, and reassurance that even in the worst of times, they will be taken care of.
- If you have children or plan to have them, it would be a good idea to save up or set aside funds for their educational expenses, college expenses, wedding, etc. In order to fulfil all their dreams and aspirations, you should accumulate enough money. This way, you will be able to provide your children with the best possible opportunities that life has to offer. A Child Plan is an excellent option if you want to make sure that your children don't give up on their dreams whether or not you’re around.
- If you want a word-free life after retirement, it is important to plan ahead and ensure that you have adequate funds. Your goals may include starting a business, pursuing a hobby, going on a world tour with your spouse, etc. Perhaps you just want to ensure you have enough funds to continue to maintain the current lifestyle you are accustomed to after your retirement years. To ensure you can reach these goals, it is crucial to think ahead and build a steady retirement fund. A life insurance policy can help you plan for retirement. An Annuity Plan or a Pension Accumulation Plan can ensure that your retirement years remain comfortable and free from financial worries.
This is just an indicative list of scenarios. Insurance companies offer many other types of life insurance plans that you can pick from, after carefully going through what your financial needs and goals are.
It is impossible to predict what life holds for you. As such, it is important to always be prepared for the unexpected and to make choices that are beneficial in the long run. Investing in the right life insurance policy can help mitigate the uncertainties in life and ensure your family's financial security in the future.