What is Life Insurance in India and why you must have it

My friend Amit understood the meaning of life Insurance when his colleague Muthu suddenly died in office. Muthu met with a sudden heart attack and declared dead when brought to the hospital. Even though Muthu was earning Rs 65,000 a month, he had only one life Insurance policy with life cover of Rs 5 Lakhs only!

Amit could feel that the small amount of Rs 5 Lakhs was a paltry sum for Muthu’s family and insufficient to meet daily expenses and education of his two kids. Muthu’s story is very common in our society as people underestimate the importance of life insurance in India. You will be shocked that only 3.30% of India’s population is covered under a life insurance plan (Source: Swiss Re SIGMA study – FY 2014-15)

What is life insurance

If you buy a life insurance policy, the insurance company promises to pay you an amount at least equivalent to the life risk cover you have taken on the event of your unfortunate death. The company would be liable to pay the above amount to your nominee. In return of this promise, you are required to pay a fixed premium to the company during the entire policy term or till the premium paying term chosen.

Why life insurance is needed

Muthu’s incidence must have made you realise why life insurance is needed? In nutshell, life insurance is must for protecting the financial future of your family.

Provides financial protection to the family

A life insurance policy promises to pay a lump sum benefit to the extent of sum assured + accrued benefits, if any (as per policy terms), in case of sudden death.This helps the family overcome the financial crisis which arises due to the death of the sole bread earner. 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 assured’s family when it is needed the most.

Helps meeting the financial goals

Within life insurance, there are various plans tailored to meet life goals. Whether you are planning for your child’s higher education, your retirement, wealth creation or protecting your home or personal loan, there is always a life insurance plan tailor-made to meet these goals. Life insurance plays a big role in financial planning as it ensures the future financial goals of the family are met even if the sole bread earner of the family is not around due to his or her sudden demise.

Inculcates the habit of savings

To meet the various financial goals one need to save regularly. Life insurance inculcates the habit of regular saving as one has to pay the premiums till the plan term ends either through monthly, quarterly, half-yearly or annual intervals. This is a habit forming exercise which makes you disciplined as far saving for your future is concerned. You can eve link the premium payments with the time of monthly credit of your salary.

Low cost life protection

Through 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.

It saves taxes

You can save upto Rs 150,000 per year under section 80C of the Income Tax Act 1961 on the premiums paid to avail tax benefit.

Benefit and claim proceeds are tax free

Under Section 10(10D) of the Income Tax Act, the maturity benefits in the hand of the policy holder or the claim amount, if any, in the hand on the nominee are also tax free.