WHY A LEGITIMATE LIFE INSURANCE IS INDISPENSABLE?
Suppose you are the only one individual in your house that has the meal ticket. You stay with your helpmate, two children and your parents. Working 9-10 hours on a daily basis just for the sake of your loved ones can be detrimental for them if you face a premature expiration. No, we never want to ruin you and your pulchritudinous dynasty but for your assurance we are ready to give you the “words of the wise”.
1) Its purpose is protection:
If the electrical wiring in your house has been installed securely and all your electrical appliances are in excellent condition, you should not expect a short circuit. Yet, chances are you would install a circuit breaker, because a short circuit, however unlikely, can be perilous. It provides protection from the risk of electrical jeopardy. We need protection from both likely and unlikely risks. In fact, unlikely risks are much more dangerous than likely risks because we are less prepared for it. An untimely death is the most treacherous risk that our families face. Life insurance provides protection against this risk.
2) Non-term traditional plans may cause you to be under insured:
Beginning with an example, why non-term traditional life insurance plans, like endowment plans, money back plans, pension plans etc are pernicious to your life insurance objective.
Case Study: Let’s illustrate that you are 30 years old with an annual income of Rs 20 Lakhs, be it a hypothetical situation. How much life insurance is sufficient for you? To get a proper estimate of your required life insurance cover, you should circumstance in your debt, monthly income your family needs to meet their expenses, and future obligations such as a child’s education or marriage. For the sake of simplicity let’s assume that your life cover should be at least 10–12 times of your annual income. Based on your annual income of Rs 20 Lakhs, your life cover or sum assured should be Rs 2 Crores. So taking your annual income as Rs 20 lakhs, your estimated net monthly income after mandatory deductions like provident fund and income tax will be around Rs 1.2 lakhs.
Let us assume that after paying for all expenses such as rent, servicing of home loans, food, transportation, utility bills, schools fees etc, you are able to save 30% of your net monthly income. This means your monthly savings will be Rs 36,000. Let us now assume you want to buy a non-term traditional life insurance policy. As discussed earlier, your ideal life cover or sum assured should be Rs 2 crores. Based on premium rates of one of the largest life insurance companies in India, your annual premium for an endowment policy of a 20-year term and Rs 2 crores sum assured, will be Rs 10-11 lakhs.
Since your monthly savings is Rs 36,000, you cannot afford Rs 2 crores sum assured policy. So how much can you afford? Let us assume that you are ready to pay a premium of Rs 25,000 per month or Rs 300,000 per annum. With an annual premium of Rs 300,000 per annum, based on premium rates discussed above, you can buy a 20-year endowment policy of Rs 60 lakhs sum assured. In the event of an untoward death, your family will get the death benefit of Rs 60 lakhs. Let us assume that your family invests the money in a risk free assured return fixed income product yielding 8%, the annual income will be Rs 4.8 lakhs or Rs 40,000 on a monthly basis.
Under normal circumstances, you spend Rs 80,000 – 85,000 on a monthly basis for your expenses. But in the event of an untimely death, your family has to survive on less than half of that amount! If you have a loan, the financial distress gets much worse. There is no doubt in this example, that your decision to buy a non-term traditional insurance cum savings plan has left you underinsured.
What about the tax benefit under Section 80C of the Income Tax Act ?
Consider term life insurance plans. The premiums are much lower than non-term life insurance plans and leave the investor with substantially higher surplus savings to invest towards their long-term financial goals.
Buying a term plan and investing in mutual funds is better than buying non-term life insurance:
Continuing with our previous case study, you need a life cover or sum assured of Rs 2 crores for your life insurance needs. If you choose a term insurance plan, based on premium rates of the same life insurer as discussed above, your annual premium for a 20-year term insurance policy for a sum assured of Rs 2 crores will be around Rs 31,000.As discussed in our case study, your monthly savings is Rs 36,000 or Rs 4.32 lakhs per annum..The premium is eligible for the 80C benefit. You can ensure sufficient cover to provide protection to your family in the event of any unfortunate mishap. The balance money can be invested in an equity linked savings scheme, which will get you a much better return and tax saving under Section 80C.
So, going back to the circuit-breaker example, the purpose of such a device is to provide protection against risks. Just like a plumber cannot do an electrician’s job and vice versa, likewise you should also separate your insurance and investment plans.
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