What is Life Insurance and why you must have it ?

Why Life Insurance Is Important Learn Lesson From Raghu?

The true meaning of the word Life Insurance made sense to me when my neighbour Raghu suddenly expired one morning. Raghu met with a sudden heart attack and declared dead on arrival at hospital. His family had no clues as to what to do in a situation like this. Once his last rites were over, the family set and had a look at his investment file. Even though Raghu was earning Rs 1 Lakh a month, it was found that Raghu had only one life Insurance policy with a life cover of Rs 5 Lakhs only along with some other small savings.

Was a life cover of Rs 5 Lakhs sufficient for the financial need of the family? Certainly not! And that is what made me sit back and analyse my own situation. I started thinking about my own financial position and tried understanding what would be the implications if something were to happen to me? I started googling and visiting various websites and found some facts which were hitherto not known to me. For the benefit of the readers, I will explain them one by one.

The concept of life insurance is about a century old or more, but its importance is still not felt universally. We shy away from a life insurance plan simply because we feel that nothing will happen to us and life will continue very easily and comfortably. That is why if you look at the chart below you will find that only 3.30% of India’s population is covered under a life insurance plan.

What is life Insurance?

Life insurance is a unique contract between the life insurance company (Insurer) and the proposer (life assured) in which the insurer promises to pay the life assured a pre-defined benefit if the event against which the policy is taken happens, i.e. the death of the life assured or the maturity of the policy, whichever happens earlier. The proposer promises to pay the annual premium during the entire policy period or till such time he is alive, which forms the contract consideration.

In simple terms, if you buy a life insurance policy, the insurer promises to pay you an amount at least equivalent to your life risk cover or more on the events against which the policy is taken happen, i.e. your unfortunate death. The company would be liable to pay your nominee the above claim amount. In return for this promise, you are required to pay a fixed annual premium to the insurer during the policy term or till the date of your death during the policy period.

Why life insurance is needed

Raghu’s incidence must have made you realise why life insurance is needed, but I have come to know few more reasons which I am sharing below.

Provides financial security

A life insurance policy promises to pay a lump sum benefit in case the life assured falls prey to pre-mature death. This promise is very important in case of individuals who are bread-winners for their families. In the unforeseen demise of the bread-winner, the family can overcome the financial crisis by getting the claim proceeds. Though emotional loss is irreplaceable, the life insurance provides the much needed financial loss. Thus, a life insurance policy provides for financial security to the individual buying insurance.

Helps meeting financial goals

The life insurance industry offers a whole gamut of Life Insurance plans designed to cater to the myriad life goals. So, whether you are planning for building a child education fund, a retirement corpus, or want to protect your home loan or personal loans in case of your untimely demise or simply want to create wealth, there is always a life insurance plan tailor-made to suit these requirements.

While we start working, we must plan for our different financial goals and start saving for it. Life insurance plays a big role in financial planning as it ensures the future goals are met even if the sole bread earner is not around due to his sudden demise

Life insurance inculcates the habit of savings

When you plan for your financial goals, you need to save for it in order to achieve it. Life insurance inculcates the habit of saving as you need to pay annual premium for the various life insurance plans that you have bought for a long period of time. Life insurance companies even provide you the facility of paying the premiums monthly. Therefore, you can link the premium payments easily with receipt of your monthly salary.

It saves taxes

The unique benefit of having a life insurance plan is that you can avail tax benefits of uptoRs 150,000 per year under section 80C of the Income Tax Act 1961.

Future incomes and claims are also tax free– The maturity proceeds received by the policy holder or the claim received by the nominee is tax free under Section 10 (10D) of The Income Tax Act. Therefore, it is one of the few saving products which provide you tax benefits on your investments and also on receipt of the maturity proceeds.

Now that I know what the key benefits of taking life insurance are, I wanted to know how much life cover is adequate as it was haunting me that Raghu had a life cover of only Rs5 Lakhs while his monthly income was Rs 1 Lakh? Was the life cover sufficient? Let us now understand that.

Life Insurance plans

Now that we have understood how much life cover Raghu should have had, let us now see what are the types of insurance plans that one can have in meeting these diverse needs. The common life insurance plans are:

  • Term Insurance
  • Whole life insurance plans
  • Endowment Plans
  • Money Back Plans
  • Child Plans
  • Unit Linked Insurance Plan
  • Retirement Plans

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