TomorrowMakers ™

A simple guide to Life Insurance

06 March 2015
Purchasing life insurance is an essential part of planning for the safe and happy future of you and your loved ones. Here’s what you need to know to find the right plan.
 
 

What is Life Insurance?

Life insurance is a protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured.

Why do you need Life Insurance?

Firstly, if you have a family who is dependent on you financial, the pay-out from life insurance can help support them financially in case of your sudden absence.

Secondly, it can be a very effective tax saving instrument as it comes under the EEE tax bracket which means it is exempted from tax at the time of deposit, interest accumulation and withdrawal.

Thirdly, in case you do not have any dependents, it can help you manage the costs that you may otherwise have shared, such as the repayment of loans, or other important life events such as education and travel.

Types of Life insurance –

1. Term plan

A term plan is the cheapest form of life insurance where a certain amount (called death benefit) is paid to the policy holder’s family if he/she expires within the term of the insurance policy.

Related: Have you heard about Term Plans that payback?

2. Whole life plan

Whole life plan is a type of insurance that has an insurance and investment component. The insurance component ensures that the family of the policy holder is financially supported in case of his/her death. The investment component accumulates in value over the years so that the policy holder can with draw it or borrow loans against it.

3. Endowment plan

An endowment policy is a life insurance contract designed to pay a lump sum after a specific term (on its 'maturity') or on the death of the policy holder. Some policies also pay out in the case of critical illness.

4. ULIPs

Unit linked insurance plans (ULIPs) are insurance plans where a part of the investment is invested in equities thus linking their performance to the market. These plans create a possibility of high returns in the long term, with the additional benefit of protection.

Related: Common Mistakes When Buying Insurance [Video]

How to pick an insurance plan that suits you

Let us consider an example where we have Rajat who is 39 years of age. His financial particulars are given below-

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From the chart above, we can say that Rajat’s expenses use up a major part of his salary which makes him partly dependent on his wife’s salary to manage the expenditure of his children. In the current scenario, Rajat is unlikely to commit to any periodic regular payments apart from the ones he already has to pay.

Now if Rajat passes away due to a life threating illness, his family will come under a heavy financial burden. His wife will receive a sum of Rs 10 lakhs from his life insurance, but she will have to pay an outstanding balance amount of Rs 20 lakhs against their home loan. Her salary will not meet the expense amount so either she will have to choose between selling the house or cashing in all their family savings to retain the house.

Rajat did not plan his insurance properly so his death will place his family under financial stress.

Related: Top 6 factors that affect how Life Insurance premium is calculated

Conclusion

As you can see above, Life Insurance can help you rest assured that your family is financially and hence emotionally supported in case of your absence, so they can live the life you have worked so hard to give them!

 

Tax Singh

"Tax Fact 9"

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