- Date : 22/09/2020
- Read: 5 mins
Is insurance important for everyone? How do you choose the best option for yourself? Here’s what you need to know when buying your first life insurance policy
The youth, today, mostly believe in enjoying life and indulging themselves. While it is natural to not think of mortality in your 20s, it is definitely prudent to prepare for ‘what if’ situations early on in life.
If you ask any young person whether they are investing in insurance, you will receive a few raised eyebrows, probably a dismissal or a flurry of questions.
The first thought that arises is, “I am a young healthy person. I have no major liabilities or debts, either. Why do I need a life insurance?”
Some who do acknowledge the importance of investing will ask other questions such as:
- Is it the right time to buy insurance?
- Is it compulsory?
- Why should I block my money in life insurance where I am not going to reap its benefits?
- Why shouldn’t I invest somewhere else and earn higher returns while I am alive?
The following set of questions and answers explain what life insurance entails, why it is necessary for everyone, how it provides protection against unfortunate life events, and more.
What exactly is life insurance?
A life insurance policy is a contract between the insured and the insurance company where the insured individual has to make regular payments called premiums. In exchange, the insurance company provides life cover in the event of death. This cover is in the form of a lump sum payment to the beneficiary or nominee.
There are different types of life insurance policies today that provide additional benefits such as a life insurance maturity payout, savings to be used in the insured’s lifetime, among others.
When is the right time to buy life insurance? What do I need it?
Life insurance premiums are based on age. The earlier you start, the cheaper it is to buy a policy. Similarly, the higher the age, the higher the premium.
You should consider investing in life insurance as soon as you start earning. This creates a comfortable safety net for the future. It is also alright to start off when you have financial liabilities, monetary goals or expenses that you wish to cover. For example, you can invest in an insurance policy to cover a home loan, to build for your child’s educational expenses, to financially secure your spouse, plan for your retirement years, among other goals.
How do I pay premiums?
You can pay the premium as a lump sum amount annually or as regular instalments on a monthly, quarterly or half-yearly basis. You can use any of the available life insurance calculators to get an accurate estimate of the premium price.
Most companies accept payments through cheques, ECS, net-banking, and credit and debit cards.
Can I save through insurance?
Based on the type of policy you choose, life insurance can not only serve as a protective cover but also act as a flexible savings option. It can become a tool to accumulate wealth to help meet future expenses. For example, certain retirement plans offer a steady monthly payback that can help meet expenses during retirement years.
How much insurance do I need?
This depends on several aspects such as the standard of living you wish to assure your dependents or the amount that would help them lead a comfortable life in your absence. Decisions on the sum assured amount should be based on the amount required by your dependents to bridge the gap between their financial needs and the amount available from other sources. This sum assured you avail of should also cover your loans and liabilities so that your dependents are indemnified.
Take stock of all your liabilities such as a home loan, education expenses or any other loans, and add the sum needed for your family to lead a comfortable life at least for 10 years or more. This should give your family members enough time to land on their feet and plan ahead.
Who gets the money after me?
While buying an insurance policy, the insured individual is necessarily required to name a designated nominee. This person will receive the proceeds of the policy after the death of the insured. In case the nominee is a minor, you need to designate an appointee (guardian).
Also, ensure that the nominee is aware of the insurance plan you have invested in and the benefits it offers. Share policy details, specifics of your various assets, important passwords, etc. with your nominee so that the payout process is as seamless as possible.
Can I save tax by purchasing life insurance?
Life insurance offers tax savings, which makes it a prudent investment tool. Premiums paid towards life insurance are deductible under Section 80C, while contributions made towards your pension plan are deductible under section 80CCC. The maturity and claim proceeds are also tax-free ( if the sum assured was not less than the said value). However, there are certain annual limits to these deductions. Further, the benefits can vary as per the provisions of the Income Tax Act. Consult your tax advisor for guidance when investing in a life insurance policy.
What other financial support can I avail from my life insurance policy?
Based on the type of policy and the insurance company, life insurance policies can offer financial support by allowing a partial withdrawal. Some insurance policies can also be mortgaged as collateral to avail loans.
What are the different types of life insurance policies available today?
It is important to understand your various options and choose a policy that best suits your needs. There are term plans that provide pure risk cover, endowment plans that help you save while providing insurance protection, money back policies that give periodic payouts to the insured to help meet short-term goals, Unit Linked Insurance Plans (ULIPs) that invest in funds for a higher return on investment along with life cover, and retirement plans that help you remain independent in your golden years.
Research your options and choose your policy wisely. A life insurance policy will not only safeguard you but your entire family.