Why do “I” need life insurance?

Everything you need to know about your first life insurance policy.

Why are Life Insurance important

Ask any young person and his/her take on investing in insurance. You will receive a raised eyebrow and a flurry of questions like:

  • Is it the right time to buy insurance? Is it compulsory?
  • I am a young healthy person. Why do I need a life insurance? I have no major liabilities or debts either.
  • Why shouldn’t I invest somewhere else and earn higher returns while I am alive?
  • Why should I block my money in a life insurance where I am not going to reap the benefits?

Following is a brief explanation of the important concepts related to life insurance that shall answer the above as well as some other life insurance related queries.

Q. What exactly is Life Insurance?

A life insurance policy is a contract between the insured and the insurance company wherebythe life assured has to pay regular amounts called ‘premiums’ and in exchange, the company provides a lump sum payment to a beneficiary in the event of the insured's death.

Q. When is the right time to buy life insurance? What is the need?

Life insurance premiums are based on age. Higher the age, higher the premium. However, one can consider investing in life insurance as soon as there are financial liabilities, monetary goals and expenses that one wishes to cover. For example, one can opt for an insurance policy to cover a home loan, to build foryour child’s educational expenses, to help your spouse manage retirement years, etc.

Q. How do I make the premium payments?

You can pay the premium as a lump sum amount or as regular installments. Most companies accept payments through cheques, ECS, net-banking, credit/debit cards, etc.

Q. 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 month payback that can help meet expenses during retirement years.

Q. How much insurance do I need?

This dependsseveral aspects like - 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 amount available from other sources. This sum assured you avail should also cover your loans and liabilities so that your dependents are indemnified.

Q. Who gets the money after me?

A nominee is the person designated by the policyholder to receive the proceeds of an insurance policy, after the death of the insured. It is an integral part of your life insurance policy. In case the nominee is minor, you need to designate an appointee (guardian). Also, ensure that the nominee is aware about the insurance plan you have invested in and the benefits it offers.

Q. Can I save tax by purchasing a life insurance policy?

Life Insurance offers tax savings also. Premiums paid towards life insurance are currently deductible under section 80C, while contributions made towards your pension plan are currently deductible under section 80CCC. The maturity and claim proceeds are also tax-free. 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 forguidance.

Q. 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 allowinga partial withdrawal. Some insurance policies can also be mortgaged as collateral to avail loans.

One of the ironies is that - Insurance is essential but we hope never to need it.

Also see: Life insurance types simplified

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