Why is life insurance important? – Advisor Forbes INDIA

Despite being the most permanent reality of life, death continues to be a difficult conversation in India. Likewise, despite being a crucial aspect of life, life insurance is not something people like to consider buying. No one wants to think of a situation that involves either of these elements. However, if the idea of ​​passing on your financial liabilities to your dependents scares you, life insurance should be your top priority.

According to the Economic Survey 2021-2022, the Covid-19 pandemic has pushed India’s life insurance penetration close to the global average from 2.82% in 2019 to 3.2% in 2020. Although an improvement over previous years, this means the considerable population that still needs to be covered. Here’s why life insurance is so important.

What is life insurance?

As its name suggests, life insurance is a contract between the policyholder and the insurance company in which the life of the policyholder is covered against any type of accident that may lead to the premature death of the insured. In other words, if the policyholder unfortunately dies during the term of the policy, the insurance company is obligated to pay a predetermined sum of money to his survivors according to the conditions agreed between the policyholder. insurance and the insurer. It can therefore be a lump sum payment, or annual or even monthly payments.

Not only against death, but with the appropriate additional benefits, a life insurance policy can also cover the policyholder against serious illnesses like heart disease and cancer if they ever strike.

Deciding on the value of human life and the adequate sum insured

While life insurance financially covers your family in your absence, it is natural to wonder about the amount of this coverage. The concept of human life value (HLV) is crucial in deciding the right sum insured. Contrary to common notion, it is not simply a calculated basis of the financial value that is added to the household. Rather, it is a calculated assessment of that value as well as the financial liabilities that one has to take care of over one’s lifetime. Apart from this, factors like lifestyle changes, income and inflation rate are also taken into consideration before concluding the right amount.

The insured amount of your term coverage depends on the stage or age at which you purchase coverage. For example, if you are under 40, you should opt for a policy that provides coverage for 20 times your annual income. Similarly, people over the age of 40 should take a sum assured of 10 to 15 times their annual income.

Alternatively, you can also calculate this value based on your family size and expenses, and opt for coverage that is 12 to 15 times your family’s annual expenses. If you buy the policy online, the aggregators also have the HLV Calculator feature which will give you a clearer picture based on answering a few simple questions.

Term insurance: the purest form of life insurance

Although the idea behind life insurance is simple – to provide risk coverage and take care of the monetary needs of the family after the death of the insured – these policies come in different variations that cater to different types of specific needs.

Term life insurance

A term insurance plan is the purest form of life insurance. With such a plan, in the unfortunate event of the death of the policyholder, the nominee (usually the spouse) receives the death benefit, either in a lump sum or in installments. The policyholder chooses the duration of the policy as well as the amount that must be remitted to his/her representative(s) after his/her death. This allows the family of the deceased to maintain their current lifestyle and achieve important life goals even after the income earning family member dies. All the policyholder has to do is pay the premium regularly.

On the other hand, if the policyholder survives the term of the contract, he does not receive any maturity benefit because it is a pure risk cover without an investment element. These plans are popular because they are the most affordable life insurance plans available on the market. Plus, they offer higher coverage at lower premiums.

Term Insurance Riders

Riders refer to additional features or additional benefits that one can opt into the policy at an additional cost. Some of the popular term insurance endorsements are –

  • Accidental Disability Benefit Rider – As its name suggests, this endorsement is useful if the policyholder survives an accident, but with a disability that may change the course of his or her life. This endorsement supports the family financially in the absence of a regular source of income.
  • Critical illness rider – Illnesses such as cancer or heart disease can deplete a family’s finances within months. With such illnesses on the rise, it is wise to opt for this rider which not only provides a constant flow of funds for daily expenses but also paves the way for better treatment without having to worry about funds.
  • Premium Rider Waiver – In cases where the policyholder may not be able to maintain a policy due to disability resulting from an accident, this endorsement allows future premiums to be waived and the policy to remain intact.

New Age Term Plans

The insurance industry is constantly changing to meet the needs of every type of consumer segment. As the scope of insurance becomes more inclusive, insurers have introduced new era temporary plans to adequately cover more people and bridge the protection gap in India. Here are two such plans that were recently introduced:

  • Term scheme for independent housewives

    An individual’s financial worth has only been calculated if they bring income to the table. However, that changed with a landmark Supreme Court ruling last year declaring that the notion of housewives not adding financial value is problematic and must be overcome.

This makes the launch of independent term insurance plans for housewives earlier this year a historic change in the term insurance landscape. Previously, housewives could only be covered through an employed spouse policy, but now they can opt into this scheme and cover their dependents in their absence.

  • Saral Jeevan Bima

    Yet another consumer segment that often misses the term insurance radar is the low-income group. The low insurance penetration rate in this group can be attributed to the affordability factor. However, as we have seen over the past two years, an unannounced tragedy can strike anyone, regardless of their financial situation. To address this issue, the Insurance Regulatory and Development Authority (IRDAI) issued regulatory guidelines in 2020 to offer a standard term policy called Saral Jeevan Bima.

Depending on need and affordability, the sum assured ranges from INR 5 lakh to INR 25 lakh. Protection can be enhanced by opting for riders such as permanent disability riders or accidental death riders.

Why life insurance is the most important part of your financial planning

Protect your family

The very first thing a life insurance policy does is free you from worrying about what will happen to your family in your absence. A life cover does this by ensuring that there is a constant flow of cash, even in your absence.

Essentially, life insurance empowers your loved ones to be self-sufficient and independent. This means your family doesn’t have to compromise on their lifestyle. The payment they receive under the life insurance policy can be used for their monthly expenses or critical life goals, such as raising children or getting married.

Protects Assets

Everyone wants to give only the best life to their family. Even if that means taking out loans, so be it. If everything goes as planned, you will be able to repay the loans on time. However, what if things go wrong and something unfortunate happens? It becomes a concern if you’re not there to pay for those IMEs. Then these comforts can turn into liabilities with a debt that weighs heavily on the family. However, with life insurance with the right coverage, you don’t have to worry about this as your assets would be protected. All you have to do is consider your liabilities when deciding the sum insured and if anything happens to you, the payment received by the family can be used to pay off the debt.

Create wealth

Several life insurance options come with an investment component that allows you to build a retirement corpus, or even save for other life goals. In fact, life insurance has been the preferred investment vehicle of Indians for decades. With sophisticated and refined products like ULIPs now on the market, one can invest according to one’s risk appetite and risk profile and save for one’s future, as well as that of one’s family.

Protects against serious diseases

The world we live in has changed. Despite the hectic pace of life, we spend most of our time in front of screens, which makes our lives quite sedentary. This has led to an increase in the incidence of lifestyle-related diseases. Many life insurance plans these days offer the option of critical illness protection. So, if the insured has chosen this option and is diagnosed with one of the listed critical illnesses, the insurance company would be required to pay a lump sum to the insured. This payment may be used for processing fees or for any other purpose the policyholder may deem appropriate.

Save taxes

A life insurance plan also offers tax advantages. The premium you pay for the policy is eligible for a tax deduction of up to Rs 1.5 lakh per annum under Section 80C of the Income Tax Act. In addition, any amount received on the death of the policyholder is exempt from tax under Section 10 (10D) of the Income Tax Act.

Conclusion

Life insurance is the very foundation of any solid financial plan. With the right type of policy and the right sum insured, one can plan and build their family’s future without worrying about whether they would be present in person to witness it or not. A death, especially of an earning family member, can cause a major setback to their financial well-being if sufficient life insurance coverage is not purchased. So avoid this mistake and get life coverage as soon as possible. Plus, since premiums increase with age, it’s always best to get life insurance as early as possible.

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