Are you buying Life Insurance for the Right Reasons?

A large proportion of Indians buy life insurance policies without understanding their benefits. Many of them look at life insurance as a tax saving instrument and invest in schemes just before the ending of the financial year for getting the tax benefit on the premiums paid. But in this process, they often end up buying any policy rather than the one that offers them the best insurance coverage or helps them fulfil their long-term goals or ensure the building up of a corpus for use at a later stage.

Although sudden death is highly unlikely, it is not impossible, and if it happens, can wreak emotional as well as financial havoc on your family. It is to deal with the financial aspect of such situations that one should buy life insurance. Some important considerations while choosing a life insurance policy include the amount and the duration of the policy, the premium amount and its frequency, plus other features, like the option of taking a loan or premature withdrawal. The death benefits should be adequate to cover the family’s expenses and pay off all the liabilities while the maturity benefits should be enough to fulfil a specific goal.

Reasons for Buying Life Insurance

Life insurance policies offer several advantages for the policyholder and their family. Some important reasons to buy life insurance are:

  • Protection– The primary reason for buying life insurance is protection against an unfortunate event. The death benefits of a life insurance policy compensate the loss of income and help the policyholder’s family to fund regular expenses, and in some cases, repay the outstanding liabilities too.  So, the primary motive of buying a life insurance policy should be to secure the financial position of the dependent family members in case of your death.
  • Long-Term Savings– Another reason to buy a life insurance policy is that it calls for the payment of regular premiums. This helps you to become disciplined in your spending and save a specific amount for the payment of premiums and the building up of a corpus. These funds are available to you at maturity and can be used to fund any type of expenses or goals.
  • Investment– Some insurance companies offer the investment of a portion of the premiums paid by the policyholders in different financial instruments to generate good returns and create wealth over the long run.
  • Tax Benefits-Life insurance policies come with tax benefits. You can claim tax deductions under Section 80C on premiums paid, Section 10D on maturity and death benefits subject to certain conditions.

Types of Life Insurance Policies

Before buying a life insurance policy, you should be clear about ‘what is life insurance’ and what are the benefits of the different types of policies available in India. While the primary aim of all life insurance policies is to protect against death, many of them come with additional features to cater to the different needs of the public.

  • Pure Life Insurance Plans or term plans offer financial security to the policyholder’s family through payment of death benefits upon the death of the policyholder. However, if the policyholder survives the policy term, no pay-out is made by the insurance company. The premiums for these policies are quite low.
  • Term Plans with Return of Premium-Some term plans come with a return of premium option wherein the insurance company agrees to pay back a proportion of the premiums paid by the policyholder in case they outlive the policy term.
  • Endowment and Money-Back Plans– Life insurance with maturity benefits is highly suitable for people looking to save funds for buying a house or saving for retirement or funding a child’s education or any other similar purpose. Some plans come with a money-back option, wherein a specific portion of the sum assured is paid to the policyholder at specific intervals to fund various expenses.
  • ULIPs-Some life insurance policies like ULIPs or Unit Linked Insurance Plans offer policyholders a chance to create wealth through the investment of a portion of their premiums in various instruments like equity and debt. Again, these policies can be linked to long-term goals and the investment allocation takes place accordingly.
  • Policies with Riders-Many life insurance companies offer life cover with additional riders for accident cover or critical illness or disability cover.

To conclude, before you buy insurance, think about the reasons why you need it. The primary reason should be the financial safety of your family and dependants in case of your death. If, however, you already have a life insurance policy, you can choose plans with other benefits like wealth creation options.  The policy amount should be decided based on your current expenses, the inflation rate, and future expenses or liabilities. You can use a life insurance premium calculator to arrive at a suitable policy amount to match your needs.