100 FAQ's on Basic Finance

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Why is life insurance necessary?

Insurance planning is an essential feature of every personal financial plan because of the following reasons: -

i. The number of nuclear families increasing

Earlier joint families were the norm in Indian society but nowadays an increasing trend of a higher percentage of nuclear families in the total number of households compared to joint families increases the need for life insurance as the dependency ratio increases significantly.

ii. Increase in Debt levels

With the change in the Indian economy in the last 20 years and subsequent growth with it, people’s appetite for loans (home loans, car loans, personal loans, etc.) has also grown exponentially. Banks and other entities are ready to give them credit. As the proportion of debt increases, there is a greater need for term insurance.

What happens if you die leaving behind outstanding home loans or car loans or personal loans? Unlike home loans, other types of loans do not have the feature of term insurance in-built in the premium. So, you need insurance to take care of this unpaid debt risk.

iii. Absence of social security increases the need for risk cover

India does not offer a social security system unlike western countries like the USA where the government provides you a minimum allowance to maintain your standard of living if you are unemployed and or do not have anybody else looking after you.

If you live well past your working age (highly possible with the advancement in medical science) then you would need income support. Life insurance can help you in your post-retirement years by providing regular income, so it functions as a useful tool for retirement planning.

iv. Providing financial support to the dependents

Particularly for those with dependents, life insurance is a fundamental element in their comprehensive financial plan. The purchase of life insurance is one of the most effective methods of protecting against the consequences of untimely death.

After a family suffers the loss of a loved one, it usually encounters a stressful readjustment period. In situations like this, proceeds from a life insurance policy (sum assured) can help the heirs/family members to maintain their standard of living.

Also, if the sum assured is a large one, then life insurance can also act a tool for effective succession planning (passing on the assets to nominees/heirs).

v. Enables goal-based savings and investment

Insurance is a means to systematically channelize your savings and invest regularly. Your periodic premiums are simply enforced savings and due to this discipline, you are assured of a lump sum amount on maturity. A policy can come in handy at the time of your child’s education or marriage. Not only this, but it can also help in your retirement planning and succession planning.

vi. Tax Benefits

In India, life insurance has been popular due to a number of tax incentives. The Income Tax act provides tax relief for investing in life insurance and investors use this form of investment for tax planning as well.

Your tax can be saved twice on a life insurance policy-once when you pay your premiums and once when you receive maturity benefits. Even during the continuance period, if you receive survivor benefits, they are tax-free. So, life insurance policies attract the EEE (exempt, exempt, exempt) regime which is good for you as at all the three-stage, you do not pay any tax.

Any amount that you pay towards life insurance premium for yourself, your spouse, or your children can be included under section 80C deduction of ₹1.50 lakhs in a financial year.

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