Why Is Life Insurance Necessary?
Insurance planning is an essential feature of every personal financial plan because of the following reasons:-
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.
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 the outstanding home loan or car loan or personal loan. Unlike home loans, other types of loans do not have the feature of term insurance in-built in the premium. So, you need credit-life insurance to take care of the risk of unpaid debt.
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.
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 as a tool for effective succession planning (passing on the assets to nominees/ legal heirs).
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.
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 survival 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.
Please note deduction under section 80C is applicable to those individuals who are in the old tax regime.