A critical part of one’s financial outlay should be investing in Comprehensive Life Insurance, be it for Pure Protection or as an Investment Opportunity. Life insurance is a risk mitigation instrument and will in different ways aid the insured/policyholder and his/her dependents in coping with unforeseen emergencies, including loss of life of the policy holder. Life insurance is hence essential for protecting one’s family financially in case of an unexpected twist of faith, but many people opt to go ahead without it. In a country like India, the Life insurance penetration among the Indian population is just about 2.9% which is one of the lowest given our population size. This will also be skewed reasonably heavily towards the top 20-25 Metros and Tier I cities/State Capitals.
So what are the Benefit of one investing in a Life Insurance Policy? The benefits of Life Insurance, thus include:
- Risk Coverage : Life is full of uncertainties, and this is where an insurance policy becomes one of the most important investments that any individual can make in his/her life. This insurance cover provides a protective shield financially for one’s loved ones which allows them to continue enjoying the quality of life they were used before the unforeseen event. Investing in life insurance gives one’s family a secure future financially, subject to sufficient insurance coverage being purchased by the proposer. In case of unfortunate death to the insured, the insurance partner pays up the Sum Assured along with the bonuses as applicable to the nominees, which benefits the bereaved family. Life Insurance importantly also protects the financial interest of people who have diminishing incomes at advancing ages, to ensure they and their family have adequate financial protection at all times.
- Investment Opportunity : Many Life Insurance schemes offer better returns when compared to many other financial investment alternatives. Except term plans, there are investment benefits across Retirement Plans, Child Insurance plans, Whole Life insurance plans etc. Traditional life insurance policies (endowment plans) also offer money-back and guaranteed cash/maturity values, which are basically in-built guarantees and defined maturity benefits through a variety of product options. Most of the Life Insurance schemes also offer Bonuses that most other investment scheme can offer. The biggest advantage is that while the money invested in life insurance is accumulating wealth, there is also importantly Life Insurance coverage during the period of cover, should anything untoward happen to the proposer. The money invested will fetch good returns and be returned fully as Sum Assured either after the completion of the term (maturity) or after the demise of the insured. If you purchase a whole, universal, or variable life insurance policy, it can accumulate cash value in addition to providing death benefits.
- Life’s Goal Planning : Life Insurance helps one in planning life’s financial goals in the future as per one’s requirements and future plans. It helps you plan for the goal of the individual for each stage of their life. Some of the key goals/stages that most persons plan for, are Children's Future and Higher Education, Marriage of the children, purchasing/building one’s Dream Home or planning a Relaxed Retired life with a sufficient corpus. Most insurance companies offer Services like Life Planning and have planners on their roles who meet customers and advice them on building these investments to meet these goals along the way. Importantly, while the individual is planning for these eventualities, if there is an unfortunate demise, then Life insurance also provides for financial support to the family through the Policy Sum Assured being paid out to them.
- Savings Instrument : Life Insurance is a long-term savings instrument where plans like ULIPs invest the premium paid by the insured in multiple investment opportunities to offer higher "risk-adjusted returns" which are higher than inflation and thereby ensuring growth of one’s corpus, apart from providing the insured a Life Cover. Insurance being a regulated sector, has IRDAI needing to ensures the safety of the policyholder’s money (AUM – Assets Under Management) deposited with life insurance companies and hence the Life Insurance companies need to be doubly sure of their investments and returns to their policy holders. Many persons also look at these investments generating an additional source of income to them post retirement and beyond. Life Insurance is one of the best instruments for retirement planning and earning through annuities. It also encourages the habit of Savings among individuals.
- Emergency Funds : The corpus accumulated over a period of time by the policy holder also becomes an Emergency Fund available if the need arises. Policyholders have the option of taking loans against their policies without compromising the policy benefits or coverages. The loan amount that can be taken in a percentage of the cash value or sum assured under policy depending on the policy provisions. This way a Life Insurance policy can help one meet unforeseen financial challenges.
- Enhanced Coverage through Riders : Riders or Add-Ons are the additional benefits that can be bought by the policy holder by paying additional premium to increase the coverage under the basic Life Insurance policy. Riders cover risks that are beyond the scope of the main life policy, resulting in a more comprehensive protection and some of these riders include Critical Illness, Hospital Cash, Personal Accident along with Disability, Waiver of Premium benefit etc. This additional cover becomes useful when the policyholder unfortunately has an illness that doesn’t result in death. For example if they are struck with a Critical Illness like a Cardiac problem, and need urgent medical attention, this Rider will pay for the expenses involved while the Life coverage continues.
- Life Insurance Settlement Benefits Are Tax-Free : If one has a Life Insurance policy and they unfortunately pass away, when the policy is still in force, their nominees/beneficiaries will receive a Lump Sum Death benefit, on which they wouldn’t have to pay any Income Tax, since Life insurance payouts aren’t considered income for tax purposes. Similarly maturity payments also are not taxable under the IT laws.
- Tax Benefits : According to the section 80C of the Income Tax Act, 1961, Premiums paid towards a valid life insurance policy are exempted from the taxable income upto certain prescribed limits. Apart from life insurance premium, section 80C allows exemption for other financial instruments such as Employee Provident Fund (EPF), Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), National Savings Certificate (NSC), health insurance premium being some of them. The total amount that can be exempted from the taxable income for section 80C is capped at a maximum of INR 150,000. The exemptions are eligible for individuals (Indian citizens) or Hindu Undivided Family (HUF). Also, the “maturity amount” is tax-free under section 10(10D).