A common sentiment among youngsters these days is that life insurance is a waste of money. Ask them why and they’ll say–because it doesn’t give any returns. On probing further, one gets to peep into how the young human mind functions. We are programmed by society to seek monetary gains from everything that we do. But life insurance should be an exception to this line of thinking.
Life insurance is an expense and one of the most important expenses that you will make. The purpose of buying life insurance shouldn’t be to earn some sort of returns from it, it should be bought to protect your family from financial woes in case of your untimely demise. Life insurance should be given precedence even over investment, especially if you’re the breadwinner of your family.
Life insurance is more important than investment because in case of your demise, the investments you’ve made might not be able to help your family come out of a financial crisis. The returns may vary and they might not be able to redeem some of the investments right away. This is where life insurance will help because it has something called “sum assured,” which is an amount that you’re insured for and is guaranteed to be given to your family or beneficiaries in case of your demise during the term of the insurance.
This should be the primary purpose of buying life insurance, which is why the best type of life insurance is term insurance. Term insurance is low-cost life insurance. You can get term insurance cover for a big amount at low premiums. As the name suggests, term insurance is insurance that you get for a specific time period. This time period is a fixed number of years and the policy comes into effect only if the policyholder dies during that period.
Very few youngsters take life insurance seriously, because one’s own demise is something no one really wants to think about. But everyone should have term insurance and it should be bought properly. Ideally, you should have term cover worth at least 10 years’ income. And you should buy it at a young age because the older you get, the more expensive term insurance becomes. The table below shows how premium increases with age for term cover of Rs 1 crore.
|Age||Premium for term cover of Rs 1 crore|
|25 years||Rs 7,000/-|
|30 years||Rs 9,000/-|
|35 years||Rs 12,500/-|
|40 years||Rs 18,000/-|
The other factors that would be worth considering at the time of buying term cover would be the number of years left to retirement, your annual expenses and any loans you may have. Term insurance plans that are bought online are also cheaper than the offline plans and can be bought very easily. While choosing a term insurance provider, it helps to pick a company that has a good claim settlement ratio. A claim settlement ratio above 95% would make an insurance company worth considering.
And of course, there is the tax advantage of term insurance that comes as an added benefit. Under Section 80C, you get tax-saving deduction on the annual life insurance premium that you pay. This deduction comes under the Rs 1.5 lakh limit of Section 80C and cannot exceed 10% of the sum assured. The premium that you pay gets deducted from your annual taxable income, which means that your cost of purchasing the insurance goes down even further.
There is also the Section 80D that allows deductions of up to Rs 25,000 on term insurance that has been bought with critical illness riders. The good thing here is that if you have both kinds of term insurance–simple and with riders–you can claim tax benefits on both of them.
This is how term insurance can give you the added advantage of tax savings. But, to further emphasize, the primary purpose of buying term insurance is to provide a cushion for your family in case something happens to you. And don’t expect to gain anything from it. You can consider life insurance to be a useful expense if it never actually gets used.