When I ask you whether you would
like to buy a life insurance policy, what would be your intended response? I
guess the most likely answer would be ‘No’. Why? Is it because of the premium
outgo? The answer to this question would undoubtedly be ‘Yes’.
India is a large country. In
fact, its population is second highest in the whole world. Yet, when we look at
the penetration of life insurance in our country, the figure is dismal. Let’s
see what the numbers say:
The penetration of insurance in rest of the world
is far more than that of in India and that too after being such a populated
country.
What do you think is the reason
of such low penetration? It is a lot of factors actually. Let’s see what they
are:
- Lack of awareness – The most common reason which acts as a blockade
to insurance penetration is awareness or the lack of knowledge thereof. We in India
are not fully aware about the importance of life insurance. We feel, life
insurance simply means paying a specified amount of money as a premium every year
for promise of a lump sum benefit paid after a long period of time. Since an
insurance plan is intangible (you cannot touch or feel it physically), people
miss its importance. They believe insurance to be an expense and thus shy away
from it.
- Lack of funds – If lack of life Insurance awareness can be tackled,
another most important factor to deal with is its affordability. In a country
where a majority of individuals are poor, buying an insurance policy often
takes a back seat. Meeting the livelihood expenses is more important and as
such, insurance is given a miss.
- Ignorance – But what about millions of other individuals who have
the required funds, financially literate and are even aware but still don’t
have life insurance? The reason is simply ignorance - These individuals believe
only in wealth creation and channel most of their savings into other investment
avenues like stocks and shares, mutual funds, fixed deposits etc. Life
insurance, as such, is given a miss.
- Importance of Financial Planning – Unlike developed countries,
financial planning in India is still at its nascent stage. While the educated
mass in India is investing in property, mutual fund, gold and stocks, but they
do it out of impulse or because somebody else has suggested it. Investments are
done without any financial plan or keeping future goals in mind. And thus, the
safety security of the family in absence of the bread earner is often ignored.
Life Insurance, which can take care of this issue, is therefore ignored.
Whatever be the reason the fact
remains the same. Insurance, as a product, is not seen and understood to be the
most important. Most of us therefore ignore the product which has lead to the
dismal penetration rates.
What about you? Which reason
keeps you from buying a life insurance plan? Is it lack of awareness,
affordability, simply ignorance or lack of financial planning awareness?
Whatever it is, here is an eye opener for you. Here are some reasons why
insurance as a product is something you should have. So let us have a look at
them:
Life
insurance is most essential for building an emergency fund
Creating a fund which would
provide the required finances in an emergency is always advised. If you have
set aside funds for those rainy days, you wouldn’t face any financial crisis.
When it comes to building such an emergency fund, which instrument lets us do
that - Is it the various investment options or an insurance plan? An insurance
plan, obviously! Other investment options are purely meant for wealth creation
or appreciation. If the sole bread earner meets sudden death, his or her
investments would be worth only that much which he or she had invested.
Life insurance, on the other
hand, promises a much higher benefit in case of a sudden death. This benefit is
irrespective of the amount of premiums you paid under the plan. Take the example
of a term plan for instance – Suppose, the Sum Assured opted by you is
` 50 Lakhs and you are
paying annual premium of
`
8,000. Your age and chosen plan tenure are also assumed to be 30 years each. In
case of your sudden death, say 10 years after buying the plan, your nominee
stands to receive Rs. 50 Lakhs. How much was your investment into the plan?
Only
` 80,000 (
` 8,000 annual premium
x 10 years), isn’t it? Had you invested
`
8,000 every year even in the best investment avenue offering the highest
returns, would the corpus amount be Rs. 50 Lakhs? The answer is ‘NO’. This is
the beauty of a life insurance plan. It helps in creating an emergency fund
which comes to your family’s rescue when you are not around.
Life
insurance helps in meeting various life goal
Besides providing emergency
funding, life insurance also helps in meeting various life goals which you
have. Here is a list of some major life goals of every individual and how life
insurance helps in fulfilling these:
- Emergency Fund – Funding for emergencies is the primary goal of
every individual and as discussed above, life insurance helps in meeting this
goal. Term insurance plans are designed in such a manner that they meet this
specific goal. They allow high levels of coverage at very affordable premium
rates. Moreover, these plans have a long tenure for a longer protection period.
- Children’s future – When we settle down and have kids, we want to
secure their future. That is why we make investments with a long-term
perspective which would mature when our children would require them. But what
if death hampers this plan? When we are not around who would provide for education
of our children? A child plan helps in this regard. Child plans promise to pay
a lump sum immediately after the parent dies. The plan continues and the
subsequent premiums are paid by the life insurance company. When the plan
completes its intended tenure the promised benefits are paid again. Thus, these
plans ensure that the dream which you had for your child would not be ruined
because of your death. These plans, thus, secure your child’s future.
- Wealth creation – If investment is on your mind, life insurance has
a solution for you. Unit Linked Insurance Plans are specially designed life
insurance plans. They offer the dual benefit - insurance protection as well as
investment returns. These plans are like mutual fund schemes where the premium
collected is invested in a diversified market portfolio or a portfolio of
assets you choose. Since the portfolio reflects the market movements, the
returns are market-linked and attractive.
- Retirement Planning – You wouldn’t like to forget your golden years
of retirement, would you? Planning for a comfortable retirement is essential
where we wouldn’t have to worry about our finances. That is why we invest for
our retirement. Life insurance pension plans help us plan our retirement too.
These plans earmark a financial plan for our retirement and pay pensions
throughout our lifetime.
Isn’t life insurance
all-inclusive? Whatever be the reason of your investment, life insurance has a
solution for every need.
Life
insurance saves tax
The final benefit which a life
insurance plan provides is tax exemptions. Whatever you invest and whatever you
get back, both are tax free. Whether you buy a term plan, child plan, Unit
Linked Insurance Plan or Pension plan, premiums paid are exempted from tax up
to a limit of ` 1.50
Lakhs under Section 80C of The Income Tax Act 1961. Similarly, the plan
benefits received on maturity or on death are also tax free under Section
10(10D) of The Income Tax Act 1961.
Life insurance is not a concept
or an idea. It is a product, though intangible, which every one of us should have.
Whatever be our requirements and whatever life stage we are in, a life
insurance product finds its application. While a term insurance plan is useful
in each life stage, other plans depend on your requirements. For instance, when
you are young and want to invest, ULIPs could be your answer, whereas a child
plan makes sense for a parent. Individuals in their middle ages should plan for
their retirement. So, a different life stage has a different life insurance
requirement. But the bottom line doesn’t change - Life insurance is essential.
Before you buy a life insurance plan though, do your homework. Know some
important aspects which should factor in your purchase decision. These aspects
include:
- The coverage – Ensure an optimal coverage. When buying a term plan,
choose coverage as per your Human Life Value or any other calculations which
would ensure a sufficient corpus to meet your family’s financial requirements
in your absence. Since premiums are cheap, a high cover should be availed. When
buying a child plan, take a cover which would be sufficient for funding your
child’s future planning. Similarly, pension plans should be bought keeping in
mind the pension which would be sufficient to meet your expenses post
retirement. So, avail of a suitable coverage when buying any life insurance
plan.
- The term – The term of the policy should also be chosen to coincide
with your requirements. Term plans should ideally have the highest tenure while
child plans and pension plans should have a term completing at that time when
the funds would be required. In case of ULIPs, the term should depend on your
investment horizon.
- The premiums – While premiums are essential in determining
affordability, they should be compared against the coverage available. The best
plan should have the highest coverage at the most reasonable premium. Compare
the different plans for their premium rates and coverage feature before you
settle on one.
Life insurance is a very potent product if it is properly utilized. Term plans are the best and the most important life insurance plans which should never be given a miss. Other plans depend on your requirements. Assess your requirements and add one or
more life insurance product in your financial portfolio today. And yes, bury your ignorance or lack of knowledge. Life insurance is important and you should opt for a plan in your best interest.
answer to this question would undoubtedly be