Financial goals such as a child’s education and the assurance of a certain standard of living for one’s spouse and family can still be achieved in the event of an eventuality, if there is adequate life insurance in place. Contrary to the old practice of buying life insurance primarily for the tax benefits associated with it, one should buy adequate life insurance for the many benefits it offers.
Buying life insurance solely for a quick deduction under section 80C of the Income Tax Act is like buying a helmet for style rather than safety, or choosing food only for taste while ignoring nutrition. Life insurance is an important financial decision for each one of us, even if many choose to migrate to the New Tax Regime (NTR), which does not allow most deductions offered on life insurance premium payments. Life insurance should be purchased for the benefits listed below:
Income replacement: Premature death is the biggest risk addressed by life insurance. A life insurance policy on the life of a breadwinner can help create regular cashflows in case of an eventuality. A regular income for survivors offers financial protection, helps them maintain a standard of living, and achieve financial goals such as a child’s education.
Wealth pool: Life insurance policies with a saving component can help build wealth that can be used to achieve large financial goals like child’s higher education. The risk of living too long is underestimated by many. Savings-oriented annuity products offered by life insurers can provide regular payouts in the golden years. Choosing suitable life insurance products can instil disciplined investing. Channelising savings into bonds and stocks using Unit Linked Insurance Plans (ULIP) can help earn healthy risk-adjusted returns and accumulate wealth over our working years.
Debt protection: While achieving many financial goals in the life, we avail ourselves of loans. Be it the purchase of the dream car or a house, loans often become inevitable. A term life insurance policy can come in handy to pay off these loans if the borrower passes away before repaying them. It ensures that the family gets to retain the assets acquired through loans, even if the borrower is not around to repay them. A lack of adequate life insurance may force survivors sell assets to clear outstanding loans. Such a situation can adversely impact the standard of living of the surviving family members.
Focused investments: Though wealth pools built using life insurance products and other investments help fund financial goals, some goals require special focus. They need clear earmarking and should be kept separate from other financial investments. For example, an individual keen on leaving a legacy for a social cause, may choose to buy a whole life policy and create a dedicated fund. Life insurance policies issued under the Married Women’s Property Act or with a beneficial nominee can be used to ring-fence assets and ensure that they are transferred to the intended beneficiaries.
The above benefits make a strong case for the purchase of life insurance during one’s working years. The long-term nature of life insurance contracts brings discipline. The buyer pays premium as she earns and gets to enjoy both protection and wealth creation over the policy term. Though the NTR does not consider deductions while computing income tax, life insurance products may still enjoy favourable taxation. For example, life insurance proceeds are tax-free in the hands of recipients, subject to terms and conditions. Also, under a ULIP, switches from a debt fund to an equity fund and vice versa, are tax-neutral. At the accumulation stage, there is usually no tax liability on life insurance products.
Everyone keen on protection and long-term savings should include life insurance policies in their financial plans. Ascertain the coverage required using a human life value calculator online. The need-based method can also be used to decide the sum assured. For example, one may want to go for a sum assured which is equal to 15 times her annual income and the outstanding debt. Consult a life insurance advisor to determine the right amount of coverage and suitable policies to ensure adequate life insurance.
