Life insurance provides protection and long-term wealth creation through a single product, helping to strengthen buyer’s financial plan and achieve long-term goals. Tax benefits associated with life insurance plans further enhance their appeal. Here is how to choose the right life insurance plan that offers financial security and tax saving.
Adequate Life Insurance
Many individuals rely on employer provided coverage or life insurance policies purchased early in their careers. However, as responsibilities grow, incomes rise and aspirations skyrocket, it is important to reassess coverage. As a rule of thumb, one should be covered for a sum assured at least 15 times of the annual income. In addition to this, large outstanding loans should be accounted into the required coverage.
Scientific methods such as the human life value approach or capital needs analysis can also be used to decide the adequate sum assured. You can use online calculators to arrive at an optimal sum assured.
The product dilemma.
While online calculators simplify coverage estimation, many insurance buyers struggle to purchase the right life insurance product. Broadly, life insurance products can be categorised into three buckets – term life insurance, traditional participating products like endowment and money-back policies offering assured returns, and ULIPs – unit linked insurance plans that combine protection with market-linked returns.
Term life insurance plan is ideal for securing large sum assured at a small premium and forms the foundation of an individual’s life insurance portfolio. Moderate risk-takers looking for protection and wealth creation over long term should consider buying a traditional life insurance plan offering assured returns and reasonable sum assured. ULIPs suit those with high risk-taking ability.
Insurance & financial goals
A carefully chosen life insurance product, aligned with one’s risk appetite and financial goal can help achieve financial freedom. Let’s understand this with a few examples. In the initial stage of a career, income is limited but liabilities such as education loan may be high. Hence, it is better to buy a term life insurance offering a large sum assured at a relatively negligible premium. As one progresses in career and family responsibilities increase, higher coverage through term life insurance along with ULIPs or traditional life insurance policies with a savings component, can help build a wealth pool to achieve financial goals. Life insurance policies offering regular income can be used to fund retirement years.
Tax benefits
Financial goals are best achieved by choosing right investments that beat inflation and offer healthy risk-adjusted post tax returns. Depending on the life insurance product chosen, investors get exposure to stocks, bonds and government securities. Carefully chosen life insurance products, after understanding tax laws and the conditions prescribed to avail tax-benefits, offer meaningful tax benefits.
For example, premium paid for life insurance policies up to Rs 1.5 lakh per year qualify for deduction under section 80C of the Income Tax Act. Premiums paid towards health insurance rider benefits (for example, critical illness, hospitalisation benefits) are eligible for tax exemption under section 80D of the Income Tax Act. Also, death claims paid by life insurance policies are exempt under section 10(10)D of the Income Tax Act.
Importantly, tax benefits should be considered as ancillary. Buyers should never compromise on protection and wealth creation – the two core benefits that life insurance products are designed to provide.
Know the product before purchase
Understand the life insurance product in detail before making a purchase. Review the benefit illustration carefully. Pick additional covers wisely, only after thorough assessment. They enhance coverage at a relatively low incremental premium. Optimise product features as per your requirements. For example, the tenure of a term life insurance policy should match with the years remaining until retirement. If income is concentrated in the initial years of career, the premium payment term can be suitably reduced while keeping the policy tenure longer.
Another key factor to consider is the reputation of the insurer. A high claim settlement ratio, low complaints levels, and proactive customer service are essential while choosing an insurer. At Ageas Federal Life Insurance, we believe that all promises can come true and we work extensively to emerge as the life insurer of choice for Indians. Our approach of combining global expertise with deep local understanding help us ensure customer delight.
Choosing the right life insurance product, after making honest disclosures in the proposal form, is a firm step towards financial security. It is also important to ensure that nominations and other policy details are kept up to date to enable smooth claim experience.
