What is life insurance?
Life insurance plan pays your family a certain sum of money as death benefit (as mentioned in the policy) in event of your death while the policy is in force and/or provides returns as maturity proceeds after a set period (called policy term) when the policy terminates; in exchange of a premium.
There are different types of life insurance plans broadly the pure protection or term-life plans and the investment plans.
In comparison to investment-type life insurance plans, term life plans only get you a death benefit and not other return. However, the death benefits you get is very large in comparison, typically 500-1000 times your annual premium. It would take an investment earning 10% interest for more than 65 years – a lifetime - to get a 500X return!
What are the types of life insurance?
Life insurance plans are classified into two major types:
Pure protection policies or term life plans: Life insurance term plan pays your family the death benefit as mentioned in the policy in case of your death while the policy is in force.
In comparison to investment-type life insurance plans, term life plans only get you a death benefit and not other return. However, the death benefits you get is very large in comparison, typically 500-1000 times your annual premium. It would take an investment earning 10% interest for more than 65 years – a lifetime - to get a 500X return!
Investment policies: Investment-type life insurance plan pays your family a certain sum of money as maturity returns after a set time period (called policy term) or the death benefit in event of your death (while the policy is in force); in exchange of a premium.
Typically maturity periods are ten, fifteen or twenty years upto a certain age limit, usually 65 years. Furthermore, these policies are traditional with-profits or unit linked (ULIP) plans. The death benefit you get is lesser in comparison to pure protection (term insurance) plans, typically 7 -10 times your annual premium.
Why should I buy a life insurance plan?
If you have family members who are dependent on your income, you must buy a life cover (a term-life protection plan at the least) to secure their future in your absence.
Life insurance provides financial protection against several risk-hazards in the life of every person:
1. That of dying too soon leaving a dependent family without any means of regular income
2. That of living till old age without visible means of support
3. Paying off loans and other expenses like illness or accidents in your absence
Moreover, the death benefit is tax free to your family u/s 10(10D), and premiums get tax exemption u/s 80C.
How much life insurance should I buy?
The rule of thumb is that you should buy a life cover of at least 10 times, and ideally 20 times your annual salary, so that your family can continue to have similar quality of life even after the breadwinner dies.
Why would you need so much cover? Consider a simple scenario, where Anil, who’s salary is 5 lakhs, took the recommended minimum cover of 10 times salary, i.e. 50 lakhs. On his death, his family puts the 50 lakhs of payout corpus in a fixed deposit. With interest of 8% this would give 4 lakhs of substitute income for his family, to manage their day-to-day expenses. It’s less than before but should be fine since Anil’s expenses are no longer to be borne. Now if Anil had loans to pay or other unplanned costs come up, then the corpus will reduce and so will the interest income. Also with effect of inflation the interest income may not be enough as years pass by. So, to be fully safe ideal cover would be 20 times the salary.
Our experts can help with determining your cover need based on your income and savings. We also can help you and your family, plan for the best way to use the benefit payout, in case of an unfortunate event.
What are the tax benefits for life insurance?
Life insurance provides two types of tax benefits:
1. The premiums you pay for a life insurance policy are eligible for tax deductions up to Rs1.5 lakhs under Section 80C (to the extent of 10% of sum assured or actual premiums paid whichever is less)
2. The death benefit (including any accumulated bonuses) received by the nominee is fully tax- free as per section 10 (10 D).
3. Any maturity proceeds received (other than death benefit) are tax-free provided, the premiums paid in any of the years during the term of the policy do not exceed 10% of the actual Sum Assured
Can I cancel my life insurance policy?
You can always cancel your life insurance policy by informing your provider about your wish to cancel within the free look period which is 15 days. When you cancel your life insurance policy, you are officially 'surrendering' the policy.
Alternatively, if you stop paying your premiums, the insurance policy shall stand cancelled or lapsed and the cover will no longer apply. However, surrender of policy is not recommended since the surrender value would always be proportionately low.