FLAME Newsletter – October 03, 2012


“Needing insurance is like needing a parachute. If it isn’t there the first time, chances are you won’t be needing it again.” – Anonymous

Planning for lives while we are alive: Importance of life insurance

All of us would have heard it a hundred times that life is unpredictable, but very few of us understand this. Just like our life, death is also unpredictable and we never know what will happen in the future. Therefore, it is important to be prepared for unseen events of the future and taking up a good life insurance is one of the sure fire ways to make our and our family’s future secure.

Life insurance is an agreement between the insurer and policyholder that guarantees payment of a stated amount of monetary benefits at the end of a specified term or on the death of the policyholder. Life insurance provides for financial security in the event of death or on the inability to earn due to physical disabilities.

Taking a life insurance responsibly can help us live the life we want to and protect our family after we are not there. Without life insurance many people would be left destitute in the event of an unexpected disaster. Besides providing for financial security in the case of one’s untimely death, it can be used to accumulate a kitty for the old age, systematically build assets for funding one’s child’s education and also for saving on taxes.

Let us look at the roles of life insurance plays in our life:

Life insurance as a ‘risk cover’

First and foremost, the primary task of life insurance is to ensure protection against losses that we are not prepared for, to help outlast life’s unpredictable losses. Designed to safeguard against losses suffered on account of any unforeseen event, insurance provides us with that unique sense of security that no other form of investment provides. By buying life insurance, we buy peace of mind and are prepared to face any financial demand that would hit the family in case of an untimely demise.

To provide such protection, insurance firms collect contributions from many people who face the same risk. A loss claim is paid out of the total premium collected by the insurance companies, who act as trustees.

Life insurance provides a safeguard in the case of accidents or a drop in income after retirement. An accident or disability can be devastating and this is where an insurance policy can lend timely support to the family in such times. It also comes as a great help when one retires, in case no untoward incident happens during the term of the policy. With the entry of private sector players in insurance, we have a wide range of services and benefits to choose from. Most of these services can be further customised to fit specific needs.

Life insurance as an ‘investment’ option

Life insurance is an attractive option for investment. While most people recognise the tax saving potential of insurance, many are not aware of its advantages as an investment option as well. Insurance products yield more funds compared to regular investment options, and this is besides the added incentives offered by insurers.

In life insurance, unlike non-life products, we get maturity benefits on survival at the end of the term. In other words, if we take a life insurance policy for 20 years and survive the term, the amount invested as premium in the policy will come back to us with added returns. In the unfortunate event of death within the tenure of the policy, the family of the deceased will receive the sum assured.

Now, let us compare insurance as an investment option. If we invest Rs. 10,000 in PPF (Public Provident Fund), our money grows to Rs. 10,950 at 9.5% interest over a year. But in this case, the access to our funds will be limited. We can withdraw 50% of the initial deposit only after four years.

The same amount of Rs. 10,000 can give us an insurance cover of up to Rs. 5 lakh to Rs.12 lakh (depending upon the plan, age and medical condition of the life insured, etc) and this amount can immediately become available to the nominee of the policyholder after death. Thus insurance is a unique investment avenue that delivers sound returns in addition to protection.

Life insurance as ‘tax planning’

Life insurance also serves as an excellent mechanism for saving taxes. The Government of India has offered tax incentives to life insurance products to facilitate the flow of funds into productive assets. Under Section 88 of Income Tax Act 1961, an individual is entitled to a rebate of 20% on the annual premium payable on his/her life and life of his/her children. The rebate is deductible from tax payable by the individual or a Hindu Undivided Family. This rebate is can be availed up to a maximum of Rs. 12,000 on a payment of yearly premium of Rs. 60,000. By paying Rs. 60,000 a year, we can buy anything upwards of Rs. 10 lakh in the sum assured (depending upon the age of the insured and term of the policy.) This implies that we get Rs. 12,000 as a tax benefit. But many people make the mistake of burdening themselves with too many life insurance policies to the detriment of the quality of their lives while they’re alive.

Remember, an insurance acts like a ceiling above your head providing you the shelter and protection from any untoward incident. With life having become fast paced nowadays, there are very few things we can hold on to. Our life’s pleasures have become momentary now and if we want to enjoy them for a prolonged time, we must ensure that the little necessities of our life are well insured.

Dr. P Nandagopal - The author is the CEO & MD of IndiaFirst Life Insurance.

Advantages of life insurance

Eminent author FC Oviatt—in his book Economic Place of Life Insurance and Its Relation to Society said, “The foundation of life insurance is the recognition of the value of a human life and the possibility of indemnification for the loss of that value.”

Life insurance provides the dual benefits of savings and security. The following benefits explain why this investment tool should be an integral part of your financial plans.

Some good reasons to buy life insurance

  • Provides financial security to your family
  • Provision for your children’s education
  • Regular guaranteed income for parents
  • Provides tax benefit
  • Builds the habit of thrift
  • Safe and profitable long-term investment
  • Assured income through annuities
  • Facility of loans without affecting the policy benefits

Step by Step Process of Buying Life Insurance

It is always wise to have a life insurance policy because it offers a sense of security, not only to the holder directly, but also to his dependents, from the uncertainty that life always is.

Notwithstanding the apprehensions attached to buying insurance policies, a good policy is known to provide a support to lean on to in the event of anything untoward occurring in the future. However, it is imperative that one understands the policy he is about to purchase and whether it suits his needs adequately.

Company choice

While buying an insurance policy, a person should shortlist the insurer from whom he intends buying the product. Almost all insurance companies in India have Term covers available and having gone through them, the person can make his choice.

Insurance cost

The next step is to find out how much an insurance product costs. For instance, a 35-year old can go for a policy that assures protection of his income till he reaches his retirement age in that the premium amount remains in the payable range.

Formalities and form filling

The insurer will require documents such as income proof (3 years IT return), photographs, pan card, residence proof, among others.

It is very important to remember that all forms should be filled by the product buyer himself and not by his agent.

The agent can take short cuts while filling the form and omit some details or because he might be concerned his client will not be eligible to be insured which will see his commission disappearing. The insured should ensure that he fills every detail as accurately as possible such as his height, weight, eating habits and medical history.

Be truthful

As the life insurance form is a 'Proposal Form' wherein the buyer is proposing for a life insurance cover, it is essential to remain truthful while disclosing the details. This is because if a policy holder were to die during the term of the policy, any misinformation or false statement in the policy could result in the nominee getting nothing at all.

Therefore, the one to suffer in the end could be his nominee who can be a dear family member and for whom the policy had been bought in the first place.

Going over the details of the policy thoroughly and understanding the terms of the contract are also needed to be taken into account while buying a life insurance policy because the person is making an important decision in his life for which unnecessary future complications can be easily avoided.

Also read…

Debunking 5 life insurance misconceptions

What is the right amount of Insurance?

How much insurance coverage one should have?

Till what age should your life insurance cover you?


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