At the end of the financial year, a lot of people in our country buy life insurance as they think it is tax-saving. Often in the process, they end up buying inappropriate plans or paying higher premiums. This is one of the greatest financial mistakes. When a person buys a life cover, the purpose should not be limited to mere tax saving. It is also an important way to protect your loved ones.
Buying term insurance is also sort of an emotional decision. It’s about ensuring that your loved ones have a secure financial future after you pass away. Insurance provides a financial safety net by replacing your income or serving as an inheritance for a loved one.
Unfortunately, that is not why most people buy a life insurance policy. The primary idea is to save a few bucks on tax. Here, we will help you understand why life insurance should not be restricted to saving taxes on your annual incomes. Instead, it should provide you an enduring promise of a safe and secure future.
Top Reasons for Purchasing a Life Insurance Policy
- Taking care of your loved ones: If you are the sole bread earner, your premature death can leave your family stranded amidst financial chaos. To keep them protected even after you are gone, investing in a term life insurance is a must. Whether it is safeguarding your child’s future or helping your partner with the needed financial security, life insurance can protect all your surviving dependents. It is an important tool to keep your family protected from distressing financial losses.
- Coverage against liabilities: Over the course of life, you may have taken financial support in the form of loans, mortgages, or other types of debt. Be it home loan, auto loan, or credit card debt, dealing with such liabilities can be a huge financial strain. A life insurance policy can help to keep your family away from such pecuniary liabilities. It can be used to pay off debt, such as credit card bills or an outstanding home loan.
- Great investment component: Several insurance policies double up as excellent investment opportunities. In such policies, half the premium amount is paid towards insurance and the rest is invested in debt or equity. These investment-linked policies help to make the most of your funds. They also help to achieve your long-term goals such as buying a house. A few policies also enable you to switch between funds as per your evolving goals.
- Maturity benefits: Many times, the insurer survives the end of the policy term. If no claims have been made up to the maturity date, the total premium paid to date is returned at the time of maturity. In such cases, life insurance policies serve as a saving instrument for the insurer. It offers a protective cover while also having a savings component.
- Takes care of your business: Life insurance policies are not just meant for you and your family. Many policies also promise to take care of your business. If you are in a business partnership, your partner can easily buy out your share of the business. The payout amount will directly go to your listed nominees, but without a stake in the company.
- Cover for health expenditures: Healthcare costs are experiencing inflation of 15-20%. A severe health condition can leave behind a huge financial burden, which may take years to transcend. A health insurance policy can cover all critical illness treatment and hospitalization expenses.
- It supplements your retirement goals: For some people, life insurance may be a useful source for supplemental retirement income. Policies like universal or whole life can ensure that you have a regular income stream every month. These policies are like pension plans where you build up cash value over time and enjoy steady income every month after retirement.
- Tax benefits: As per the Income Tax Act, individuals can decrease their tax obligations by putting their money in specific tools, including term insurance. Irrespective of the plan you buy, you can save taxes with insurance policies. Section 80C states that the premium amount paid against your life insurance plan is entitled to a maximum tax exemption for up to 1.5 lakhs per annum. Also, Section 10(10D) mentions that any payouts received from the insurance policy are completely tax-free.
- Peace of mind: Death is inevitable. To cover for unforeseen situations, you must do your bit to secure your family’s future. You must ensure the financial security of all family members if you are suddenly not around to provide it. Knowing that your immediate family has some financial support in the event of your demise will give you great peace of mind.
Types of Life Insurance Policies & their Benefits
- Term insurance plan: These policies are purchased for a fixed period, such as 10, 20, or 30 years. They don’t carry any cash value or maturity benefits. They turn out to be of use only on the occurrence of the event.
- Endowment policy: It is the same as term insurance policy except that the insurer receives a lump sum amount in case he survives the maturity date.
- Unit linked insurance: These policies come with an investment component. The premium amount is divided into two parts. One part goes towards coverage and the second helps to build wealth over time.
- Whole life policy: This policy extends up to the whole life of the insurer. Also, it comes with an option to partially withdraw the amount insured.
- Annuity or pension plan: In this, the premium amount is amassed as assets and returned to the policyholder in the form of monthly/annual income or lump sum, as per the decided terms.
Things to Consider While Purchasing a Policy
You must keep the following points in mind while selecting a life insurance policy.
- Research: It is important to conduct thorough research and appraise all options to receive maximum benefits from your plan.
- Read the terms and conditions carefully: The terms and conditions include all relevant information. Read the fine print prudently to make informed decisions.
- Pay attention to the lock-in period: This is an important consideration. Most companies offer a lock-in time frame of typically 15 days where you can return the policy, in case you are unsatisfied.
- Consider premium payment options: All good insurance agencies offer annual, semi-annual, quarterly, and monthly premium payment options. Make sure to opt for an ECS payment system that will automatically debit your bank account for the premium amount.
- Don’t hide information: Sometimes, insurers try to hide some details at the time of policy purchase. It is important to clearly specify all your personal credentials and medical history to the agency. Any misinformation can cause issues at the time of the claim.
Wrapping Up
Life can be really unpredictable. By investing in a term life insurance, you can protect your beneficiaries from the unknowable and help them get through difficult and unstable times.
Also, tax benefits should not be the only factor to consider purchasing an insurance plan. A good insurance policy serves as an income replacement tool for the family when the primary income earner suddenly passes away. So you must get in touch with a reputed insurance agency and get comprehensive coverage that promises greater wellness for tomorrow.