When you really think about it, your life and health are your family’s biggest assets. So, what would you peg as the financial value of your life? Most of us don’t know how much we’re worth. Many believe that life insurance is important. Life insurance is a sound risk management tool. It is meant solely for the benefit of our loved ones.
Life Risk Cover
If you are an earning member, you definitely need a life insurance policy. The idea is that a life insurance policy compensates for your financial contribution to the family. Therefore, it’s important for you to have enough insurance until you retire rather than your whole life. To know whether term life or whole life policies are better, listen to our podcast.
We all know of families that have seen tough times after the sudden death of a loved one. Life insurance safeguards against this kind of risk. It can provide financial stability during difficult times. The right amount of insurance could support the family’s expenses, help settle loans, and provide for future goals.
Signing up for a life insurance policy is a responsible and thoughtful act.
Return on Investment
Most of us are likely to survive the duration of our life insurance policies. It is only natural to analyze the return angle. Life insurance policies come in many forms –
- Endowment policies offer guaranteed returns at regular intervals.
- Unit Linked Insurance plans offer market-linked returns.
- Whole Life policies have a cash benefit at the time of death.
- Term insurance has no return component.
Of the lot, the term seems like it has the lowest return on investment. However, term policies are far more affordable than other kinds of insurance. So, you would actually have more money left over if you purchased term insurance. This money can be diverted into avenues of your choice to deliver the kind of returns you expect. In most cases, term insurance and a customized investment strategy outperform the other kinds of life insurance policies. As counterintuitive as it seems, term insurance is the best option for both returns and risk management.
The reason we take life insurance is that we’re worried about death and an unexpected death that might impact our loved ones. Every life insurance policy has a death benefit that is often equal to the sum assured. Ideally, the death benefit should be equal to your human life value. The death benefit may come in two forms:
- Annuity: In this instance, the life insurance company manages the investments to generate regular income for the beneficiaries. An annuity is similar to a pension scheme. The beneficiaries will receive regular income based on the terms and conditions outlined in the life insurance policy.
- Lump-Sum: The insurance company may compensate the beneficiaries by paying a lump sum (equal to the sum assured) upon the death of the insured. The family could work with a professional financial planner to manage these investments to provide for their monthly expenses and financial goals. They could also use the life insurance proceeds to settle any outstanding loans.
Under section 80 C of the income tax act, premiums paid towards life insurance can be claimed as a deduction from an individual’s total income. This deduction is subject to a limit of Rs. 1,50,000. Currently, any bonus/ maturity benefits from an insurance policy is exempt from tax.
In conclusion, the advantages of having life insurance is that your family’s financial interests are protected, you make a good return on investment while managing financial risks, and you take advantage of tax benefits.