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Life insurance offers dual benefits: financial security to your family in case of the policyholder's death as well as helps you save tax, says Alok Patnia.
Illustration: Uttam Ghosh/Rediff.com
Life insurance is a contract between an insured and an insurer, where the insurer pays the designated beneficiary, a sum of money in exchange of premium, upon the death of the insured person. Life insurance provides the dual benefits of savings and security. So, prepare for the unexpected by buying life insurance.
The obvious reason for buying life insurance is that it takes care of loved ones. If anything happen to you, the life insurance you have purchased is in place to protect and provide financial relief for those who must carry on without you. It's about them; simple!
Why do you need life insurance?
Risk cover
Life today is full of uncertainties; in this scenario life insurance ensures that your family continues to enjoy a good quality of life against any unforeseen event. If you have a family that is financially dependent on you, then you definitely need to insure yourself. The most common reason to buy life insurance is it provides protection to your family in case of any unforeseen events.
The life insurance proceeds can be used to support your family members with the expenses.
Compulsory saving-cum-investment
A life insurance policy could be used as a compulsory saving-cum-investment avenue. Proceeds from the insurance policy could be used to fund future expenses such as child's higher education or retirement funds or even a well-deserved holiday.
Protection against rising health expenses
Life insurers through health insurance plans offer the benefits of protection against critical diseases and hospitalisation expenses. This benefit has critical importance given the increasing incidence of lifestyle diseases and escalating medical costs.
Assured income through annuities
Life insurance is one of the best instruments for retirement planning. The money saved during the early life span is utilised to provide a steady source of income during the retired phase of life. It is never too early to begin planning for retirement.
Facility of loans without affecting the policy benefits
Policyholders have the option of taking loan against the policy. This helps to meet unexpected needs without adversely affecting the benefits of the policy. Term life insurance can be used to pay off outstanding mortgage balance.
Partner in a firm or self-employed
It is highly needed by people who are partners in a firm or have their own proprietorship firms. Business owners need insurance for: income replacement and to protect the future of the company. If a partner, owner or key employee is suddenly dead, the business can deteriorate very quickly.
With the right insurance in place, the surviving business partners will have enough capital to keep the business going while looking for a replacement for the deceased partner, or to buy out the heirs of the deceased partner.
Builds the habit of thrift
Life insurance is a long-term contract wherein a policyholder, have to pay a fixed amount for a defined period. This builds the habit of long-term savings.
Safe and profitable long-term investment
Life insurance is a highly regulated sector. It ensures that the safety of the policyholder's money is the primary responsibility of all stakeholders and also ensures that the life insurers focuses on long term returns and do not take risky investment decisions for short term gains.
Tax planning
Life insurance policies can be useful tax planning tools, because the policyholder is eligible for tax benefits under the Income Tax Act 1961 (Act). Though there are multiple modes for saving tax, life insurance is one of the most effective tax planning instrument.
With our life insurance plans individuals can not only save tax but also look at achieving their long term goals.
Here are a few advantages of tax planning by using life insurance policies:
Deductions:
Deductions allowable from income for payment of life insurance Premium (Section 80C):
Benefit is available to individuals and Hindu Undivided Family
Premiums paid under a life insurance policy are eligible for deduction under Section 80C* of the Act, subject to the provisions of the said section.
Contributions to a pension plan are eligible for deduction under Section 80CCC* of the Act, subject to the provisions of the said section.
*The aggregate amount of deduction under section 80C and 80CCC shall not exceed one lakh fifty thousand rupees.
If the amount of premium paid in a financial year for a policy is in excess of 10 per cent of the actual capital sum assured, then deduction will be allowed only for premiums up to 10 per cent of the actual capital sum assured.
With these benefits, we can say that life insurance insures death of a policyholder. It protects our family during unforeseen situations.
Always keep this one thing in mind: THE OLDER YOU GET, THE MORE INSURANCE COSTS
Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.