Ask individuals wanting to buy life insurance, about how they do their tax planning and the first reply will be - insurance policy. Such is the nature of life insurance. It is bought by almost everyone right from the bigwigs of the business world to small retail investors. And most buy it for one core reason – to save tax. But should this be the only reason to buy a life insurance policy? We don’t think so. Here, we present some guiding principles for individuals who are contemplating taking life insurance.
1. Passing away early
One is never sure about life. We often come across people claiming that nothing is going to happen to them; that they are too young to pass away. But do they really know what the future holds for them? We can assure you they don’t, because the question ‘What if?’ has probably never crossed their minds. We only have to read newspaper headlines about the recent Tsunami, the earthquake that took place not so long ago and such other natural calamities to understand how the future can be unpredictable.
Individuals need to insure themselves to secure the future of those who are dependant on them; especially so if they happen to be the sole breadwinners. You wouldn’t want them to go through hardships or rely on others/relatives, etc. This, in fact, is the prime reason why one should buy an insurance policy.
2. Living too long
Advances in the field of medicine have grown by leaps and bounds over the past few decades. Due to this, life expectancies have gone up. This poses another problem for individuals. It is generally observed that individuals who tend to live way beyond their earning years like say, till the age of 85 or 90, usually face a problem coming to terms with increasing costs of living. And that is not taking into account the manifold increase in medical expenses of course. This takes place largely due to imprudent financial planning by individuals during their earning years. Insurance, if bought at the right time for the right amount, acts as a saviour in such times. Individuals could opt for a pension plan offered by insurance companies, which suits their profile in terms of income, proposed retirement age and proposed expenses post-retirement. Such plans provide an annuity, which means that individuals keep getting a fixed sum every month/year after they have retired.
3. Painful existence
Maybe an individual has planned well during his earning years to secure himself financially. He has also designed his financial portfolio in such a way that he is drawing a comfortable monthly income to support his family expenditure. But what if an individual were to have a health problem afflicting him or his spouse? What if the remedy to this ailment were to cost him a sum beyond his financial capacity? Here again, life insurance can act as the saving grace in two ways. One, by way of a medical rider like the accidental death benefit rider, permanent disability benefit rider, critical illness benefit rider. These riders are taken along with the life insurance plan and help cover the medical expenses.
And secondly by allowing the individual to surrender the insurance policy. Of course this should be done only in case of an urgent need like a serious health problem and even then, after all other sources have been exhausted. Surrendering the policy will help in the generation of a lumpsum amount that can be used for covering the high cost of medical expenses.
4. Tax benefits
Do we need to elaborate on this any further? Traditionally, life insurance has always been bought more for tax benefits than for what it is actually purported to do; i.e. insure human life. But the role of life insurance in an individual’s tax planning cannot, in any way, be undermined. Under the new regime, individuals can now invest upto Rs 100,000 in insurance premia to avail of a deduction from taxable income. The tax sops provided on insurance help ‘increase’ the individual’s disposable income and make him consider taking a life insurance plan which he otherwise may not have done.
We cannot change yesterday; that is clear. Nor can we begin tomorrow until it is here. But what we can and should do is to make today count to ensure ourselves of a financially secure and stable tomorrow.
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