What is Life Insurance?
Life Insurance is a financial product were the person who buys it is insured against his untimely death to the extent of the sum insured only in the case of Term Insurance policies and the sum assured along with the accrued bonus in case of saving oriented life insurance policies.
Who needs Life Insurance?
Any family which depends on one or two earning members’ income month on month needs to have their bread winners covered against untimely death.
How much insurance is required for the bread winner?
The amount received by the family from the insurance company up on death of the bread winner should be sufficient enough to take care of the minimum requirement of the family to maintain the same living standard. Here the amount of premium paid and number of policies held by an individual is not important and only the sum assured payable on death is very important in a life insurance policy.
Which is the best life insurance policy to buy?
There is no life insurance product whether it is term insurance or savings oriented policy called the best. Only those insurance policies which fulfill 2 conditions are considered to be the best globally.
Condition 1 : The life assured should be in a position to pay the premium till the maturity of the policy which should necessarily extend the tenure of his earning span without compromising on the other intermittent needs of the family at various point in time.
Condition 2 : The amount received from the insurance company in the event of untimely death of the bread winner should be good enough to take care of the minimum requirement of the dependent family maintaining the living standard.
If you take a look at the statistical information released by IRDA, more than 50% of the policies fail to fulfill the first condition after 5 years of its purchase.
Nearly 90% of the policies sold do not fulfill the second condition. Under insurance prevails in most of the sales.
Different types of life insurance policies
Term Insurance policies : these types of policies pay the sum assured only death of the policyholder before the end of the policy term. There is no maturity payment payable under these policies if the life assured survives till the term of the policy
Saving Oriented Life Insurance policies : These plans pay to the nominees, the sum assured along with the accrued bonus in the event of death of the life assured before the maturity of the policy. The amount received by the nominees is absolutely non-taxable.
On maturity of the policy, the sum assured together with the accrued bonus is paid to the life assured.
The amount received by the life assured on maturity is not taxable provided the premium paid per annum for the policies bought after 1st April 2003 is not more than 20% of the sum assured and the premium paid per annum for the policies bought after 1st April 2014 is not more than 10% of the sum assured.
The amount received by the life assured on maturity is not taxable irrespective of the amount of premium paid for the policies bought before 31st March 2013.
Why Life Insurance penetration (the percentage of life insurance premium to GDP of the country) and Life Insurance Density (Ratio of Life Insurance premium to the population of the country) is low compared with the global level.
It is because of Immortality complex. This is the belief each and every one of us have within us that nothing will happen to us, we will not fall sick, we will not meet with any accident and so on.
In spite of this belief why people should buy life insurance is because of its unique character. i.e. Life Insurance cannot be bought, it can only be offered. One should be eligible to be offered a life insurance plan at the terms and conditions to be decided by the insurer.
When you have some health issues, you can go to a doctor and get it cured, When you face some legal problems, probably an advocate can help you If you have any tax issue, a chartered account can come to your rescue.
But after having any of these issues, if you approach a life insurer or a non-life insurer, they will be helpless. Life insurance and non-life insurance products are like parachutes. One cannot buy the parachute in the midair. They should be possessing the parachute when need arises. Like that one should be having the suitable insurance plan when he faces issues like above.
The premium paid for a life insurance policy is eligible for deduction under section 80C of IT act up to Rs. 1,50,000/- per annum