In our last few articles, we discussed the importance of getting health insurance to avoid being cripplied by medical bills. The recent roll out of a standard health care policy (Arogya Sanjeevini, which you can read all about here) by the IRDAI was a step in the right direction. When it comes to life insurance, however, a whopping 988 million Indians still remain uninsured. Buying a life insurance plan and building a financial cushion for your family in the event of an untimely death is just as important as purchasing health insurance.
Although it’s tempting to refrain from thinking too deeply about the financial implications of your premature death (not exactly the best way to spend a Sunday morning, we know), avoiding such considerations could be a costly mistake.
Studies have repeatedly shown that humans are not wired to intuitively perceive probabilities in terms of raw percentages. Consider this statement for instance: ‘Using a motor vehicle every day increases your risk of dying by 1.2%’. To some, that might seem like a negligible probability. What if it was phrased this way instead: ‘In any given group of 90 individuals who consistently use motorized transport, at least 1 of them is certain to be fatally injured at some point’. Since most working professionals use motorized transport every day (generally, when the country is not fighting a pandemic), the second statement somehow feels like a more chilling proposition.
1 in 10 deaths are a consequence of sustaining physical injuries from unforeseen events. As a subset of this, over 151,000 fatalities due to road accidents were reported across the country in 2018 alone, of which about 105,000 victims were under the age of 35. These statistics alone should be sufficient to motivate you to secure the financial future of your family. Regardless of how old you are, the best time to invest in a good life insurance policy is now.
When does life insurance become crucial?
It is important for everyone who supports a family to buy life insurance. In certain scenarios, however, insurance becomes a dire necessity.
Supporting aging parents – A large proportion of young earners serve as the only form of financial support for their parents. Individuals over the age of 65, who are not covered by pension schemes or have some form of passive income, are especially vulnerable. Buying a policy that offers good coverage can potentially take care of their living expenses for the remainder of their lives.
Repayment of outstanding balances – Being forced to repay a personal loan after losing their primary source of income can be a harrowing affair for a family. Before finalizing your life insurance cover, stating any debts to your insurance provider is always a good idea. This will ensure that your family has funds to repay the loan while also supporting themselves financially.
High-risk jobs and adventure sport enthusiasts – Individuals who work in mines, fire stations, or other similar environments are at a significantly higher risk of sustaining fatal injuries. The same is true for bikers, rock climbers, and thrill seekers. If you fall into any of these categories, a life insurance policy is a necessity, not a luxury.
How else is a life insurance policy helpful?
Reduced income tax – Regardless of the features of an insurance plan, tax benefits of up to ₹1,50,000 can be claimed under Section 80C. The Income Tax Act of 1961 also allows for tax-free proceeds under Section 10 (D) in the event of policy maturity or death of the policy holder.
An alternate form of forced savings – Provident funds and other types of long-term investment schemes ensure that you are financially secure post retirement. The same can also be accomplished by purchasing a Unit Linked Insurance Plan (ULIP, which you can read more about in our Beginner’s Guide to Investment), for which the premium is relatively higher than general plans. The extra money that you pay is treated like any other investment that compounds over time, and is paid back with interest after maturity.
Compensation for employees in small businesses – Life insurance policies with ‘buy-sell’ agreements can compensate employees and stakeholders in the event of the owner’s demise. Other stakeholders who are a part of the buy-sell agreement can easily purchase the remaining portion of the business by directly paying the nominees of their deceased business partner. In certain cases, the policy can also serve as a collateral for minor business loans.
Why should you buy life insurance when you are young?
Do all millennials really need life insurance? Yes, but you have some time to get it if you are still at university or looking for your first job. If you are financially supporting your spouse, parents, or siblings, however, buying life insurance is a wise move. The premium is generally low (assuming the buyer does not smoke or have comorbidities) and the coverage amount is high for insured individuals under the age of 40.
It is easy to be lulled into a false sense of security in your 20s and early 30s but the truth is that life insurance premiums start to become a real financial burden if the policy is purchased after a certain age or contracting certain illnesses. Developing certain medical conditions can even make you ineligible to buy affordable life insurance.
As we talked about in the 7 financial lessons lockdown taught us, this pandemic has only shown us just how unpredictable life can be and that the best laid plans can come undone. Actions, however, are harder to undo, and getting life insurance is a reliable way to battle the uncertainties of life.