Life Insurance: Saving more than your taxes

We have seen life insurance being sold aggressively by agents at the end of the financial year, mostly during the month of January to March. You know the reason? It is tax saving! Most of the companies ask their employees to submit proof of their investments so that the remaining tax on their salary income for the financial year can be deducted and deposited with the Income Tax department.If you are one of those who do tax planning at the last moment should note that you might end up buying a wrong life insurance plan.

You must understand that saving taxes is one of the benefits that life insurance offers but there are many more reasons to buy a life insurance policy. Let us analyse them.

Financial security to the family

This is the primary benefit of buying a life insurance policy. The sum assured you take in the policy is the amount (called death benefit) that insurance company pays to your nominee in case of your unfortunate death during the policy term. The death benefit amount ensures that your family’s future is secured, in your absence, provided you had taken adequate life insurance cover.

Therefore, you must take adequate life cover (sum assured)in order to make sure it is sufficient for your family’s financial requirement and well-being in your absence. But what should be your life cover?  This is the question which intriguesall.

A good thumb rule is to have a life cover at least 10 times your annual income. For example, if your annual income is Rs 12 lakhs, then your life cover should be at least Rs 1.20 Crores.

However, is it enough? It is not, if you have other liabilities. Therefore,to select the right life cover amount, keepthe following in mind –

  • Your current monthly household expenses
  • do you have a home, personal or car loan
  • The amount required for your child’s secondary and higher education

Once you figure out the above, you should increase your life cover to the extent of these expenses or liabilities by taking a term Insurance plan which comes with very low premium.

Life insurance helps in life stage specific planning

You have different financial needs at each stage of your life. Life insurance is a product which offers tailor-made solutions for various stages in your life.It even helps you plan and reach different financial goals while protecting the financial future of your family. Following could be some of your specific life stage planning and how different insurance plans can fulfil that.

Just started your career – Assuming you are not married, at this stage your focus is on long term wealth creation and to take care of your aging parents. You can invest in ULIPs for long term wealth creation as it invests in market linked instruments like shares and bonds etc.  For taking financial care of your aging parents, you can consider annuity planswhichcan get them regular income throughout their lives.

When you get married– With marriage comes additional responsibility, at this stage securing financial future of your spouse and securing your lifeis the main objective. You can buy a term plan to adequately cover your life and increase your savings in ULIP plans to grow long term wealth.

Buying a home for the family – If you plan to buy a house, get additional life cover to the extent of the home loan amount with help of additional term plan cover.It ensures that in acse of your unfortunate death, your family retains the house by paying off the home loan.

On birth of your child – With new addition to the family comes new responsibilities. While you should increase your life coverthrough term plan, you should also buy child insurance plan toprotect the future of your child. Child plans protect the future of children in case of unfortunate death of parent by providing them the life cover amount twice – once, onthe sad demise of the parent and again when the policy matures without having to pay any premium post parent’s death.

Planning for retirement years– During this stage of your life, you need a decent amount which can get you a regular cash flow to meet your monthly expensesand medical emergency needs. You should start saving in annuity or pension plans which provide you regular annuity payment during your retirement years.

Helps build longterm Savings

Life insurance is ideal for building long term savings for meeting your various financial planning needs – Be it planning your retirement or building a retirement home, your children’s higher education or simply wealth creation, life insurance has suitable plans for all these requirements. For example – While a ULIP plan can help you build decent wealth for your future by investing in market linked instruments, a child plan can protect the future of your child and a pension plan can provide regular income during your retirement years.

Conclusion

We have seen how life insurance helps you in every stages of your life and how it protects the financial future of your family. You should consider these aspects carefully while buying right insurance plans for you. You also save taxes when you buy a life insurance plan but that is ‘icing on the cake’!

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