Life insurance is a critical product that ensures your family's financial security. Simply put, it is a policy where your insurer pays a tax-free financial payout (known as a death benefit) to your designated beneficiaries in case you pass away.
In India, it is a common practice to buy life insurance, especially if you are the sole earner. It ensures that your family stays protected in the event of your untimely demise. Insurers sell many ranges of life insurances. From around Rs 50 lakh to Rs 5 crore, the amount can depend on how much you think will fulfil your family's needs.
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Factors To Consider When Buying a Life insurance:
Major financial obligations: Before selecting a policy amount, you must consider outstanding loans, home EMIs, children's education, marriage expenses, and household medical bills. The idea should be that your family can pay these bills without any financial stress.
Inflation: The cost of living rises over time, reducing the purchasing power of money. This is why you need to decide a coverage not in today's value but what it can purchase in 20 or 30 years time. That will provide a sufficient buffer for your family to stay protected from the impact of inflation.
Tax: Tax benefits depend on the policy type and prevailing rules, so factor them into your decision without making them the sole reason to buy insurance. While payout from the life insurance is tax free, any gains arising from their investment can trigger tax liability at your parents' hands.
How Life Insurance Works
In a life insurance policy, you become the insured person and are required to pay premiums. You can choose the insurance period ranging from 10, 20 or 30 years. Usually, your premium is locked at the time of purchase, so you do not need to worry about inflation or other concerns.
To be clear, if you survive the term, the policy expires with no payout. People usually get a limited policy duration policy instead of a life-long one as it is more affordable and practical.
For example:
If you are young and healthy, and you get a 25 year life insurance policy instead of a life-long one, you are likely to save more on premium. The idea is that these 25 years ensure that your family is protected in case you are not there. However, after the 25-year-period, your savings and investments should be enough to cover any expenses.
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This means that you should ideally design your financial strategy in such a way that makes you less dependent on the insurance as time passes by. Over 25 years, you may pay off your home loan, build investments, and accumulate retirement savings. Your children could also be financially independent, which means that your family may need less financial protection.
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