In some developed countries like the UK & EU, government makes social security payments, albeit very small amount, if you do not have earning member or you have no source of income. In most developing countries this type of policy does not exist, either because of the cost to the country or sheer size of the country’s population makes such policies prohibitive. One must still realize the fact that such non-earning families are helpless and cannot be left at the mercy of relatives or society. Mostly the earning member of the family would ensure some safety net for the dependent in case of his untimely death like rental income, savings etc., but life insurance beats all these safety nets hands down. Life insurance is a crucial part of risk coverage, and any financial advisor or wealth manager must add this to his client’s portfolio.
Risk Cover:
The primary purpose of life insurance is to provide financial protection to dependents against the risk of your untimely demise. The lumpsum amount that the dependents get cannot replace you but certainly avoids the pains of no income in your absence. They can maintain their lifestyle, pay off the debts, cover essential expenses and the cost of education and healthcare.
So if you have unpaid debt, children whose education is not completed yet and other liabilities you need to recognize that you do carry the risk of untimely death and must buy protection. In fact, in our country Life Insurance agents carry a big stigma of irritable salespeople and that indirectly creates the repulsion towards life insurance.
Historically LIC has some role to play in that because a Rs.2 Lakh annual premium for 20 years used to give only life cover of 40 Lakhs or so. Traditional endowment plans have been partly responsible for individuals to not consider life insurance seriously. It was always thought of as a savings instrument and not so much as risk coverage. That perception is slowly changing due to the introduction of pure risk plans like Term Insurance. In brief the term insurance gives life insurance for a specific period and pays to dependents only on death. The cost of term insurance can start from as low as Rs.500 per month for 1crore sum insured for a 21 year old male. Normally you need to go through the medical test and policies are issued for a specified period as well as for whole life.
Types of Life Insurance Products
Pension Plan:The Life insurance companies provide pension plans where you buy pension by investing in pension plans that pay fixed income every month or every year for lifetime and some of the variations under this also offer return of contribution. This income is called an annuity, and it is taxable in the hands of the receiver. Often there is a restriction on the age of entry, typically between 35 to 85 years. For example, Maxlife SWAG Pension plan offers immediate pension of 7% rate and if you are ready to wait for another 5 years the rate goes over 10%. TATA AIA Life offer FG Pension and FG RR, immediate annuity rate is 7% and if you wait for 5 years then the rate can be as high as 12%. The pension products are often better than interest on FD because you lock the annuity rate (interest rate) at the outset, unlike FD interest which could change with the market.
Savings Plan:Life insurance companies offer a wide range of products under this category; however, these are effectively investment products with life insurance attached. There are Guaranteed returns product and there are guaranteed bonus addition products so one needs to be careful on which variant is bought. The most liked saving plans are those which give immediate return from next month where you pay premium for say 7 or 12 years and start getting tax free income from next month for life or for say 35 to 40 years.
ULIP:These are combination products like savings plan except the investment is made in equity or debt markets and the returns change with the market. These were very popular products 10 years ago but as the financial literacy increased the investors have realized that investment and insurance clubbing does not deliver best returns and the sum insured has limitation since the premium has the investment component.
There are three terminologies one should look at
Participating plans, here the policy holders get the bonus etc., based on the performance of the insurance company
Nonparticipating plans, here the policy holders returns or gains are not linked to the insurance company’s gains and therefore tend to be guaranteed or fixed.
Market linked, here the returns are linked to the stock & debt market.
Tax Benefits:
Life insurance policies offer tax benefits on premium paid, under Sec 80C of Income tax act and the death benefit is generally tax-free under Section 10(10D).
Conclusion:
Life insurance is not just a financial product; it's a crucial safety net that provides financial security against life risk. By investing in life insurance, you are ensuring the financial well-being of your family.
