Insurance has been one of the most useful financial support solutions, especially for emerging economies. However, the perception of insurance in a growing economy like India has been marred with misconceptions and a lack of awareness.
The year 2014 marked a significant milestone in insurance presence in India. The central government introduced multiple economic inclusion policies to bring the masses into the fold of financial protection. These progressive policies ultimately lead to personal accident and health insurance being available as social security schemes.
Insurance Penetration & Density in India
Quite often insurance is dismissed as a morbid product or thought rather than a product of financial safety. Another side of the perception is that it is something designed for the affluent.
Both sides of thinking ultimately leave a large section of the society prone to losing financial status due to contingencies like illnesses, untimely death or natural calamities.
Insurance penetration refers to the ratio of collected premium to GDP while density refers to per capital premium collection. Both measures indicate the acceptance and development level of the insurance market in any country. For India, these numbers stand at 2.82% and USD 58 for life insurance, while general insurance, which includes health insurance plans, stands at 0.94% and USD 19 per capita. (as per 2019-20 IRDAI Annual Report)
Although these numbers have been growing steadily over the years, India still ranks among the bottom 10 for these figures. Indicating that Indian markets have much farther to go and faster if we are to keep up with the world.
This applies to both general and life insurance plans.
Do You Need Insurance?
One of the biggest questions you could ask to postpone your insurance decision indefinitely is whether you need insurance. The answer should usually be yes. However, the next question is sure to stump you clean off the intended path.
So, let’s first make the order of questions clear. The correct line of questions would go something like the following:
a) What kind of insurance do I need?b) How much insurance should I have?
First of all, not everyone will need all different types of life or general insurance covers. For example, if you are an individual who is below 18 years of age, you may only need health insurance coverage.
Second, the amount of life, health, or general insurance cover you will need will depend on the following two factors:
- Your financial status
- The financial worth of your insurable assets
Thus, you can be more specific with your next line of queries, such as, ‘which insurance cover should I have?’
Types of Insurance Plans
Technically speaking insurance plans only have two classifications. However, in common usage you will face three types of insurance plans:
a. Life Insurance plansb. Health insurance plansc. General insurance plans like motor, house, etc.
Why do you Need a Life Insurance?
Life insurance need is one of the most complex to estimate. The first thing to understand is that the purpose of life cover is to protect your family and ‘their’ financial goals. Thus, an adequate life insurance cover will help you achieve:
i. Long-term financial safety for your family’s household (living) expensesii. Pay-off ongoing debtiii. Save money to meet child’s important future goals
Although you may feel that you need multiple complex calculations to estimate the real financial safety need for your family, it is rather easy. If you have a regular income, you can easily estimate your eligibility. The source of income could be any, rental, interest income, salary, or business.
In general, a life cover of 10 to 15 times your annual income is sufficient to provide for the three factors for your family. For example, if your annual income is Rs. 10 lakhs, you can get a life cover between Rs 1 crore to Rs. 1.5 crores for the complete financial safety of your family.
Term Insurance & Other Protection Plans
However, you should know that for this purpose you only need a protection plan like term insurance cover, for the following reasons:
1. Simple to understand and operate
2. Inexpensive, i.e., even a single premium amount for a 30-year policy may be as low as 1% of the life cover amount for a 30-year-old.
3. Can provide reliable and long-term regular income to your nominees. iSelect Star term plan from Canara HSBC Oriental Bank of Commerce Life Insurance gives the option to divide the sum assured so that your family can receive inflation-adjusted regular income pay-out as well as the lump sum money.
4. Easy to secure a large sum assured amount
5. Adding other protection plans like accidental disability cover and terminal illness cover gives added safety to your family at a nominal additional cost
Few term policies like iSelect Star Term Plan offer terminal illness cover as an inbuilt default cover with the term policy without any extra premium cost. Thus, the best term insurance policies can resolve your financial protection need for the family easily.
Other Plans for Other Purposes
While a term insurance plan is designed for protection, other life insurance plans serve other purposes and financial goals. For example:
1. Unit Linked Insurance Plans (ULIPs)
a) Gives multiple fund options for investment including equity fundsb) Use this plan to build wealth or meet any financial goalc) Great for long-term financial goalsd) Can help you build a tax-free corpus
2. Child Plans or Child Education Plans
a) Perfect for investing in your child’s higher education and marriage goalsb) Use the goal/premium protection feature to ensure that your child has the financial support you intended even after your untimely demisec) Usually, tax-free maturity, except in the case of ULIP plans where your annual investment is more than Rs. 2.5 lakhs. Then it will become a capital asset and taxed as such.
3. Pension or Annuity Plans
a) Designed to convert lump sum money into safe and long-term regular incomeb) Help you generate pension after you retire or even before retirement
4. Endowment and Moneyback Plans
a) Safe long-term investmentsb) Best for wealth preservation as the returns are tax-free and usually closely follow the inflationc) Best for investing in important goalsd) Can also have a goal protection feature
Tax Saving in Life & Health Insurance
Life and health insurance plans also help you save tax. Almost all life insurance plans offer tax exemption and deduction under section 80C, so far as your investment into the plans follows:
i. Annual investment less than 10% of policy’s base sum assuredii. Annual investment less than Rs. 2.5 lakhs in case of ULIPs (for plans purchased on or after 1st Feb 2021, no limit for earlier plans)
Similarly, health insurance plans provide your tax-deduction opportunity under section 80D. The premium you pay can reduce your taxable income by up to Rs 1 lakh in a year.
i. Deduction for your family - self, spouse, children under 25 years of age ii. Deduction for your parents
The deduction limits are dependent on the age of insured persons:
i. Up to Rs. 25,000 if aged below 60ii. Up to Rs. 50,000, if 60 or above
Thus, using insurance can not only save you and your family from financial hardships due to mishaps but also give you tax benefits. Using correct and adequate life and health insurance plans will also help you look after your family’s future goals while protecting them from your untimely demise.