Life is indeed a rollercoaster with delightful twists and turns; however, it may throw a few curveballs as well. The last thing anyone wishes for is to see their family members in trouble, and being a loving member oneself, nothing feels better than having secured them against all adversities. Such a feeling of protection stems from financial planning, which in turn, is achieved by insurance policies.
Insurance premiums, riders, and underwriting may appear to be quite intimidating at first glance, but they have made the process of securing our near and dear ones a lot simpler. To facilitate an in-depth understanding, we present an overview of the working mechanism of financial safety nets through a few basic pointers.
The Need for Family Protection
Imagine a typical day in your life of yours. You work really hard to earn a livelihood, paying off your house lease or loan and other expenses such as grocery shopping and utility bills. Now, think about a situation wherein you are no longer able to continue working. How will your family manage the pending dues?
It is a known fact that the burden of school fees, grocery shopping, and other expenses will never cease to exist, no matter what. The primary objective of financial planning is to provide a sort of umbrella to your family members against all these difficulties, no matter what.
Basics of a Life Insurance Policy
Life insurance is basically a contract, which is signed between the beneficiary and the insurance company, wherein the latter promises to pay a certain sum of money (in case of the unfortunate demise of the former while the policy is active) to the legal heirs of the insured.
Life insurance plans are generally of two types: pure protection and savings cum protection. A suitable choice depends upon the age of the insured as well as the desired financial goals and monthly budget.
Term Insurance: A Pure Form of Protection
If your main goal is maximum protection for a low cost, you should look at a pure protection plan. When you buy term insurance, you pay strictly for coverage. There are no complex investment returns or cash-value build-ups attached to it.
In a term plan, the insured is allowed to choose a cover amount and a tenure of his/her choice. The chosen tenure could range anywhere between age 60 to 70, or even beyond. Upon the demise of the insured during the policy period, a certain sum of money (the cover amount) is paid to his/her legal heir. However, in case you outlive the policy, you will not be entitled to claim any amount.
A term plan is indeed a fairly useful risk management tool that offers a reasonably high sum assured at a fairly low premium. The young and the earning members of the family shall always wish to make a term plan their preferred choice of financial protection because their legal heirs will always be entitled to receive a certain sum assured to meet their future expenditures, no matter what.
Endowment and Other Policies That Cumulate Savings and Protection
An endowment plan, on the other hand, is aimed at meeting short-term financial goals in addition to covering risks.
When it comes to the comparison between an endowment plan and a term plan, the former seems to have quite an upper hand in terms of saving capabilities wherein a certain sum of money is saved every year along with a cover amount that is claimed by the legal heir in case of the unfortunate demise of the insured. Certain endowment plans also offer a bonus in addition to the sum assured.
Since endowment plans offer a cash value, their premium amount seems to be on the higher side as compared to term plans. These days, these kinds of plans are highly preferred by individuals who have quite an array of financial goals to achieve.
Taxation and Other Legal Issues
Insurance products often involve a number of tax-related aspects. According to the New Income Tax Act, 2025, certain additions and deductions pertain to specific insurance riders and health benefits, which are eligible for the claim amount under New Income Tax Act, 2025, Section 126.
The abovementioned exemptions and deductions are subjected to the terms and conditions of the insurance company, which may vary from one organization to another. Therefore, it becomes necessary for the buyer to keep a detailed record of all policy-related facts and figures.
How to Choose the Right Cover?
Choosing the right cover involves a lot of planning and analysis. Therefore, it becomes essential for the buyer to analyze the current financial standing of his/her family and chalk out a realistic goal. A few important aspects to consider while finalizing a decision include:
- Assess financial liabilities: Make a list of all the financial liabilities, which your family members will be obligated to bear in case of your demise. The liabilities include home or car loans, among others.
- Number of dependents: Try to figure out the number of family members, who solely depend on your income. The more the dependents, the higher shall be the cover amount. Moreover, the younger they are, the more is the requirement of a fairly wide cover since they will need financial help for a really long time.
- Estimated annual income: Estimate your current annual income and multiply it by 10-15; this will give you an idea about the cover amount that you should choose.
- Monthly budget: Take a close look at your monthly budget and choose the best-suited premium amount; the chosen amount should neither exceed the budget limit nor should it be felt by you as a strain of sorts.