Life Insurance Myths Busted
Taxes and death are inevitable Life insurance helps cut down on taxes and provides economic security to the policyholder’sdependentsin the event of his/her death. While these are the two leading factors that motivate people to purchase a policy, they might also act as deterrents. Mr.Lodh, 27, has been working as an IT executive in an MNC for two years but he doesn’t have a life insurance policy. He is convinced that it’s unnecessary since he has invested in tax-saving mutual funds, which offer high returns, and because he is unmarried. But a life insurance policy is necessary and here’s how these arguments can be refuted -
- Tax saving: Premiums paid towards life insurance are covered under Section 80C of the Indian Tax Act to the extent of Rs 1.5 lakhs. However, the main objective is to obtain financial security after the policyholder’s death, and that too is exempt from taxes under Section 10D. One might argue that the same exceptions can also be availed in mutual fund investments. But depending solely on investments and that too at an early age can be risky as the dependents will be left without a cover after the depletion of current assets.
- Investing in term insurance is a bad idea: There are some financial schemes that offer more interest than a term insurance. However, investing in a term insurance plans ensures peace of mind and that too, at a nominal price.
- Unmarried people don’t need insurance: If an individual does not have a family, why purchase a policy? Because people grow old and most insurance companies are reluctant to provide health cover to the elderly. If a person invests in a term insurance plan, proceeds from it can be used to pay for medical bills. Additionally, if the policyholder dies without leaving any dependents, he/she can always will the proceeds to be paid to a charity.
- Young people don’t need insurance: A prevalent notion is that life insurance is for the elderly. Although, death has nothing to do with age. So, the earlier a person invests in an insurance policy, the more secure will be his/her family members.
- Life insurance is expensive: There is a host of life insurance policies being offered by various companies. An individual can choose any one that fits his/her budget. But a low premium should not be the primary factor when it comes to deciding on a plan. It’s better to strike a healthy balance between affordability and pay-off, otherwise, the dependents might end up receiving a paltry sum.
- Insurance coverage should be twice the annual salary: This varies from person to person, depending upon their situation. An individual should assess his/her financial position before determining the amount. Ideally, it should be sufficient to meet the expenses of your entire family. If the policyholder is the breadwinner, the cover should be worth 8 to 10 times of his/her annual income. This gives rise to another myth though, that only breadwinners need life insurance. The insurance plan may vary according to a person’s role in the family but its need can never be completely dismissed. For example, in the absence of a homemaker, the proceeds can be used to pay for the daycare and maintenance costs. Insurance providers even offer child insurance plans.
- Group insurance will suffice: These days, organizations offer group insurance plans to their employees. But these plans are only effective as long as the individual is working in the company. If the employee resigns or is sacked, or if the organization shuts down, then the individual will cease to be a policyholder. Also, these policies may not provide adequate cover for the employee’s family.
Tax benefit is subject to changes in tax laws
While these myths are used by people to delay purchasing life insurance policy, few would contest that it’s a futile investment despite these prevalent notions.