A little more than a year ago, the Saxena family had few worries. Sharad Saxena, 49, was an Indian Railways employee, his wife Archana was a contented housewife and their three children were all studying.
Saxena had a house in Ujjain, where the family was based, and there seemed no cloud on the horizon. Till July 2006, that is, when the family’s world suddenly fell apart. Saxena died of a cardiac arrest, leaving the family shattered.
Emotional trauma apart, there was the looming spectre of financial insolvency, as Saxena was the sole breadwinner. But this is where Saxena’s forethought paid off: he had taken an insurance policy to ensure that his family did not have to suffer financially in the event of his death. Apart from that, his family was entitled to a full pension from the Indian Railways. And one of the children was automatically eligible for a job with the Railways.While the Saxenas declined the job offer, the pension and insurance have made sure that they are not too badly off financially. Says Arpit, the youngest of Saxena’s children: “Except for the emotional trauma, we have not faced financial burden of any kind. The house we live in is ours and one of my sisters has taken an education loan, part of which we repaid from the insurance claim we received.” However, it is a fact that had Saxena reviewed his insurance needs and increased the death benefits, his family would not have to depend quite so much on his pension today.
Life insurance is meant to protect your dependents. That it helps with tax planning is an added advantage; you get tax benefits under two heads:
» Deductions are based on the amount invested in products, and will be deducted from the gross salary
» You get deduction of up to Rs 1 lakh under Section 80C on premiums made for life insurance policies
» The premium paid during a financial year for a deferred pension plan or notified pension plan is also eligible for tax deduction under Section 80C
» Premiums paid for health insurance and riders are deductible under Section 80D up to Rs 15,000 a year
» Under Section 10(10D) of the Income Tax Act, any sum received under a life insurance policy, including the bonus on such policy, is exempt from tax
» However, this rule does not apply to any sum received under Section 80DD(3), under a Keyman Insurance Policy, or received other than as death benefit under an insurance policy issued on or after 1 April 2003
» Up to one-third of the maturity amount of a pension plan can be withdrawn in cash, and is treated as tax free
Other wage-earners with financial dependents will do well to learn from this story. It’s crucial to get a sense of how much life insurance you need, but it is even more important to review your needs with every changing situation and stage in life.
Says YVDV Prasad, vice-president, business development, ING Vysya Life Insurance: “Life insurance is an income replacement tool that, in the event of your death, will enable your financial dependents to maintain their lifestyles for a reasonable period, and meet their financial goals even in your absence.”
You never know what life is going to throw at you, and planning for every contingency may seem next to impossible.
Vivek Khanna, director, marketing, Aviva India, agrees: “The need for life insurance stems from the inability to predict one’s death.” It’s easy to plan for happy events—a marriage, a birth, graduation and the like.
But planning for the unexpected is far more difficult. The good news is that you don’t need life insurance at every stage in your life (see illust ration below). But when you do need it, make sure it’s adequate.
Sankalp Srivastava, 34, says: “I have committed my family to a lifestyle that is difficult to change. I have insured my life so that they don’t have to lose out on their quality of life.” Srivastava has taken a high-value cover, to take into account his housing loan.
Is that enough? How do you know how much exactly is adequate insurance? Some experts suggest that you aim for cover that’s six to ten times your annual income.
Others prefer to use the human life value concept, which calculates the amount of insurance you need based on the financial loss that your family would incur if you were to die today.
However, an increasing number of financial planners calculate insurance needs based on an individual’s net worth (see How Much Do You Need?).
These planners believe that the amount of cover depends on variables like age, income, assets and liabilities and financial responsibilities. Obviously, there is no one-size-fits-all insurance cover.
Calculating your needs and reviewing them on a regular basis will ensure that you are not underinsured. Surprisingly, a large portion of the insured population is, like Saxena, under-insured.
This is largely because most people do not understand insurance and only think of it as a morbid necessity. Instead, consider what you are worth, and how much your family will need to maintain its lifestyle without your earnings. And if disaster does strike, your dependents will think gratefully about your forethought. Isn’t that reason enough to be adequately insured?
—with inputs from Mahesh Sharma
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