Saving taxes is everyone’s predominant motto when it comes to investments. Thankfully, the Income Tax Act 1961, has allowed various types of investment avenues to be exempt from the purview of income tax. If you choose these avenues for investment, you can earn tax exemptions and deductions on the amount you invest, the returns generated and the benefit you get.
When it comes to insurance too, you can earn income tax exemptions. Both in the case of life insurance and health insurance plans, tax exemptions are available. Let’s explore how –
Related Article: Retirement through Equity Linked Savings Scheme
Life insurance and tax benefits
Premiums and tax benefits
The premiums paid for a life insurance policy are tax-free under Section 80C. The premium is deducted from your gross total income and, thus, lowers your taxable income. The maximum limit which you can claim as an exemption is Rs.1.5 lakhs. The premium can be paid for a policy taken by yourself, your spouse, and your children’s life.
Furthermore, the premium that you pay should not be more than 10% of the sum assured of the life insurance policy. So, if your policy is for Rs.5 lakhs, your premium should be Rs.50,000 or less to be eligible for tax exemption.
One thing which you should remember is that your premiums would be allowed as exemptions only if you hold your life insurance policy for a specified tenure. ULIP plans should be held for at least 5 years while other life insurance plans should be held for at least 3 years. If you do not hold the plans for these specified durations, the exemption allowed would be reversed back in the year you surrender the plans.
For premiums paid towards a pension plan, Section 80CCC would be applicable for claiming an exemption. The limit and other exemption conditions would be the same.
Policy proceeds and tax benefit
The maturity benefit or the death benefit which you receive is also tax-free in your hands. These benefits would not attract any tax under Section 10 (10D). Furthermore, there is no upper limit on the number of benefits that qualify for tax-exemption. Any amount you receive would be tax-free given the premium paid is below 10% of the sum assured. If the premium exceeds 10% of the sum assured, the entire maturity benefit would be taxable in your hands. The death benefit, however, would not be taxed even if the premium is above 10% of the sum assured.
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Annuity/pension plan proceeds and tax benefit
Under pension plans, whether traditional or ULIPs (Unit Linked Insurance Policy), the tax treatment of the policy proceeds is different. You have the facility of withdrawing 1/3rd of the proceeds in cash when the plan vests. This withdrawal is called commutation of pension and it is tax-free under Section 10(10A). However, the remaining 2/3rd portion of the policy proceeds, which are paid as annuities, are taxable in your hands. The annuity pay-outs you receive would be taxable at your income tax slab rate in the year in which you receive the pay-outs.
Health insurance and tax benefits
Health insurance plans also provide tax relief for the premiums that you pay. Health insurance premiums are exempted from tax under Section 80D. You can avail a maximum of Rs.1,00,000 as an exemption from health insurance premiums. Here’s how –
|If you buy a policy covering you and/or your family||You can claim a maximum exemption of Rs. 25,000|
|If you are above 60 years of age and buy a policy covering you and/or your family||You can claim a maximum exemption of Rs. 50,000|
|If you buy two policies – one covering you and/or your family and another covering your dependent parents||You can claim an exemption of Rs. 25,000 (for the policy on your family)+ Rs. 25,000 (for the policy on dependent parents) – Rs. 50,000 (total)|
|If you buy two policies – one covering you and/or your family and another covering your dependent parents and your dependent parents are above 60 years of age||You can claim an exemption of Rs. 25,000 (for the policy on your family)+ Rs. 50,000 (for the policy on dependent parents who are senior citizens) – Rs. 75,000 (total)|
|If you are above 60 years of age and your dependent parents are also above 60 years of age and you buy two policies – one covering you and/or your family and another covering your dependent parents||You can claim an exemption of Rs. 50,000 (as you are a senior citizen)+ Rs. 50,000 (for the policy on dependent parents who are senior citizens) – Rs. 1,00,000 (total)|
So, both life and health insurance plans provide you tax relief. While the premiums for both these plans reduce your taxable income, the policy proceeds of life insurance plans give you tax-free returns too. So, the next time you are investing in an insurance policy, know its tax implication.
Awareness about Term Life insurance has increased manifold. Many people are either already insured or wanting to insure themselves. Buying term insurance is very convenient nowadays. With the ease of online insurance plans and Low-cost insurance, it has become an important part of a long term personal financial plan. While the loss of a near & dear one is emotionally devastating, term life insurance at least helps you to ensure that the financial loss does not worsen the tragedy.
We can calculate insurance cost online with few clicks based on some general questions but your final premium is based on your health and medical history and other factors. While applying for Life insurance policy, insured has to disclose facts & various personal details like age, height & weight, Income, health, habits etc.
Cost of insurance differs from person to person. Mainly life insurance cost depends on mortality rate. Any factors Which increase the chances of mortality increases your cost of insurance. Higher the risk higher the cost. There are many factors which affect mortality. Few of them are not in your control. These include your age, health & medical history of yours and family or whether you have any pre-existing medical conditions. However, you can control or change few of your unhealthy habits which will reduce your cost of insurance.
Your height and weight are one of the most important factors which affects your life insurance cost. Insurance companies needs to determine whether you are healthy person by calculating your BMI (body mass index). Based on this insurer decided if you are overweight or underweight as per their pre-decided measurement of weight in proportion to your height. Overweight / Underweight puts insured at more serious health issues like diabetes, stroke, heart attack etc. If you are able to control your weight and maintain a healthy BMI i.e. balanced weight as per your height, you will be able to save more on insurance cost.
2. Smoking & Drinking
Insurer ask question in the application form about your drinking and smoking habits of individual. If you are smoker then question like how many cigarettes you smoke in day and if you are drinker then question will be asked about how many units of alcohol you drink per week / day. There is substantial difference in life insurance premium for non smoker and non drinker individual’s.
3. Adventurous Sports
Any individual who enjoys and involved in activity like trekking, bungee jumping or sky diving, car racing etc. are classified as highly risky and can result in high life insurance cost.
4. Working in a Risky job
Your job and current profile also plays a crucial role in deciding insurance cost. If you are working in merchant navy or mining job or as pilot or any other high risky job, it increases professional hazard. Insurer charges lesser premium to people who works in administrative job and higher premium to people who working either in high risk job or may be posted in an area where life risk is very high.
5. Taking Drugs
If you are habitual of taking illegal drugs like Marijuana, cocaine etc. it will impact your life insurance cost. If you are tested positive during pre medical test for insurance either you are asked to produce more documents to prove you don’t consume drugs or, your insurance policy application could be denied outright. Once your application is rejected, for life time while applying for any policy after that you have to mention reason for rejection of the previous policy.
6. Lying on your Insurance Policy
Insurance is contract of utmost good faith. As insured you are expected to disclose all the fact related to your life insurance policy. Any act of non discloser is deemed as intentional and if found at the time of claim, will result in rejection of claim by insurer. So It’s advisable to disclose all the fact and personal details while filling the application form.
Nowadays hectic and stressful lifestyle has affected health of many people. Working for extended hours, junk foods, poor diet, no time for exercise etc. its established that they are associated with poorer health. Insurer evaluates various factors like your height & weight and medical condition, if not found healthy, increase your cost of insurance.
These were the 7 habits that you should control to reduce your insurance cost drastically.
Related Article: Types of Health Insurance policies amid COVID-19
It’s time to bid adieu to 2020 and welcome the New Year 2021. We all make New year’s resolutions but we ignore the most important part: Financial Health. Let’s change the tradition and make financial resolutions for 2021.
Create a Budget
Preparing the budget is an important tool to control costs and expenditure. Here is an effective tip to make an efficient budget. Consider all your income and expenditure. Also, consider that a certain percentage of your income would be allocated towards savings and investments.
Various websites and applications offer the budget tools for day to day routine as well a periodic requirements.
Increase your health insurance cover
The uprise of COVID 19 in the year, 2020 made us understand the importance of Health insurance. You need to look at the Health Insurance Cover even if you are covered by the group Insurance Cover. It may so happen that some Health Insurance policies may not cover a particular disease or cover might be restricted to a particular threshold.
Review your life insurance
We all invest in Life Insurance but mostly as a tax saving instrument. Every person has to opt for Life Insurance Cover which would render benefits to the family in case of an unfortunate incident. This would also require taking into account the inflation factor and unforeseen expenses.
Start tax planning early
Tax planning is mostly carried out mostly when the due date approaches. However, this would neither serve the purpose nor would be beneficial in terms of liquidity leverage. There are various tax instruments available according to your risk appetite, liquidity status, and investment goals.
Write a Will
Usually, Indian people will look at will writing as an exercise of succession management which is required only post-retirement. However, the nominations and investments are required to be known by the family.
Someone once asked me, ‘Did you get sold to insurance or did you buy insurance?’. At first I was confused, how can someone get sold to insurance? But after few minutes I understood what he meant. Almost everyone gets sold to insurance.
Another mistake that people often make is, buying insurance from friends and family. Which could be even worse than buying it from an insurance agent. Every time your friend or relative has to reach their target, they’ll know who to approach. You’ll be stuck with paying premiums for policies you may not even want. You are paying those premiums with your hard earned money. You can use that same money elsewhere, and even profit from it. Use your money to work for you, not the other way round.
Insurance has to be bought for the right reasons. It is a very important financial tool and your financial kitty would be incomplete without it. Parents work so hard to make their children’s life easier, so that their children do not have to slog later.
Everything is becoming so expensive, that planning ahead is very important to reach your goals. Specially if you have a lot of people dependent on you. ‘Life is uncertain’ is a fact, no one can change it. So it always better to have your loop holes covered, before you come to that stage. It’s hard enough your family has to suffer the loss of your life, but don’t put a financial burden on them too. Life insurance policies are not only meant for covering the loss of your life but you can also cover the financial loss of any goal too.
Let us now look at some reasons why you need insurance, some of them might even surprise you. Here goes:
1. Basic Cover For Your Financial Loss :
This is one of the most common reasons why you need insurance, to cover your financial loss. Your family will be so devastated at the time of your death, that they will not be able to think straight. This insurance cover will help them get back on their feet and also cover the immediate expenses that come along the way. This way, you can save your family the trouble of not worrying about their financial needs.
2. Tax Benefits:
Some people buy insurance to obtain the tax deductions available to them. The best thing about life insurance is that their maturity claim as well as the death claim are both tax free. Even the premium amount is available for deduction under section 80C. The premium claimed can be, up to a maximum amount of Rs. 150000/-, since that is the limit under section 80C. After having said that, do not buy any insurance just to claim this deduction. If you are going to buy insurance for this reason, then you might as well buy a policy that will attend to your needs.
3. Financing Your Debt:
Now I’m sure you do not want your family to carry the burden of paying off your liabilities. So if you have got your other goals covered through various investments, then get your liabilities covered through insurance. For example, you’ve taken a house loan, and you still have half the amount to pay back, take an insurance cover for that amount, so even if you are not there, your family will have the finances to pay off the loan.
4. Sort Your Education And Retirement:
Life insurance just doesn’t mean insurance for your life only. It also provides cover for your income. For retirement, annuity is a very good option to consider. After investing in an annuity, you will receive a regular income till your survival. So if you haven’t considered this option, I think it’s time you do.
As for your education, there are education plans offered by the insurance companies for your children, so that in case of an unfortunate event, your child’s education will not be compromised in the bargain.
5. Earlier The Cheaper:
The earlier you buy a life insurance cover, the cheaper it is for you. While you are still young, there is a very low chance of you getting diagnosed with various diseases. So it’s always better to take insurance earlier, so you do not have to spend much when it comes to premium payment, it will be affordable.
6. Insure Your Business:
Insurance is a very handy tool if you have a partnership business. You can take insurance on your partner’s life, so that if he/she passes, the company can use that money from the claim to make up for the loss of the deceased partner. The money can also be given to the nominees of the deceased’s family, this way they do not have to give them a share in the company.
7. Regular Income:
Apart from your basic cover, insurance also provides you with regular income. So if the insured passes away, the family members will get the death claim as well as regular income will be provided to the family. This way the family can use the claim for the immediate expenses and the regular income for their monthly expenses.
8. Sometimes It Can Be Too Late:
The famous phrase ‘It’s never too late’, but in insurance, it can be too late. Do you think a person at the age of 55 or 65 or 75 years of age can get an insurance policy easily? No insurance company will take that risk, and even if they do, then the premium amount will be so high, you might not be able to afford it. So don’t wait for it to be too late.
9. Back Up To Fund Long Term Goals:
Now you may think, we have investments for that. But a lot could go wrong with your investments. In this case, we will consider how an insurance policy, can come to your rescue. For example, you are investing through SIP, to achieve a certain goal in say 10 years down the line, after 5 years, you pass due an unfortunate accident. Now from where is your family going to get the funds to continue that SIP, and how will they be able to reach that goal? But if you had an insurance policy, your family can use the death claim amount to continue with the SIPs.
I think these reasons are more than enough to at least think of buying insurance. You may have had bad past experiences with insurance, but now you are aware of the options available to you, which can help you plan accordingly. So if you still have doubts about your choice, then always consult an adviser, they will guide you in making the right choice. So get insured and get that ‘Peace Of Mind’ in return.
Every insured person always have this worry. Everyone remains a little concerned over this. Will the insurer settle my claim as per the policy terms? Is there any hidden condition that can actually prevent me from getting my claim in the right time? Is there any activity or possible loopholes in the process that can negatively affect claim settlement? All these worries and concerns are common.
Here you Read Complete guide on Covid-19 Medical Insurance
Yes, rejection of claims is not rare and you have sufficient reason to be concerned over this. Claim settlement is the most crucial part of a insurance policy that no insured person can take lightly. Let us try to answer all your concerns with a single remark. If you have followed the process as it is required starting from filling out the form with right information to attending medical tests to paying timely premiums and applying for the claim in right time, nothing can obstruct you from getting your claim.
Here we are going to provide 7 most important tips to make your claim settlement smooth and absolutely hassle free. These are the time tested and tried principles that worked for most insured persons around the world in regard to claim settlement.
1. You Should Not Put Full Trust On Insurance Agent
When applying for a insurance policy often we are carried away by the rosy side of the proposed benefits and just forget to ask about all the things on the flip side. This happens particularly when we put too much trust on the insurance agent. While you have to listen to what he has to say about the policy you nevertheless should verify all the statements made by him and read the policy details and form in detail before coming to a decision. Most claims that are rejected are resulted from a hurried decision and forms filled up in haste. Any wrong information or inadequate information can lead to rejection of claim. So, instead of filling up the form in a jiffy just read the fine prints carefully and make sure it is filled up without missing any vital information.
2. Stay Away From Giving Incorrect Information
Insurance company is trusting you as per the information provided by you and promising you an insurance sum as per the policy terms. Naturally, any wrong or inadequate information furnished by you is equal to a breach of trust that can lead to the rejection of claim. It is your duty to furnish all the necessary information to the insurer and in case you do not fulfill this obligation, the company does not have the obligation to pay the claim amount. Naturally, you need to be perfect in your position and provide all correct information asked for.
3. Disclose Your Medical History
In any insurance policy the prime evaluation on the basis of which a proposed sum assured or insurance benefit is determined is the assessment of risk. The medical history of you and your family is crucial to assess the risk involved in insurance policies. This is why disclosing the medical history in detail is so crucial to get your claims at any moment of contingency. From your habit of substance abuse like tobacco or alcohol consumption to any instances of prior medical treatment or diseases, you need to disclose all your health and medical data to the insurer at the time of applying for the insurance coverage.
4. Do Not Avoid Medical Tests
The underwriter in insurance company assess the risk involved in an insurance policy based on the information furnished by the applicant. Now, in certain cases where there is larger risk involved due to higher sum insured value or any possibility of medical risks, the applicant may be summoned for some medical tests as required by the insurer. You have to attend these tests to provide correct and updated health information and help underwriter assess the policy risks.
5. Update Details Of The Nominee To Help Faster Claim Settlement
There are many people who just apply for a life insurance policy for only financial benefits or tax benefits and do not give much thought to the process of claim settlement and the insurance benefits that the beneficiaries can get in case of any contingent situation. Naturally, they carelessly fill up the nominee information without caring much about the credibility of correctness. Remember, at the time of claim settlement the nominee information should match with the original documents provided by the nominee and any dissimilarity or difference in this can lead to delay or rejection of claim. In case the nominee of a policy dies earlier than the insured person, update the information with the insurer and provide a different nominee as applicable.
6. Make Sure That The Policy Is Not Lapsed
Any insurance claim is null and void when the respective policy is lapsed and not in force. This is why to get your claims you need to ensure paying the premiums before due date and keep the policy alive. All insurance companies provide a grace period for paying their premium in case the due date is failed. Only if you cannot pay the premiums within this grace period the policy become lapsed and you fail to get your insurance claim.
7. Fill Insurance Claims At The Earliest
Your family may forget filling up claim forms when going through an emergency situation. Yes, it may not be a priority high on the list but nevertheless you cannot completely avoid this as such negligence can prove costly when it comes to settlement of claims. Even when someone cannot attend such a situation one can always communicate the company through a friend or close one and intimate the insurance company about the same. When you do not make any delay in intimating insurance company, your claim is processed smoothly without least delay.
Life insurance is meant for achieving the financial goals in case of any sudden loss or contingent situation. But to have the full insurance benefits you need to adhere to the norms and provide information as you are asked for.
Many of us people think it is absurd to purchase the life insurance plans at an early stage of life, because you are too young to die and have a whole lot of life to earn and save for the life insurance plans, but truly speaking, the life insurance plans should be bought in the early years of your working life. Even if you go and ask any of the financial planner or advisor, they will also suggest you to go and purchase the life insurance in the early years of your earning.
Owning a life insurance is not a sign that you are near your last days, but it symbolizes your smartness and the ways how wisely you have planned for your family and loved ones even if you are not around to take care of them. Most of the people are unmarried in their early years of the earnings and they do not think that there is any need for the life insurance right now as they have not started off with their family life yet.
But think about it twice, once the family life starts, the responsibilities gets doubled, the expenses increases, the family needs to take some important investment decisions for the settlement of the family or the buying of a new house, or any thoughts about the family planning in the upcoming future years and so on the expenses keeps on increasing.
When do you exactly have the time to save from your mere income from which you serve the family, take care of your dependents and even pay for the mortgage?
When you are the only bread bearer of the family then you need to have a life insurance. The life insurance is the best investment plan to safeguard of the future of your loved ones after something happens to you. You can take care of your family members even when you are not around. The life insurance plans provides the death coverage for any uncertain event. The death coverage helps the family in the times of any financial crisis or provides them the financial strength and stability to carry on with their lives smoothly.
Read here: Complete guide on Covid-19 Medical Insurance
The Younger You Purchase The Life Insurance, The Better It Is
You would not want your family to suffer from the financial problems when you are not around and thus you would definitely want to set aside some amount of money that is more than enough for all the future needs of the family and the uncertain events that may occur in the future. And if you begin saving for your life insurance in the early years of your life then you can save more than others and can also save it very cheaply. As it is always said the younger the merrier.
Here are some of the major reasons which will support you in the purchasing of the life insurance while you are young –
- Health is wealth. It is a known fact that you are much more healthy and energetic in your twenties than you can be in later years, so you can work hard to earn more money and can start your life insurance soon by savings and investing with almost 10% of your total earning. And life insurance companies also rely on the health of the individual at the time of the issuing of the life insurance plans. You are prone to a large amount of premiums if you start your life insurance in later years when you are not as healthy as in your twenties.
- You can get loyalty benefits for being a long term client to the life insurance company. The companies provide lots of loyalty benefits to their clients in order to be competitive in the market. And if you have started off with your life insurance in early twenties, then by the time you are in your fifties, you would have earned a lot of life insurance loyalty benefits.
- Life insurance provides you the cash value. The cash value of the insurance amount is so much important factor. On the basis of the cash value, an individual can take loans and borrow money from the banks. The policy loans need to be taken for any major life events in the future years and thus there is another advantage of having a life insurance early.
- Save you money. It is always said to save your money, but keeping aside the money can reduce its time value and thus life insurance is the best way to invest the savings if you are a conservative investor.
- You can also get various tax benefits. The premiums for the life insurance plans reduce the total taxable amount and thus one can use it to save their income tax as well.
- The younger, the cheaper. This is true for life insurance, as you have a long period of time to save a huge pile of wealth for your loved ones, and you can also do it with cheaper premiums.
So these were the important reasons why you should be insuring yourself in the early years rather than waiting for your mid 40s when premium will be too high.
Life is unpredictable and you never know what is going to come next. You always have to be prepared for the best and the worst. Life insurance is an important tool in protecting a family’s economic well-being if a parent or partner dies.
A life insurance policy is an indenture with an insurance company. In exchange for premium payments, the insurance company supports a lump-sum payment, referred to as a death benefit, to beneficiaries upon the insured’s death.
Life insurance is a very crucial part of one’s financial well-being. Insurance needs to be given preference over investments for any person who has dependants. Thus, this makes life insurance an effective tool to not just save taxes but to also ensure that your family is protected.
Generally, life insurance plan is selected on the basis of the goals and needs of the person. Term life insurance usually provides protection for a set time period, while whole life insurance provides lifetime coverage. It’s imperative to note that the death benefits from all types of life insurance are generally tax-free.
- Tax Saving Deductions For Life Insurance Products Is
Under Section 80C, life insurance premium payments paid up to Rs 1.5 lakh in the name of the taxpayer, taxpayer’s spouse or children are allowed as deduction from the gross taxable income.
Under Section 80C, ULIP investments up to Rs 1.5 lakh are also eligible for the same deduction. ULIPs are unit-linked insurance schemes that provide a mix of equity investments and life insurance.
Life insurance plans should not be considered as an investment. The purpose of life insurance should be to protect one’s family and dependents, not to gain any kind of return from it. That is why term insurance is the best kind of life insurance- it is economical and delivers the fundamental purpose of providing protection. ULIPs (Unit Linked Insurance Plans) are products that support investment as well as insurance. It is suggested that investment and insurance should be handled individually. Preferably, one needs to get life insurance after considering factors like income, expenses, debt, and age.
Insurance is a significant aspect of any sound financial scheme. Different types of insurance help in protecting you and your loved ones in numerous ways against the cost of accidents, disability, illness, and death.
The insurance assessment should be made on the basis of your family and economic condition. There are many types of insurance but unfortunately, no one-size-fits-all policy. For instance, life insurance can be a fundamental necessity, specifically if you have a spouse and children. Disability insurance is important for everyone which delivers an income stream if you are not able to work.
Read here: How Much Life Insurance Do You Really Need?
Apart from life insurance, there are other things as well which needs to be protected. The majority of the people need some amount of all of these types of insurance to choose from.
Let us discuss this.
Classification of Insurances:
- Homeowners Insurance
Homeowners Insurance ought to let you refurbish and rebuild your home after a unavoidable physical destruction or damage and supports in covering the structure of the house and it’s contents. Insurance of at least 80% of your home’s replacement value, sans the financial worth of land and foundation, is essential for you to be obscured for the cost of repairs.
There are many categories of policies, with progressively inclusive coverage and cost. These plans not only protect your house but it’s surroundings as well.
- Auto Insurance
Automobile Insurance protects you from damage to the considerable investment in a car and/or from damage or injury caused by you or someone driving your vehicle. It can help cover costs that you or anyone in your vehicle may incur due to an accident with an uninsured motorist.
Auto liability insurance is obligatory for any individual who has a car. In many states, it is mandatory that you have liability coverage before you register a vehicle. However, the minimum coverage provided by the state is quite meager to provide enough protection. Fire, theft, and collision coverage are advisable for a vehicle having more than marginal value. You can cut back on costs, however, by selecting a higher deductible – the amount of loss should exceed before you get compensated.
The auto insurance cost differs greatly; it depends upon the type of company offering it; your preferred coverage and deductible, where you live, the type of vehicle, and the ages of drivers in the family. Sufficient discounts are often available to safe drivers, non-smokers, and the ones who travel to work via public transportation.
- Liability Insurance
Often referred to as umbrella liability insurance, this applies when the personal liability and lawsuit coverage in other policies gets exhausted.
Life insurance, received when you die, can support a surviving spouse, children, and other dependents; can help maintain their standard of living, can help pay off debt, can help in finding the education costs. The amount you require depends on your situation.
Your financial expert can help you evaluate your needs to determine the types and amounts of insurance that are ideal for you and your family. For instance, term coverage costs less but may remain active for a definite term of years. For lots of families, an arrangement of whole life and term insurance may support for current and future needs.
If your family member or anyone depends on you financially, Insurance is a must have product in your portfolio. When it comes to insurance, there are various types of policies with varied benefits and features.
Which is the most beneficial policy for you?
How much insurance do you need?
These are few questions that need to be answered before buying a life insurance policy. Buying a life insurance policy is important but what is equally important is to buy adequate insurance.
In this article, we will discuss insurance need analysis by thumb rule method which is easy & quick to calculate. Important point to remember while applying thumb rules is the calculation won’t give you the exact insurance amount you should have. But it will definitely give you a fair idea to start with. Exact insurance depends on various factors like age, dependent needs, goals, liabilities etc. Although these thumb rule methods won’t give exact insurance required but with these methods we can calculate minimum insurance required and get ourselves started.
If you would want to know the exact insurance cover required for yourself, you may get in touch with a financial planner. This will help you to get the answer to this question customised to your needs.
Now let us start with these thumb rules.
1.Based on yearly income
The first thumb rule is based on your yearly income. Ideally, a person should be insured to the extent of 12-20 times of his yearly income. Lesser the age higher the multiple. Here Income refers to net income means income left in hand after reducing your taxes and personal expenses. Please note that we are talking about your personal expenses here and not the family expenses.
This is one of the easiest ways to calculate minimum insurance required. For example, a person aged 25 has yearly income of Rs.5 Lacs and spends Rs.50,000 on his personal expenses throughout the year. He then should be insured to the extent of Rs.90 Lacs (Rs.5 Lacs – 50000 =Rs. 4.50 * 20 times).
Read more:- 7 Reason Why You Should Buy Insurance
2.Based on family’s monthly expenses
The second important thumb rule takes into account your expenses. Based on expense method an individual should be insured to the extent of 80 to 120 times of his family monthly expenses. The underlying assumption here is we need to plan for adequate insurance by making provision for their regular expense if we are not there.
For instance, a person’s family monthly expenses are 50,000 then he should at least have an life insurance cover of Rs. 60,00,000. ( 50,000*120)
3.Income plus expenses method
As per this method, a person should be insured by following both methods – i.e.income method and Expense method. It is a combination of income method and expenses method. In the first part, insurance is calculated as per the income method and in the second part, the amount required to pay off all the loans and financial goals are added to the first part.
For e.g. as per first part income method insurance calculated is Rs.50 Lacs and second method other loans and goals totals to Rs. 30Lacs. In that case total insurance needed is Rs.80 Lacs.
4.Affordability of premium as % of your income
An individual has various responsibilities and priorities. Insurance premium is treated as expenses if it’s paid for pure insurance policies. An individual ideally should pay around 6% of monthly income as insurance premium for self-insurance. As more members of the family are insured he can increase this by 1% per person.
Premium paid for savings and investment plan should not be considered, only pure insurance cost is calculated as part of the limit. Many companies follow this thumb rule while buying insurance under group insurance policy for their employees. Now that you are aware of how to calculate the amount of insurance required, you are ready to take the first step. It is suggested that you use these thumb rules as a guiding principle only. They can provide a framework for you to assess your individual needs. To get a more accurate idea of the amount of insurance required, you may get in touch with a financial advisor. Don’t wait and start investing in an adequate insurance cover by downloading the fintoo app.
What do people fear most? It is an uncertainty of life, which makes people worry about their loved ones. So, there must be a solution to this problem, which will at least cover your loved ones financially in case of need or contingency! Yes, there is indeed a solution – insurance. Insurance will help cover the insured and/or the family of the insured. This article will help you understand a few important things like the importance of insurance, how to choose insurance and it will answer the most important thing – how much should be the coverage and why?
Types of insurance which deal with most important aspect of contingency management
- Life insurance: – Life insurance will cover the most uncertain thing in life which is – death. There are again many subtypes under life insurance. There is a term plan which will need the insured to pay a fixed sum for the predetermined time. There is also an endowment policy which will provide survival benefits along with death coverage.
- Health Insurance: – Health insurance provides coverage for the medical emergencies and hence second most important. Most of the employees have group health insurance but it needs to be analyzed and assessed whether your group insurance covers the potential liquidity needs and is optimum or not. If not, then it is time to raise your sum assured which will help you cover the unexpected medical emergencies. It is always suggested to have medical cover over and above the cover provided by the employer.
In this blog, we will focus on Life insurance only.
So let us see how to assess whether you have enough life coverage or not?
- Loan coverage: – Needless to say that we all have some kind of debt burden, be it in form of housing loan or be it in the form of car loan or any other type of debt. Make a list of all such loans and arrive at an approximate figure of total loan repayment. If your total sum assured takes care of this loan liability, you are safe, otherwise, it is time to raise your stake. This will help your family to pay off the debt in case of any unfortunate event.
- Routine expenditure: – This includes basic expenditure like power, rent, grocery expenses, etc. which can’t be avoided and must be incurred for survival. Add up all your sum assured and/or retirement income and factor with the expected inflation rate. If your sum assured could cover this inflated required sum then you don’t need to touch your insurance.
- Lifestyle expenditure: – These are the expenditure which is incurred to maintain a lifestyle. So, this will cover pretty much basic expenditure like vehicle maintenance, second home repairs, renovation expenditure etc. These are the ones which are hard to locate, but if considered at the earliest, even these expenditures are easy to cover.
- Savings to income ratio: – If you save almost around 35% or more of your income, then it is safe to say that you need not invest more in life insurance. For e.g. consider that you have been investing 30% of your income in mutual funds having an approximate rate of return of 10-12%. Also, that you have invested in term insurance which will cover your family in case of death of the insured. In such a case, you need not divert your further income towards the term insurance since your mutual fund investments will take care of it, So you should buy Insurance along with SIP for your betterment.
- Investment goals: – You may wish to marry off your children lavishly or you may be wanting to provide them with the best education. But all of it comes with a cost, and to provide for it your family will need strong financial support. You can easily achieve it by investing in the right kind of insurance. There are many insurance policies which are tailor-made for such events which help you cover these expenses even if you are not there with your loved ones.
Instances when you need to raise insurance coverage
- Getting married: – When you started earning, you may have thought only about yourself and your parents. But, when you get married, you need to think of your spouse also in terms of insurance coverage. You need to add your spouse to your nominee list too.
- Starting a family: – When you hold your new bundle of joy in your hands, the first thing that comes to your mind is about its safety and security. This is another major event when you need to restructure your insurance investment. When a child is born, you need to raise your sum assured to cover the additional expenditure.
- Additional income: – When you earn a promotion or income raise, it is time for you to consider a corresponding increase in sum assured. This will help your family to incur and adapt to the better lifestyle needs even when you are not around.
- Additional loan : – You may invest in a second home or a new car by resorting to loan for the same. But, while you take the loan, you need to think about repayment of the loan when you are not around. If not taken care of, generally this additional asset may be termed as a burden due to loan repayment by the nominee or heirs. To avoid this situation, you need to increase your sum assured to such an extent so that it will cover at least a major part of the loan repayment.
So these were some of the instances where you should be increasing your life insurance cover to keep you adequately insured at all times. You may download the Fintoo App to get a suitable insurance policy for yourself.
The term ‘Life Insurance’ is easy to understand, though it features may be complicated. It all depends on the needs of a person. If a person knows what they’re looking for in an insurance policy, it becomes easy for them to search for one. Insurance is important for everyone because it covers the possibility of a risk occurring.
The reason as to why people end up buying the wrong policy is because they don’t buy it according to their needs. People make their decisions based on other people’s experience. Everybody’s needs are different, so based on that, policies from different life insurance companies should be compared.
The outbreak of the COVID-19 pandemic might have made you realise the importance of having life Insurance but do not make these mistakes while Deciding on an Insurance Policy. Let us discuss these mistakes in detail.
Insurance Is An investment
One of the biggest mistakes, thinking insurance is an investment. People need to know that insurance is to cover their risks. If you want to invest, there are many other avenues where you can invest in, they give you better returns and other benefits as well. Taking a ULIP and an endowment policy just because it has investment, will result in paying high premiums and the maturity or death benefit will not be much also. In many cases, the first question people ask when it comes to insurance is, how much return will I get? In fact the right question is supposed to be ‘How much cover am I going to get?’
No Proper Research
Before buying an insurance policy, do you compare it? Most common answer will be “No”. This is also why they end up with the wrong policy. It is always important to do research before you take a policy. Identify what your needs are and the cover you require. Then once you know your need, pick out the best insurance companies in the market. The next step is to compare the different policies and the policy which suits your needs the best, is your answer. If you do not know how to go about it or if you are not sure of whether what you’ve chosen is right, then seek advice from a financial advisor.
‘THINK’ Insurance Is A Waste Of Money
Almost everyone thinks insurance is a waste of money which is not true. Insurance is a need, especially when there is only one person working in the family. People give excuses like ‘I don’t have money’, ‘premiums are expensive’ and so on. In this case, a term insurance is the best to take, it’s the purest form of insurance and it serves one’s needs and it’s premium is cheap. It’s not a waste of money. It secures your family’s future.
Some people blindly trust the insurance agents, just because their friends or relatives are agents. In the end, they are the ones suffering, because they are paying a premium for a policy that’s not even required by them. That same premium could have been invested somewhere else and they could have got a better return. It’s your hard earned money, so use it wisely. Don’t just blindly buy policies, that will be a waste of money.
Before buying an insurance policy, there’s only one question you need to ask yourself, What is my need? It all comes down to this question. People easily get influenced by others and easily influence others as well. If a policy doesn’t cater to the needs of one person then it does not mean that it will not suit anybody else as well. It is better to do research on one’s own needs, rather than asking others about their policies.
So, now we know where we are going wrong and where we make the major mistakes while choosing insurance policies. If the above points are kept in mind, then the policy you choose will be for your benefit only. You may download the fintoo app to buy insurance plans suited to your needs.