Vijaywada-based Harsh Raj G, has a life insurance policy, even though he is only 24 and doesn’t have any dependants. He was 19 when his father bought the policy which is a combination of an endowment and a whole life plan “My father was going to retire soon and I would start working in some time, so he thought it was the right time to buy a life insurance policy for me," said Harsh Raj.
Life insurance serves as a safety net in the unfortunate event of the death or disability of the policyholder. The payout can support dependants and fund expenses if the primary source of income stops suddenly. So, at 19, Harsh Raj didn’t really need life insurance. Investing the money would have been a better choice. But that’s not the only thing he got wrong; the choice of insurance in his case was a bundled savings plan that comes with very little insurance. Harsh though is not alone. While it may seem unusual, more and more young people are buying life insurance. “Over the last few years we have seen an increased penetration of life insurance among millennials. They are primarily buying life insurance as a savings instrument and not just for tax saving," said Piyali Konar, executive vice president, Kantar, a data and consulting firm. But look at it this way. In order to save and invest money, there is a wide universe of instruments that if you evaluate may offer better returns than a bundled life insurance plan. However in terms of offering protection, that is to provide financial stability to your loved ones on your death, there is only one product and that is life insurance. Looking at life insurance through the prism of saving, therefore, can get you to make the wrong choices.
You need life insurance if you have dependents and you need to choose wisely the type of life insurance product you bring home. Of the various life insurance products available, a term plan is best suited if you’re looking for a cost-efficient protection plan. According to Shweta Jain, certified financial planner, chief executive officer and founder, Investography Pvt. Ltd, a term plan cover is supposed to help bridge the gap between the corpus you have and what you would need as an insurance cover in case of an unfortunate incident. “Also, if you move to a different country or city, you may choose to stop paying the premium without being penalised unlike an investment-related insurance policy," said Jain.
According to Puneet Nanda, deputy managing director, ICICI Prudential Life Insurance Co. Ltd, individuals up to the age of 40 should have a life cover equivalent to 15-20 times their annual income. For those between the ages of 40 and 50, a life cover of 10-15 times their annual income should suffice, and for those above 50, it is advisable to have a life cover of five times the annual income.
When to buy it
The best time to buy a term plan is the moment you have dependents. It could be retired parents, children or a financially dependent spouse. Once you have dependants, it makes little sense to delay buying the policy as longer you wait, the more premium you may end up paying.
“Life insurance premiums increase as you age, therefore, buying it while you’re still young would help you save on the excess premium. Also, insurance companies may require you to undergo medical tests before issuing a policy above a certain age," said Munish Sharda, managing director and chief executive officer, Future Generali India Life Insurance. Insurers take into account how high risk a customer is while considering an application. If you’re young, you would most likely be healthier and the chances of making a claim in the near future would be low, so the premium is also lower. “The premium for a 30-year-old non-smoking male, for a life cover of ₹1 crore till the age of 60 is about ₹8,000 per annum, but the same individual will have to pay about ₹11,000 every year if he purchases the policy at 35," said Nanda.
Life insurance has the added advantage of offering tax deduction of up to ₹1.5 lakh paid towards premiums, under Section 80C of the Income Tax Act. However, that should not be your reason to buy the product. The sole purpose of buying insurance is to protect you and your family against unforeseen events. You can avail tax benefits by saving in other products such as tax-saving mutual fund schemes and public provident fund (PPF), among others.