Why to buy Life Insurance

12 min readJun 14, 2022

A few years ago the mere mention of the word insurance brought to mind the spectacled insurance agent, who forced you to buy policy every few years. Selling of insurance may have changed, but the importance of insurance has never changed. All of us need financial protection from the unknown. With insurance, risks can always be covered.

In this Blog, we will learn about the basic of insurance, why insurance should not be mixed up with investment and much more.

Why to buy Life Insurance?

Most of us have an umbrella at home. We use an umbrella only for a few weeks in a year, yet we keep it. All of us have different plans for future. But then life is full of uncertainties. One may not be there tomorrow and plans may remain as plans. But, financial goals as parent, as wife/husband, or as son/daughter will not go away. Even after a tragic event, our responsibilities do not change.
Life insurance is a financial cover for protection from risks linked with human life. Events like death, disability, accident, etc. can cause financial harm. We are after all humans. Our lives are subject to risks of death and disability. Cause can be anything, but the outcome of such risks is always negative.
When a human life is lost or a person is disabled, there is a big loss not just physically but also financially. There is loss of income to the household. Though no human life can be valued, the loss of household income can be compensated in a little way. This has to be done by giving a monetary sum, either in lump sum or in installments.
This sum could be determined based on the loss of income in future years. This is how in life insurance the concept of sum assured has emerged. Life insurance products provide a finite amount of money in case the life insured dies during the policy term, or becomes disabled due to an accident.

Life Insurance is needed:

1. To ensure that your immediate family has some form of financial support in the event of your death.

2. To finance your children’s education and other needs.

3. To ensure that your loss of income due to serious illness or accident is compensated.

Life Insurance is for your family and not for your own

You may not realize this, but you buy life insurance because it is the best way to shield your loved ones. Our death is a surety, but the time, place and cause is not. But our loved ones live after our death. So, buying life insurance is a financial decision based on strong emotions. It is about love and care, and the unknown future.
Yes, life insurance is about taking care of loved ones. Our life is about meeting responsibilities. It is about keeping promises. The truth is anyone who takes a decision to buy life insurance looks at it from the family’s point of view. This is probably the only product where you do not look at your own interests. People view life insurance as a powerful tool that protects your spouse and children from the financial losses that can devastate their lives.

An expression of love and caring

People celebrate Valentine’s Day every year. This day is about love. It shows you care for each other. In a similar tone, life insurance is about caring for your family. You want to ensure their financial security if you are suddenly not around. Should you die prematurely, the proceeds of a life insurance policy will help you keep the promises. So, that your family and the people who are important to you never suffer. By protecting their financial future through a life insurance policy, you’re enabling your loved ones to maintain the lifestyle that you chose for them, even if something unexpected should happen to you.

Who needs Life Insurance?

It may be argued that everybody needs life insurance. Yes, anyone who has a family to support and is an income earner needs to buy insurance. Our economic value goes beyond just a few months. In a sense, we are like a bank fixed deposit that every month pays interest to help support and fulfill family’s dreams.
The general rule about buying life insurance is that you should buy it if you have dependents. Who are dependents? A dependent is a person who relies on your financial support. This may include your spouse, aging parents, children, siblings and other relatives. These people may be younger or older than the person whose life is covered by the insurance policy. This is because the age of the dependent is not as important as the purpose of the policy to replace your economic value, once you’re gone.
Many people buy life insurance policies when they get married. Others buy life insurance when they are expecting their first child. But spouse and children are among a whole range of dependents. One should not wait till the last to buy life cover. But it is true that once you have reached retirement age, there’s a lot less requirement for life insurance. By the time you retire, your children are most likely financially independent. Once you are retired, you would have no major financial obligations like home loan. This is a time when you are living on retirement savings. However, if you feel your spouse may need extra money to cover say, unexpected medical and long-term care expenses, do maintain a life insurance.
One of the most important reasons you should buy life insurance is if you have a home loan. It is common to sign up for a 20-year home loan. But what if you die in 10 years? There are special life insurance policies that are tied directly to home loans. If the borrower faces premature demise, the insurance policy repays the entire loan. This will ensure you home stays with your family.

What are the Types of Life Insurance?

There are some basic types of life insurance policies. Each policy type has the core function of providing a life cover. Let us have a quick look.

Term insurance — Term plans are the most basic type of life insurance sold. They provide life insurance cover with no savings or profits component. They are the most affordable form of life insurance. The premium you pay is the cheapest. A fixed sum of money, called the sum assured is paid to the beneficiaries of the policy if the policyholder expires during the policy term. This is called the death benefit. If the policyholder survives, there is no pay out to the beneficiaries.
Endowment plan — Endowment plans contain life insurance, but they also have a maturity benefit. Unlike term plans which pay out the sum assured only in case of death of the policyholder, an endowment plan pays out the sum assured under both scenarios i.e. death and survival. The premium charged is more expensive than term plans. This too is a combination of insurance and saving. A certain amount is kept for life cover. The rest is invested by the life insurance company. In an endowment plan, the benefit is either in the form of death benefit when the policyholder dies, or maturity benefit when the policyholder outlives the policy term. To attract customers, endowment plans may offer bonuses periodically. Endowment plans are commonly referred to traditional life insurance. They carry lower risk than ULIPs, but offer lower returns too. Do remember endowment products can save tax on investment and their corpus is also tax-free.
Unit linked insurance plans (ULIP) — This is a combination of insurance and investment. The premium paid towards ULIP is partly used as a risk cover (insurance). Increasingly, a large portion of the ULIP premium is being invested in funds for investment. One can invest in different funds offered by the ULIP offering insurance company depending on their risk appetite. ULIP funds can be compared to mutual funds. However, costs associated with ULIP structure make this investment cum insurance product competitive only if you hold it for the long-term. Do remember ULIPs can save tax on investment and their corpus is tax-free. There are many similarities between ULIPs and mutual funds, but ULIPs also contain insurance advantage. ULIPs are a combination product of investment and insurance. Mutual funds are a pure investment avenue, with no insurance benefits.
Money back policy — A money back policy is a variant of the endowment plan. In this policy, you can get periodic payments over the policy term. Portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured. In case of death over the policy term, the beneficiary gets the full sum assured. Money back plans are also eligible to receive the bonuses declared by the company. Like other insurance products, money back plans save tax on investment while their returns are tax-free for the policyholder/ heir / nominee.

Why Insurance should not be mixed with Investment?

When you put your money somewhere, it is okay to expect something back. This is true especially for investment. So, is pure term insurance an investment? No. Life insurance is not an investment. In life insurance, if you die, your nominee/beneficiary gets the money. In any investment, the return or benefit is enjoyed by the investor. In case of life insurance, the death benefit by design is never enjoyed by the policyholder.
You may ask then how are those insurance policies giving benefit to policyholder? These are not pure term plans. In their bid to get something out of the money given to the insurance company, many opt for insurance policies that give you ‘something back’. This insurance is not purely insurance; it has an element of investment in it. Term insurance is the purest, cheapest and best form of life insurance. But, any other form of insurance is costlier.
Remember the death benefit of a term life insurance policy is the only advantage of such a policy. When you buy any other form of insurance such as money back plan or endowment plan, you are not buying pure insurance. You are paying for some insurance, and some investment. With so many pure-play ways of investment already existing, there is little reason in buying an insurance policy also for investment purpose.
In a term plan, you pay a premium for covering a specific risk. If the risk doesn’t happen, you lose the premium. This is okay, because you pay a very small amount. But if the risk event happens, your nominee/beneficiary gets the promised money. This simple arrangement is why a term plan’s premium is very low. If you want to invest, you can go ahead and do so in a pure investment vehicles like mutual funds, direct stocks etc.

How much Insurance do you need?

This is a question all of us face in the process of buying life insurance. While deciding the extent or quantum of cover, it is important to remember that the main objective of insurance. Insurance is bought to provide financial support to your family and/or dependents. Naturally, the life insurance cover should be able to support them for the longest period of time.

The process of how much insurance you need starts by identifying your financial goals. Your goals will not vanish if you meet unfortunate premature death. So, the life insurance cover will be the sum of meeting these goals. The following 2 factors will help you calculate:

1. Your current annual income — The first major factor to consider in the process of deciding your life insurance quantum is your current annual income. If you die, you will need to ensure your family survives for at least 20 years. So, multiply your annual income with 20. So, if your current yearly income is ₹ 6 lakh, multiply by 20 and your life insurance cover should be minimum ₹ 120 lakh (₹ 6 lakh X 20).

2. Your current and future financial liabilities — The second major factor are your present and future financial liabilities. Present liabilities could be car loan, home loan, education loan etc. In case you die early, your family cannot pay the loan EMIs along with household expenses. So, add these loans to your life insurance cover. Include future liabilities as well. For instance, a child’s education or marriage — these goals need to be met. So, estimate the amount needed for such future liabilities and add to the calculation. For instance, if your total outstanding loans are ₹ 25 lakh, your insurance cover has to be ₹ 120 lakh plus ₹ 25 lakh. If your future liabilities are worth ₹ 35 lakh, the total cover amount has to be ₹ 120 lakh + ₹ 25 lakh + ₹ 35 lakh = ₹ 180 lakhs.

Why are Insurance claims rejected?

Even after buying life insurance, many families discover that at the claim stage their policies are worthless. Yes, their claims are rejected. Let us find out what are some of the most common reasons for rejection of life insurance claims.

1. Incorrect information given at the time of application — Insurance operates on the basis of trust. So, any form of misrepresentation of data is bad for life insurance claims. Wrong information about age, income, occupation, qualifications, lifestyle and medical history will open the door for rejected claims in future.

2. Non-Disclosure of medical status — The wilful non-disclosure of previous and existing medical conditions, operations, and surgeries leads to claim rejections. The insurance company needs accurate information about your medical history to calculate the policy premium. If you give wrong information, the entire premise of the policy is based on falsehood. When this is discovered, rejection of claim can happen.

3. Policy Lapse due to non-payment of premium — Do remember life insurance claims are settled only for active insurance policies. This means the policy should be active. If you do not pay premium within the allocated period, the life insurance policy can be lapsed. This can happen if you have missed paying the premium. If the policy is not active, then claims are not entertained. Use the direct bank debit facility so that you never miss an insurance premium payment.

What is e-Insurance account

An ‘e-Insurance Account’ (eIA) is the portfolio of insurance policies of a proposer/policyholder held in an electronic form with an insurance repository. This e-Insurance account facilitates the policyholder by providing access to the insurance portfolio at a click of a button through the internet. This helps eIA holder to keep a track of insurance policies (life as well as non-life) under one umbrella. An e-Insurance account is offered ‘free of cost’ to the applicants. There are no charges levied to the individual for opening the eIA. There are no charges for maintaining the eIA. There are also no charges for changing any details of the eIA.
eIA can be opened in two simple steps. eIA can be opened by filling the eIA application either online at www.nironline.ndml.in/NIR or writing the details on the physical form and submitting the same to an Approved Person.
The eIA opening form and the details about KYC documents required available are at www.nir.ndml.in After filling eIA opening form — either online or in paper form, submit it to Insurance company or Approved Persons along with the KYC documents. Remember to carry original documents while submitting application for the purpose of KYC verification and receive acknowledgment.
Applicant can also submit the eIA opening form online on NDML NIR system by accessing www.nironline.ndml.in/NIR Typically, an eIA will be opened within 7 days of the receipt of the application form from the applicant. Once an eIA is opened, you will be able to get credit for all the insurance policies in the same account.

What is NSDL National Insurance Repository (NIR)?

NSDL Database Management Limited (NDML), formed in 2004, is a wholly owned subsidiary of National Securities Depository Limited. (NSDL). NDML has received an approval from the Insurance Regulatory and Development Authority of India (IRDAI) for setting up Insurance Repository. It is named as NSDL National Insurance Repository (NIR).
NIR facilitates holding of all types of insurance policies in electronic form in a single e-Insurance Account (e-IA). Thus, it does away with all the lacunae of holding the insurance policies in physical form. It also facilitates conversion of the existing paper policies into electronic policies at the request of the policy holders.

NIR brings a whole host of facilities -

NIR is a platform based on the internet.
NIR allows you access based on login ID and password.
NIR permits single view for all insurance policies at one place.
NIR allows online payment of premium.
NIR has very user friendly navigation which makes it convenient for everybody.
NIR helps in sending alerts and messages on transactions and modifications.

For the eIA policyholder, NIR brings 3 distinct benefits.

1. Policy Servicing — NIR enables single request contact details update, premium alerts and payment for all insurers, increased number of service touch points, and ease in registering bank account details for premium payment and payouts.

2. Convenience — NIR facilitates one time Know Your Customer (KYC) update, storage of policy in e-format, all insurance policies are under one umbrella, and advantage of consolidated insurance statement on an annual basis.

3. Claims — NIR allows you to not just have a single view of all policies to an authorised person in case of death of the e-IA account holder, but also is helpful for one time claim intimation.

Important Points to be remember

Life insurance is a financial cover for protection from risks linked with human life.
Life insurance ensures that your immediate family has some form of financial support in the event of your death.
Buy life insurance if you have dependents and liabilities.
Term insurance is the simplest, best and cheapest life insurance available.
Insurance should not be mixed with investment.
Your life insurance cover should be able to support your family for the longest period of time.
Life insurance claims can be rejected due to false/incomplete information or non-payment of premium.
Open an ‘e-Insurance Account’ (e-IA) to hold policies in an electronic form with an insurance repository.
Utilize the benefits offered by NSDL National Insurance Repository (NIR).

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Originally published at https://www.yourcaguide.com on June 14, 2022.