We all understand the essence of life insurance. It provides financial assistance to beneficiaries in the event of the death of the insured. But what we may not be aware of is its role as financial aid for life-disrupting disability and preventing us from working.
Another misconception is that many equate life insurance policy with Life Insurance Corporation of India (LIC) which is wrong. “Most people think life insurance policy is LIC. LIC is a business and life insurance policy can be provided by more than 20 insurance companies in India,” says Naval Goel, CEO and founder of PolicyX.com.
According to financial planners, good life insurance helps the family in the event of the death of the insured as well as in the event of loss of income due to illness or accident.
Here are three common myths about life insurance.
Employer-sponsored life insurance is sufficient: This is because the employer-sponsored life insurance policy is valid only until the time of employment with the employer. So if you decide to quit your job, retire or be laid off, your coverage will end. The benefit provided by the employer does not allow you to have control of your policy. Your employer usually limits the amount you can have and it cannot be customized to your needs. If the employer, who is a policyholder in this case, decides to cancel or reduce the benefit, you could find yourself without coverage or without adequate coverage.
Says Sajja Praveen Chowdary, business manager, term life insurance, Policybazaar.com: “Another consideration is coverage. Although employer-provided group term insurance may be inexpensive or free, it may not be right for you. Often, life insurance coverage provided by employers is limited to one to two times your annual salary. This coverage would be sufficient if you are single and have no dependents. However, this amount would not be enough for a family to meet their basic needs in case they find themselves without any income.
The right thing to do is to purchase an individual term plan for you and your family to support your long term life goals.
Only breadwinners need life insurance: While it’s true that life insurance is essential for the person who provides most of the household income, there is value and an added safety net in having insurance coverage for your spouse as well.
“This is an insurable risk, and housewives should purchase life insurance with the breadwinner. Having life insurance for non-breadwinners can help the family adjust to losses in the event of misfortune. There are now stand-alone term insurance plans available for homemakers that are not tied as top-up coverage to the spouse’s term insurance coverage,” says Chowdary.
Life insurance is primarily a tax saving instrument: Many people view their life insurance policy as a tax-saving tool. You are entitled to a tax deduction under Section 80C of the Income Tax Act 1961 for the amount paid as a premium for your life insurance.
Many policies also come in the form of return of premium, endowment, or unit-linked insurance plans that pay a sum insured or continue to maturity, as the case may be, at maturity if the insureds survive the term of the policy. Thus, they also serve as a corpus for the future financial goals of the insured.