NEED OF BUYING AN Assurance/Wellness
Why do you need to buy insurance and assurance policies. Remember, insurance is meant as a hedge against uncertainty while assurance is a guarantee of return of capital with some reasonable returns. In an assurance, the assured return comes on top of the risk cover. Conceptually, they are different, but normally policies are sold with features of insurance and assurance built into them. But what is the need for insurance and assurance for individual policyholders? Let us look at some key justifications.
Why it is important to buy insurance / assurance
For simplicity we will combine the advantages of assurance and insurance into a single unit and explain the subtle differences where applicable.
- Perhaps the most important aspect of any insurance / assurance plan is that it gives you a financial safety net. Perhaps, insurance and assurance can never fill the emotional void, but will help you fill the financial void. The death of a breadwinner is normally the biggest nightmare for any family; both emotionally and financially. Adequate insurance cover can ensure that the family does not have to run around for funds. The insurance money enables the family to manage its expenses and make alternate plans for the future. Insurance allows the luxury of buying time.
- Insurance and assurance support your long term goals. This is something that is often underestimated. Let us take a practical scenario. Say, you plan to accumulate Rs1 crore for retirement in 20 years and are already well on track at the end of 5 years. However, your spouse is diagnosed with cancer and all your savings are depleted towards the treatment. That is where an insurance policy or ideally a combination of insurance and assurance will tide over the financial emergency without impacting your financial plan.
- The third point follows as a logical corollary to the previous point. Insurance and assurance ensure that your retirement plan and your plans for your child’s higher education are not affected. In fact, there are child plans wherein premiums have to be paid only till the parent is alive and in an emergency, the insurance company ensures that the child education happens without any hassles. Here the insurance and assurance plans take care of your long term financial goals too.
- Insurance and assurance can also help to pay off family debts in the event of emergency. Assume that you have bought a home with a home loan. What happens in the event of the demise of the breadwinner? That is why it is advisable that you not only have a risk cover against life and assets but also your liabilities. Your pure risk cover should cover all the loans, so that in the event of an unfortunate event, that policy amount can be used to repay the loans. The property then belongs to the family without any encumbrance. The cost of insurance is quite low.
- Plain insurance is not a saving option, but an assurance policy can double up as a savings option too. For example, if you take a risk cover through ULIP (unit linked insurance plan), then it becomes like an assurance product. Your life cover still exists; however, the value of the investment also appreciates over time and translates into benefits in the form of higher ULIP NAV. You not only get life cover but also watch your investments grow gradually over time. Since ULIPs can be also be invested in equities, they become substantial wealth creators.
- The beauty of insurance and assurance is that they are flexible and hence customizable. For example, if you have a family history of diabetes or hypertension; you can customize your plan accordingly. Similarly, if your job puts you at risk of accidents, you can again customize your policy. Policies like ULIPs allow you to merge insurance and assurance with different risk levels based on expected returns.
- Finally, insurance and assurance can be effective tax saving tools. It is better not to buy insurance and assurance purely for tax cover, but that is an important aspect. Life insurance: be it pure risk cover or endowments, entitles you to deductions under Section 80C of the Income Tax Act up to an umbrella limit of Rs1.50 lakhs. Health Insurance entitles you to tax benefits under Section 80D up to Rs25,000; extendable to Rs50,000 for senior citizens. Similarly, assurance plans like ULIPs and Pension plans also qualify for Section 80C benefits with appropriate lock-in periods. On top of all this, the terminal receipts on death, maturity or surrender of insurance and assurance plans are fully tax-free in the hands of the recipient. That is a huge benefit.