Why life insurance matters for your family's financial security
A guide to why life insurance matters for family financial security, the types of policies available and the tax benefits under the new Income Tax Act, 2025.
No one can predict what life will bring, but everyone wants to be prepared for hard times and keep their family safe. In joint family systems, people work hard round the clock to give children and elders a good life. But if something were to happen to the earning member, what would happen to the household's finances? This is where financial planning begins, and one thing considered essential in this planning is insurance.
In simple terms, insurance is a safety net that protects against major financial loss. A group of people facing similar risks pool money into a common fund. When something happens to one of them, they receive compensation from this fund. In short, it is a way of sharing risk. The policyholder pays a premium to the company every year, and in return the company promises that if something happens to the policyholder, the nominee will receive a fixed sum. Insurance cannot prevent accidents or misfortune in life, but it does help a family recover quickly after a loss. For instance, if a family of five has only one earning member, insurance supports that family through difficult times.
Many people wonder why insurance is necessary when the money could be invested elsewhere instead. But no one knows when death will come. In such situations, the family not only has to bear the grief of losing a loved one but may also face financial hardship. This has made life insurance even more important today, as joint families are breaking down and people are moving towards nuclear families. With a home loan or any long-term loan, insurance means the family does not have to sell property to repay it. It can also cover expenses that the earning member used to pay for while alive, such as rations and electricity or gas bills. A good policy can also help with children's education and marriage expenses, help pay off future liabilities, and, most importantly, offers peace of mind once taken.
Life insurance is not all the same; different types of policies are available depending on need. Term insurance is the most basic form, offering a higher sum assured for a lower premium. If the policyholder dies during the policy term, the nominee gets a large payout, but if they survive the term, nothing is paid out on maturity, which is why it is considered light on the pocket and suitable for young people. An endowment plan combines insurance with savings, where part of the premium goes towards the cover and the rest into a savings component, with the sum assured paid out on maturity or on death during the term. A Unit Linked Insurance Plan, or ULIP, combines insurance with market investment, mixing wealth creation with cover.
Many people also buy policies before the end of the financial year to save on tax. Under the new Income Tax Act, 2025, life insurance offers certain tax benefits. For instance, the amount paid to the nominee on the policyholder's death is exempt from tax under Schedule II(2) of the new Income Tax Act, 2025. The amount received on maturity or the surrender value may also be exempt under certain conditions, depending on the ratio of the annual premium to the sum assured. Since tax rules change every year, it is better to check the latest rules with a chartered accountant before buying a policy.
All terms and conditions should be read carefully before taking a policy, as eligibility, premium and waiting period vary from company to company. While filling out the proposal form, the company asks about age, health, habits and occupation, so it is important to answer truthfully. Giving false information or hiding health details can lead to a claim being rejected, defeating the entire purpose of taking insurance.
Choosing the right plan is just as important. Do not take a policy simply because a friend, relative or agent suggested it. Choose a policy based on your age, existing liabilities, monthly expenses and the number of people financially dependent on you. Check the company's claim settlement ratio and customer reviews carefully, and do not hesitate to ask questions. Insurance is a long-term responsibility, so choosing the right policy is the sensible thing to do.
