Seriously, there are some very compelling reasons why you should buy insurance when you are young & you think you don’t need it! If you think 20s is too early to consider financial planning and insurance, then you couldn’t be more wrong. As you will find out in this story, buying insurance early can actually save you lakhs over a lifetime! Think of all the comforts that you can buy for yourself, all the parties and holidays, only if you decide to take that one timely step.
Many would wonder, does one need be insured when so young, and that too, single? Is that intelligent use of one’s savings? But, by insuring yourself early, you will follow the basic rules of good financial planning – think for the long term. But more importantly, look at this opportunity of getting insured early as a flash sale that you cannot miss!
If you are young and earning, it is advisable that you should get insured, even if you don’t have dependents to think of. There are are many good reasons to purchase life insurance early in your working career.
Among the many benefits, your premium payments will be low even when your responsibilities keep growing, requiring lesser payout on this count; you can start creating a corpus for your middle age when the policies mature; you can avail tax benefits and you can also provide added protection to your aging parents who can be the nominee, should something happen to you. As you go along in life and have your own family with children, the nomination can be altered to provide financial protection to them.
We take up each of the benefits in detail to why it is advisable to start purchasing insurance early:
LOWER PREMIUM RATES
Early purchase of life insurance ensures that your premium payout annually remains low throughout the policy term. Every year of delay pushes up the rate and since life insurance is a long-term contract, the rate remains high for the entire tenure.“Life insurance plans should be bought as early as possible in life as the primary purpose of a life cover is to provide financial protection to your family in the event of death. One should also buy a life cover early because the premium goes up as you grow old. This is primarily because on an average, the chances of death are lower with a younger person when compared to someone on the higher side of the age,” says Yashish Dahiya, co-founder and CEO, Policybazaar.com.
For instance, if an individual aged 25 buys a term insurance plan of Rs 1 crore, he can get a cover for 25 – 30 years , till the age of 45 – 50years. His annual premiums would range between Rs 7,000 to Rs 8,000 only. On the other hand, if a 30 year old buys term insurance for himself, he can get a cover for only 25-30 year policy for an annual premium of anywhere between Rs 9,500 to nearly Rs 12,000.
Naval Goel, CEO & Founder, PolicyX.com also says one should consider purchasing life insurance at an early stage in life. “Ideally you should buy life insurance as soon as you start your career, say by around 24-25 years, as that is the best time when you don’t have too many liabilities and a stable source of income flowing in. Purchasing life insurance will protect your near ones against any sudden mishap in your life,” says Goel.
PRICE YOU PAY FOR A DELAY
The following table will give you a snapshot of how every 5 years of delay pushes up your insurance premium by a substantial amount.
For the illustration we have taken the example of a term plan with a sum assured of Rs 1 crore. The policy term in this case is till the age of 60. We start with a person who is 20 years and the indicative premium he/she would pay if the start of the plan is delayed by a block of five years.
|Age||Annual Premium (In Rs – approx)|
As you would see, every 5 years delay would push up the premium by 40-50 per cent. Thus, the premium payment for the remaining years till 60 nearly doubles if one purchases at 30 instead of 20 years of age. Hence, it makes sense to start building your insurance portfolio early.
HOW MUCH SHOULD YOU BE INSURED?
A common question troubling those who want to buy a cover is how much insurance is adequate? Is there a standard way to calculate? The exact amount of cover required cannot be pinpointed and would vary from individual to individual. However, there are various factors that should be taken into account while deciding on an appropriate cover for youself. Your income, age and liabilities are the main criteria that should weigh when making up your mind on the sum assured.
While the needs of an individual are always different at different stages of life, one common criterion to factor in while buying a life insurance cover is inflation. It is extremely crucial to buy an adequate cover as your life cover gives your family financial protection in the event of your death,” says Yashish Dahiya.
He elaborates: If a person who is the breadwinner dies at 50, the family would need financial support in his/her absence. In such a case, life insurance cover could act as your income replacement. So, if a 30-year old buys a Rs 20 lakh cover by paying Rs 50,000 premium annually, do you think it will be sufficient for the family 20 years later? The cost of living 20 years down the line would be much higher than that what it is today and hence, it is important to factor in inflation while buying a life insurance plan.
An advantage of investing in insurance plans is the tax-saving element under Section 80C of the Income Tax Act. So, while you are protected and invested for the future, you make a decent saving on tax payment which can be used for other purposes including investment. Hence, life insurance can be a good tool for your overall tax planning purposes.
Under 80C/80CCC of the I-T Act, you can claim deduction for premium payment of up to Rs 1,50,000 annually. All individuals who invest in insurance and Hindu Undivided Families (HUF) are eligible to claim the deduction.
WHAT TO BUY
You have the option of purchasing a term plan, an endowment plan or a unit-linked insurance plan (ULIP). Here is a snapshot for you to understand what each of is:
Term Insurance: Term insurance is the most affordable form of life insurance plan. It provides you high risk cover with lesser premium. In case of death, the insurance company pays the sum assured to the nominee or beneficiary mentioned in the policy. However, the thing to keep in mind is that a term insurance plan does not give you any returns or give the money back. “Term insurance plans can be taken for a period ranging from 5 to 40 years and are best suited for individuals who want overall safety rather than returns,” says Goel of PolicyX.
Unit Linked Insurance Plan: ULIPs are purchased in units. The price per unit is announced by an insurance company called the Net Asset Value (NAV), declared every day. ULIPs provide the dual benefit of life insurance and investment. The performance of this plan is linked with the market. You choose the allocation of investments in the stock market. The sum assured is paid out in the event of death. These types of policies generate better returns as compared to other types of plans in the long term and are best suited for individuals who are looking for returns with moderate risk.
Endowment Plan: Unlike Term Plan, endowment plan pays out a sum-assured along with profits in both the cases- death and survival. This plan charges higher premium which is invested in equity and debt. These policies generate returns in the range of 4-7 per cent. They are suitable for people who do not want to take much risk and look for secure investments in government securities and debt instruments.
Here’s how each of these insurance categories work:
For this we are assuming a person who is 30 years of age and is a non-smoker.
Term Plan: If you pay a premium of Rs 10,000 per annum for 30 years, you can get a sum assured of Rs 1 crore to Rs 1.25 crore depending on the company and plan chosen.
Endowment Plan: A premium of Rs 10,000 per annum will create a corpus of approx Rs 3 lakh to Rs 5 lakh of sum assured with a potential income of Rs 5-6 lakh.
ULIP: Will provide a sum assured equal to 7 to 10 times you annual sum assured and returns will depend on the linked product – equity or debt – usually 4-8 percent per annum after charges.
Unlike endowment plans, ULIP is market linked and the costs are low. The policyholder can choose equity or debt based on his or her risk profile. The risk of investment return in ULIP is borne by the policyholder. In an endowment plan, the risk of investment is mostly borne by the insurance company as it offers a fixed return guarantee along with potential upside. However, the charges are usually higher in endowment plans.
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