Life Insurance Benefits Beyond Tax Saving in India: A Holistic Approach to Financial Planning

In India, many people rush to buy life insurance during tax season, primarily seeking the tax-saving benefits under Section 80C, as per the old tax regime. However, this is a misconception that limits the true value of life insurance. While the tax benefits are appealing, the real value of life insurance lies in its ability to provide financial protection, ensure financial continuity, support long-term financial planning, and offer peace of mind.

Life insurance has far more significant benefits beyond tax saving as they offer comprehensive coverage that goes beyond just tax deductions. Life insurance is not just a tax-saving tool, but a crucial element of a well-rounded financial plan that secures your family's future and helps you achieve your financial goals.

Myth: Insurance Is Only for Tax Saving

Many individuals buy life insurance primarily to leverage the tax deductions under Section 80C (up to ₹1.5 lakh, only under the old tax regime), and the tax exemption on the maturity benefits under Section 10(10D). While these benefits are attractive, they should be seen as incidental rather than the primary reason for purchasing insurance.

Focusing solely on tax savings often leads to under-coverage, as individuals fail to evaluate the actual protection needs of their families. The "March purchase mindset" — buying insurance only during the tax season — encourages poor decision-making, and it results in policies that do not align with long-term financial security or goals.

Reality: Life Insurance Is Primarily Financial Protection

Life insurance is fundamentally designed to provide financial protection for your loved ones in case of an unforeseen event. Its core benefit is income replacement — ensuring your family can maintain their lifestyle even in your absence. The payout can cover daily expenses, children's education, and future needs, preventing financial hardship.

The benefits of life insurance also include protection against loans and liabilities to ensure your debts do not burden your family. Beyond the financial aspect, it brings emotional stability and allows your family to cope with loss without the added financial strain.

Building Long-Term Wealth

Life insurance also offers excellent wealth-building potential. This highlights the importance of insurance as a tool for long-term financial growth. Here's how:

• ULIPs (Unit-Linked Insurance Plans): These plans offer market-linked growth and allow your investments to grow over the long term based on the performance of equity and debt markets.
• Wealth creation: ULIPs provide a hedge against inflation and help your savings grow at a pace that outstrips rising costs.
• Endowment and guaranteed plans: These policies provide predictable returns, offering both life cover and a savings component. This makes them ideal for those who seek security and assured growth.
• Dual benefit: With life insurance, you get protection against life's uncertainties and the opportunity for accumulating wealth.

Life Insurance for Goal-Based Planning

Life insurance plays a crucial role in achieving long-term financial goals by providing a structured savings plan. Here's how:

• Child education: A life insurance policy can help you build a dedicated fund for your child's education, ensuring their future is secure, no matter what happens.
• Retirement: With the right life insurance plan, you can accumulate funds to ensure a comfortable, financially independent retirement.
• Asset-building: Policies like ULIPs help build assets over time, supporting goals like purchasing a home or investing in other wealth-building avenues.

By disciplining your savings and maintaining continuity, life insurance ensures you stay on track with your financial goals, even in challenging times.

Tax Benefits as an Added Advantage

The tax benefits of life insurance have been traditionally known and realised. However, since the recent national budget changes, this understanding needs to change. In any case, insurance has great potential to enhance your financial planning:

Section 80C: Premiums paid qualify for deductions up to ₹1.5 lakh. This provides a great tax-saving opportunity. However, you have to choose the old tax regime to claim this benefit.

Section 80D: Health riders and critical illness plans offer additional tax deductions, which further reduce your taxable income. This too, is available under the old tax regime only.

Section 10(10D): The maturity benefits are tax-exempt provided you meet certain conditions. This provides a tax-free payout to beneficiaries. It is important to note that there are certain regulatory and IT law conditions to this exemption.

However, tax benefits should never drive your decision to purchase life insurance. The primary need of insurance should always revolve around financial protection and long-term planning, with tax savings as a bonus.

How to Choose the Right Plan?

Choosing the right plan requires careful consideration of your needs and goals to reap all the benefits of life insurance. Follow these steps:

• Determine the exact need of insurance: Identify what you want to achieve — be it protecting your family, saving for education, or building wealth.
• Calculate coverage: Aim for coverage that's 60 minus your current age times your annual income to ensure adequate protection for your family. Consider the HLV (Human Life Value) and the riders you might require.
• Match product type to goal: Select the appropriate plan based on your objectives. For pure protection, consider term insurance plans; for wealth creation, explore ULIPs or guaranteed plans.
• Review regularly: Re-evaluate your coverage periodically to ensure it aligns with your changing needs, life stages, and financial goals and you can reap the benefits of term insurance.

By following these steps, you can choose a plan that provides the right balance of protection and financial growth.

Conclusion

The benefits of life insurance go beyond just tax-saving; it's a long-term commitment that provides essential protection for your loved ones. By securing adequate coverage, you ensure financial continuity, protect your family's future, and create a foundation for wealth-building. It's a holistic solution that supports your long-term goals, whether it's securing your child's education, planning for retirement, or ensuring stability in times of uncertainty.

Explore Bandhan Life plans like iTerm Prime that offer comprehensive protection and growth, and also ensure your family's future is secure and your wealth accumulates — all while going beyond the tax season to provide lasting financial stability.

FAQs

1. Is life insurance worth buying if I already invest in other products?

Yes, life insurance is essential for financial protection, even if you have other investments. It provides a safety net for your family in case of unforeseen events, which other investments may not cover.

2. Which type of life insurance provides protection + returns?

ULIPs (Unit-Linked Insurance Plans) and endowment plans offer a dual benefit of life cover and wealth accumulation, which makes them ideal for those seeking both protection and returns.

3. When is the best time to buy life insurance?

The earlier, the better. Buying life insurance when you're young and healthy allows you to secure lower premiums and long-term financial protection. Ideally, get covered before major life milestones like marriage or parenthood.