Importance of Life Insurance in India

Table of Content

1. Why Do You Need Life Insurance?

2. Why Is Life Insurance Important?

3. Why Life Insurance Is the Most Important Part of Your Financial Planning

4. What Are the Points to Consider While Buying a Life Insurance Policy?

5. How to Choose the Right Life Insurance Policy

6. Summary

Why Do You Need Life Insurance?

Life insurance is more than just a policy. So, if you are wondering why life insurance is important, it is because it protects your loved ones from financial hardship when life takes an unexpected turn. 

As per the Economic Times, only 34% of Indians have a term insurance plan. This is quite surprising since in most Indian households, a single or primary breadwinner supports the family’s daily needs, education, and long-term aspirations. 

In such cases, life insurance becomes a necessity, not an option. It ensures that your family’s financial stability and standard of living are maintained even in your absence. Therefore, by providing an assured sum to your dependents, life insurance bridges the financial gap caused by income loss.

• Secure Your Family’s Financial Future

Life insurance serves as a financial cushion, safeguarding your family from economic distress during challenging times. In India, only 57% of individuals have witnessed an improvement in their living standards. This percentage can be threatening if the family's sole breadwinner suddenly dies. 

In the unfortunate event of the policyholder’s demise, the payout from the life insurance policy helps cover essential expenses. This can include children’s education, household costs, medical bills, and outstanding debts. 

For many Indian families where one person’s income supports multiple dependents, this safety net is crucial. It ensures that your loved ones can continue their lives without financial compromise, preserving their dreams and dignity. 

Whether it is paying for your child’s higher studies or maintaining your home’s stability, understanding the importance of life insurance guarantees continuity even in your absence.

• Accomplish Your Financial Goals

Modern life insurance plans are designed not just for protection but also for wealth creation. For instance, endowment and savings plans combine the benefits of life cover with systematic financial growth. 

You can plan for major life milestones, such as your child’s education, marriage, or home purchase, with the maturity proceeds from these policies. For example, if you invest in an endowment plan early in your career, the policy’s maturity amount can help fund your child’s higher education. 

Thus, knowing the importance of life insurance helps you stay prepared for both expected and unforeseen financial goals, building long-term stability.

• Brings Peace of Mind

According to The New Indian Express, India ranks 118 out of 147 countries in terms of happiness. Therefore, the financial benefits a life insurance policy provides can provide immense peace of mind. 

Knowing that your family will be financially secure even when you are not around reduces anxiety about the future. It allows you to live with confidence, knowing that your responsibilities are taken care of. 

Additionally, retirement-specific insurance plans help individuals build a steady income post-retirement, ensuring self-reliance and dignity in old age. This assurance of lifelong security makes life insurance one of the most responsible financial decisions an individual can make.

• Save Tax

Understanding the importance of life insurance can yield significant tax benefits, making it a smart addition to your financial portfolio. Premiums paid towards life insurance policies qualify for deductions under Section 80C of the Income Tax Act 1961¹, up to ₹1.5 lakh per financial year in accordance with provisions of Section 80CCE, which caps the aggregate deduction under Sections 80C, 80CCC, and 80CCD(1) of the Income Tax Act, 1961.

The maturity proceeds can be exempt under Section 10(10D) of the Income Tax Act, 1961¹, subject to applicable conditions. Death benefits are completely tax free for the nominees.

Additionally, health-related riders attached to life insurance plans can offer extra deductions under Section 80D up to a maximum of ₹25,000 per financial year for self, spouse or children and ₹25,000 towards dependant parents below age 60 years This limit for the parents increases upto ₹50,000 per financial year in case of senior citizens parents. 

These benefits make life insurance not only a protection plan but also an efficient tool for tax savings and long-term financial planning. 

Note: Tax benefits are subject to prevailing laws and may change from time to time.

Why Is Life Insurance Important?

The importance of life insurance is that it is not just a financial product. It is a long-term commitment to protecting your loved ones and your financial dreams. 

In a world full of uncertainties, it acts as a safety net that ensures your family’s well-being, even when you are no longer around. Beyond providing financial security, life insurance also supports your broader financial goals, such as wealth creation, retirement planning, and tax savings.

Therefore, if you are wondering about the importance of life insurance in India, here are the reasons to consider: 

1. Peaceful Life

Ultimately, the most significant value of life insurance lies in the peace of mind it brings. Knowing that your family will be financially secure in your absence provides emotional assurance that no other investment can offer. 

Whether it is protecting your loved ones, achieving your dreams, or ensuring a worry-free retirement, life insurance helps you live life confidently. Therefore, by understanding the importance of life insurance and choosing the right plan based on your life stage and financial priorities, you can secure not just your wealth.

2. Tax Benefits¹

Life insurance also offers tax-saving benefits, making it an efficient financial instrument. Premiums paid towards your policy are eligible for deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per financial year. 

Additionally, maturity proceeds can be exempt from tax under Section 10(10D)¹, subject to the plan's terms and conditions, while death benefits are completely tax free. Additionally, health-related riders attached to life insurance plans can offer extra deductions under Section 80D¹, up to a maximum of ₹25,000 per year for self, spouse and children. Also, ₹25,000 towards premiums contributed to parents below 60 years of age. This limit increases to ₹50,000 in the case the parents are senior citizens (above 60 yrs). These benefits enhance the value of your investment while supporting your long-term financial goals. 

Note: It is advisable to consult a tax advisor or review your policy documents for detailed tax implications. 

3. Corpus Creation

Though 74% of Indians are aware of term insurance plans, many are still reluctant to buy one for financial security. It is essential to understand that certain life insurance plans, such as Unit Linked Insurance Plans (ULIPs), Endowment Plans, and Guaranteed Return Plans, offer the dual advantage of protection and investment. Therefore, while the life cover ensures your family’s financial safety, the investment component helps you accumulate wealth over time. 

For instance, by investing regularly in a ULIP, you can build a corpus that can later be used for your child’s education, marriage expenses, or a home down payment. These plans encourage disciplined saving habits and long-term financial planning, ensuring that your dreams stay on track even when life takes unexpected turns.

4. Clearing Debts

Nearly 47.8% of Indians have personal loans, which they use to cover daily expenses and maintain their lifestyle. Furthermore, for most Indian families, financial obligations such as personal loans can create immense pressure, especially when there is only one earning member. 

In the unfortunate event of the policyholder’s death, the life insurance payout becomes a crucial source of relief. The importance of life insurance is that it allows dependents to pay off outstanding loans, cover children’s school fees, and manage everyday expenses without falling into a financial crisis. 

Imagine a scenario where the sole breadwinner passes away unexpectedly, without life insurance, the family might struggle to maintain their home or lifestyle. With life insurance, however, they can remain financially stable and free from debt.

5. Fulfilling Long-Term Goals

Understanding the importance of life insurance encourages disciplined savings through regular premium payments, which, over time, help build a significant corpus. The power of compounding ensures that even small, consistent investments grow into substantial wealth. 

This accumulated fund can be used to meet important life goals, such as buying a house, supporting a child’s higher education, or starting a new business. Therefore, with the flexibility of modern life insurance products, you can align your policy tenure and sum assured with your long-term aspirations, turning dreams into achievable milestones.

6. Achieve Retirement Goals

A survey conducted by Business Standards shows that 23% of Indians still work after retirement to support their family expenses. Hence, planning for retirement is an essential part of financial well-being, and life insurance plays a crucial role here, too. In this case, pension plans and retirement-focused ULIPs help you accumulate funds during your working years and convert them into a steady income stream after retirement. 

The importance of life insurance is that many plans allow you to purchase an annuity, which provides a guaranteed income for life, reducing your reliance on children or others in your later years. This ensures financial independence, allowing you to enjoy your golden years with comfort and dignity.

Why Life Insurance Is the Most Important Part of Your Financial Planning

Life insurance is the backbone of a sound financial plan, ensuring that your long-term goals remain intact even in the face of life’s uncertainties. It not only protects your loved ones but also serves as an investment tool, a tax-saving option, and a means of financial independence during retirement. 

The importance of life insurance plans is that they integrate seamlessly with your financial objectives, covering risks, creating wealth, and offering stability when you need it most. In short, life insurance is not an optional expense but a crucial step toward building a secure and balanced financial future.

Here are the reasons why life insurance is a crucial part of your financial planning:

• Safeguards Your Family

Around 69% of Indian households suffer from financial insecurity, making it crucial for them to understand the importance of life insurance. The primary purpose of life insurance is to provide financial protection to your dependents in the event of your untimely demise. 

For families with a single or primary earner, it acts as a lifeline, replacing lost income and helping loved ones maintain their standard of living. The payout from a life insurance policy can help cover essential costs, such as daily living expenses, children’s education, and loan repayments. 

Imagine a scenario where the primary breadwinner suddenly passes away, without insurance, the family could struggle to pay EMIs or tuition fees. However, with life insurance, they receive financial support to continue their lives with dignity and security.

• Protects Assets

Understanding the importance of life insurance in India helps you protect your assets. In the absence of adequate financial resources, families may be forced to sell valuable assets, such as property, jewellery, or business holdings, to cover expenses or repay debts. 

The death benefit from a term or business insurance plan provides liquidity, helping your family meet immediate financial obligations without having to distress sell. Moreover, business owners can ensure the continuity of their enterprises with key person insurance or partnership protection plans, thereby safeguarding the family’s long-term financial interests.

• Builds Wealth

There is a significantly increase in purchase of term insurance a plan by 50% among self-employed Indians. They are buying modern life insurance products like ULIPs (Unit Linked Insurance Plans), Endowment Plans, and Guaranteed Income Plans to combine financial protection with wealth creation. 

Regular premium payments act as disciplined investments that grow over time through bonuses or market-linked returns. For instance, a ULIP allows you to invest in equity or debt funds while enjoying the security of life cover. 

Over the years, when you completely understand the importance of life insurance, these plans can help you build a substantial corpus for milestones such as buying a home, funding your child’s higher education, or retirement planning. Thus, life insurance is not just about risk coverage; it is also a long-term wealth-building tool that helps you achieve your financial aspirations.

• Protects Against Critical Illnesses

Life insurance goes beyond death benefits through riders^**, optional add-ons^** that enhance your coverage. Critical illness riders provide a lump-sum payout upon diagnosis of critical diseases such as cancer, heart attack, or kidney failure. 

Similarly, accidental death and disability riders offer additional financial support during unforeseen events. These add-ons help manage medical costs, hospitalisation, and loss of income, ensuring that your savings remain intact. 

By choosing the right combination of riders, policyholders can customise their insurance to meet both life and health protection needs, strengthening their overall financial safety net.

• Saves Taxes

Understanding the importance of life insurance will ensure tax savings. Premiums paid for life insurance policies qualify for deductions under Section 80C of the Income Tax Act, 1961¹, up to ₹1.5 lakh annually. At the same time, the proceeds received upon maturity can be tax-exempt under Section 10(10D) of the Income Tax Act 1961¹, subject to specific conditions, whereas the death benefits are exempt completely. These benefits reduce your taxable income while ensuring that your investment remains safe and rewarding. 

What Are the Points to Consider While Buying a Life Insurance Policy?

Buying a life insurance policy is one of the most significant financial decisions you will make. It is not just about choosing an insurance plan; it is about ensuring long-term financial security for yourself and your loved ones. 

To make a wise and informed decision, you must consider several factors such as your life stage, coverage amount, premium affordability, and the insurer’s reliability. Therefore, understanding these aspects helps you select a policy that aligns with your current needs and future goals while providing peace of mind.

Here are the points to consider while buying a life insurance policy:

• Assess Your Current Life Stage

Your life stage plays a crucial role in determining the type and amount of life insurance coverage you require. For instance, a young professional in their 20s might focus on building a financial foundation and opt for a basic term plan with affordable premiums. In contrast, someone starting a family should consider a higher cover to ensure financial protection for their spouse and children. 

Meanwhile, a pre-retirement individual may prioritise savings-oriented or retirement plans to secure a steady income post-retirement and create a legacy for their dependents. 

• Calculate the Amount of Life Coverage You Need

Determining the correct sum assured is essential to ensure your family’s financial stability in your absence. A common rule of thumb is to choose a life cover amount at least 10 times your annual income. 

However, it is essential to customise this estimate to your personal circumstances, taking into account existing liabilities, dependent family members, and future financial goals such as children’s higher education or marriage. Therefore, using an online life cover calculator can help you estimate an accurate coverage amount based on your income, age, and expenses. 

• Verify All Fees and Charges

Before finalising a policy, carefully review all associated fees and charges. These may include policy administration charges, rider premiums, fund management fees (for ULIPs), and surrender charges. 

Understanding these costs helps you assess the cost-to-benefit ratio and avoid surprises later. Always read the policy brochure or terms and conditions thoroughly to know where your money goes. 

Tip: Additionally, check for tax benefits available under Sections 80C¹ which allows a deduction of up to ₹1.5 lakh per financial year on life insurance premiums paid for self, spouse, or children and ensure that the sum assured and premium ratio comply with the conditions prescribed under 10(10D)¹ so that maturity proceeds remain fully exempt from tax. For policies issued after 1st April 2023, the exemption under Section 10(10D) does not apply if the annual premium exceeds ₹5 lakh (other than in case of death benefits), to maximise the value of your policy. Transparency about costs ensures that you invest wisely and stay committed to your long-term financial plan.

• Understand the Claim Settlement Ratio

The Claim Settlement Ratio (CSR) is one of the most reliable indicators of an insurer’s credibility. It represents the percentage of claims settled by the insurer against the total claims received in a financial year. 

A high and consistent CSR, preferably above 95% reflects the insurer’s reliability and efficiency in settling claims, which is crucial during emotionally challenging times. This ensures that your family can access financial support without unnecessary delays or complications.

• Premium Amount

While affordability is a key factor, it should never come at the cost of inadequate protection. Having a complete understanding of the importance of life insurance lets you compare premiums for similar coverage across different insurers. This helps you find the right balance between cost and benefits. 

Furthermore, opt for a policy that offers long-term affordability, meaning you can comfortably pay premiums throughout the policy tenure without affecting your other financial commitments.

How to Choose the Right Life Insurance Policy

Selecting the right life insurance policy is one of the most crucial steps in achieving long-term financial security. The ideal plan should align with your income, life goals, family responsibilities, and risk appetite. Making an informed choice ensures that your loved ones remain financially protected, even in your absence. 

Below are key aspects to consider before finalising your life insurance plan:

1. Adequate Coverage

The first step in choosing a life insurance policy is determining how much coverage you truly need. Your coverage should be sufficient to cover outstanding loans, daily expenses, and future goals. 

A simple rule is to choose coverage that is at least 10–15 times your annual income. However, this may vary depending on your dependents and liabilities. The right amount ensures your family’s financial continuity in emergencies. 

2. Premium Paying Ability

Affordability plays a vital role in sustaining your life insurance policy. Choose a plan with premiums that fit comfortably within your current budget so you can maintain it over the long term without financial strain. Remember, life insurance is a long-term commitment; missing payments can disrupt coverage. As your income grows, you can increase coverage or add riders for enhanced protection. 

3. Policy Tenure

Your policy tenure should align with your long-term obligations. For instance, a young parent may need coverage that lasts until their children become financially independent. Someone nearing retirement might opt for a shorter duration focused on wealth preservation or legacy planning. 

Although longer policy tenures typically involve higher premiums, they provide extended security and peace of mind. Therefore, choosing the right tenure ensures that your family’s financial needs are protected for as long as necessary.

4. Personal Factors

Understanding the importance of life insurance is essential to providing your family with financial protection in your absence. Factors such as age, health, lifestyle, and occupation significantly influence both the cost and type of policy you should choose. For example, younger individuals can benefit from lower premiums, while those with pre-existing conditions may consider plans with critical illness or disability riders. 

Additional riders, such as accidental death or waiver-of-premium benefits, can enhance coverage based on individual risk levels. Carefully assessing these elements ensures your policy remains tailored to your unique needs.

Summary

Understanding the importance of a life insurance policy involves balancing adequate coverage, affordable premiums, and a suitable tenure, while considering personal factors such as age, health, and lifestyle. By aligning your plan with income, long-term goals, and family needs, you can build a strong financial safety net and ensure lasting peace of mind for your loved ones.