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Importance of life insurance in a double-income family and how to find out the right coverage amount

Sunil Dhawan
life insurance, Coverage amount, double-income, working spouse, New Tax Regime, IDBI Federal Life Insurance

With the introduction of the new tax regime from the financial year 2020-21, taxpayers will have the option to pay tax as per the new simplified tax structure or continue with the old tax regime. For those opting for the NTR, among the various income tax deductions that will have to be forgone, the premium paid on life insurance policies will also not be there for tax benefit. However, the tax benefit is only incidental to a life insurance policy and policies need to be bought purely for saving and protection needs. In today’s world, in several households, both the spouses work and thus share the dreams, aspirations and goals equally to a large extent.

In an email interview with FE Online, Vighnesh Shahane, MD & CEO, IDBI Federal Life Insurance, talks about the insurance needs for working couples and the implication of the new tax regime on life insurance policies.

Is it true that for someone opting for New Tax Regime from next year, the tax benefit under section 80C for premium paid on existing policies or new policies will not be available? Will section 10(10d) tax benefit still be there?

By opting for the new tax regime as announced in this year's Budget, the taxpayers would have to forego a deduction up to Rs.1.50 lakhs under Section 80C of the Income Tax Act, 1961 in respect of the premium paid for purchase or renewal of life insurance products. So the tax benefit under Section 80C would not be available for premium paid for existing policies if the taxpayer has opted for the new tax regime.

However, the tax exemption under Section 10(10D) would be available for all policies meeting conditions stipulated therein. Tax exemption under Section 10(10D) is not specifically excluded if the taxpayer has opted for the new tax regime.

What is the role of life insurance in a double-income family?

Even in a double-income family, the role of life insurance is crucial. The earnings of both spouses contribute towards meeting the family's financial needs such as groceries, household utility bills, children's school fees, EMIs on outstanding loans and other expenses. In case of the untimely death of either of the spouses, the loss of one income could adversely affect the family's lifestyle in terms of quality of schools, family vacations and repayment of loans.

By both partners investing in life insurance, there is a financial security net for the family in case of any unfortunate circumstance. The payout from the life insurance plan would not only allow the family to maintain its lifestyle in the present but also achieve its milestones over the long-term.

In a family of working spouses, how should the life coverage amount be decided?

To understand the amount of life insurance required, it is important to calculate the individual Human Life Value (HLV) of both the spouses. This is the amount that each individual sets aside for his family's consumption after deducting the cost of his own needs and tax, from his gross salary.

By calculating his economic value to the family and the approximate number of remaining years of service, an individual will be able to decide on the appropriate life cover for himself. It is also necessary to review one's life insurance coverage periodically. As a person's income grows, his life cover would also grow proportionately and he may need to purchase additional coverage.

With rising life expectancy, how important does life insurance become?

As life expectancy increases, Indians will need substantial retirement savings in order to lead comfortable retired lives. Investing in life insurance will help an individual to combat the impact of increasing annual inflation on regular retirement income, as well as provide a sufficient amount of savings for any health emergencies that could dent retirement savings.

There are life insurance plans available that not only provide financial protection to families on the untimely demise of the insured person but also allow investments for future needs like retirement. Thus, on surviving the term of the plan, an individual has adequate savings for his or her retirement.

Additionally, life insurance companies offer various retirement income options called annuities which could provide regular income for a fixed period, coverage of spouse after death, the return of the principal amount, and so on.