Graduating from college can be a scary time. We’re suddenly thrust into a world of complete freedom; a freedom that we haven’t experienced before. It is a freedom that permeates into the social, professional and financial choices we make, which could be a daunting thought for most of us. While almost all of us have had some experience in making social and professional choices, this would be our first experience with complete financial independence. In this article, we talk about an important tool for ensuring financial stability – insurance.
Insurance has always been considered one of the safest financial investments to make. The requirement for insurance can be broadly summarized in 3 points:
A risk cover:
Financial independence comes with the responsibility of thinking a little long term and anticipating periods of time where there is an urgent requirement for a large amount of money. An example of this would be emergency medical treatment. Healthcare is not cheap and without proper protection, it could bankrupt an individual. There are plenty of government institutions (United India) and schemes (Rashtriya Swasthya Bima Yojana) that offer health insurance at competitive rates. The liberalization of the insurance market has also enabled a fair number of private companies to enter the market. Investing a small amount of one’s salary for insurance would go a long away in securing financial safety for a rainy day.
To understand how this benefit works, we need to take a closer look at India’s income tax slabs. People who earn between 5-10 LPA (Lakhs per annum) are required to pay 20% of their income as tax, while people who earn above 10 LPA are charged 30%. The first 2.5 lakh is untaxed, following which, the rates are calculated. In this situation, money that is used to pay insurance premiums go untaxed, and therefore gives an individual lesser tax to pay.
Example: Subramani is an NIT-T graduate who just got placed at a reputed company for 7.5 LPA.The first 2.5 lakhs is untaxed, requiring him to pay 1 lakh (20% of 5 lakh) as tax. If he has an insurance policy that requires him to pay 30,000 per year, this amount is subtracted from 1 lakh, making his yearly tax payment 70,000 rupees. Thus, Subbu has the benefit of making an investment for the future, as well as saving him money that would otherwise not yield him any benefit.
Investment and pension plans:
The aspirations of the middle-class in the previous generation revolved around securing a 9-5 sarkaari job, ensuring financial stability and finally retiring on a government pension and additional savings. Our generation faces a vastly different ecosystem that doesn’t guarantee immediate financial security, let alone the future. To alleviate this, insurance providers offer schemes that function as pension plans if there was no insurance claim in the period of premium payment. In simple terms, the money one pays the insurance company returns with profits provided there wasn’t an insurance claim in the middle.
Insurance is often construed to be boring and complicated. This article is our effort in demystifying something we should all know about, the most accessible tool to ensure financial stability
Written by Gautham Mahadevan.