What Is Life Insurance and Why Is It Important?

Faraz is a 25-year-old shop assistant earning ₹20,000 monthly in Pune. His parents, both in their 50s, and his 16-year-old sister rely on his income. Their tiny apartment costs ₹8,000 in rent, while groceries take ₹5,000. His sister's school fees are ₹3,000, electricity and water bills come to ₹2,000, and he tries saving ₹2,000. 

But nights are uneasy - what if his scooter accident last month had been worse? Who would pay the ₹15,000 hospital bill next time? How would his family survive without his salary? The tea stall owner, Mr. Joshi, mentioned something about "insurance for common people" last week. 

Faraz wonders if this could be the safety net his family needs. We will explore how ordinary Indians like Faraz can protect their families.

What Is Life Insurance?

Life insurance is an agreement between a person and an insurance company. The person pays money every month or year, called a premium. If the person dies, the company gives money to the family. This helps the family pay for things like food, school, and rent. Life insurance is helpful when someone has a family that depends on them. It gives peace of mind and financial support.

Note: Premiums vary based on age, health, and insurer

Example:

Purnima is 28 years old and lives in Mumbai. She buys a term life insurance plan. She pays ₹10,000 every year. Her plan covers ₹1,00,00,000 for 30 years. If Purnima dies during this time, her family will receive ₹1,00,00,000. This helps her family live without money problems.

Importance of Life Insurance

1. Financial Security

Life insurance provides financial security to your family in case of your untimely death. It ensures that your loved ones can maintain their lifestyle and meet essential expenses even in your absence.

Read More – Term Insurance vs Whole Life Insurance: Key Differences

A simple example:

In this example, life insurance provides a ₹50,00,000 payout, ensuring the family's financial needs are met even after the policyholder's demise. Without it, the family faces financial hardships.

2. Debt Coverage

Life insurance helps cover debts if something happens to you. It ensures your family does not have to repay your loans.

Example:

Prince, a 28-year-old from Delhi, took a home loan of ₹40,00,000. He bought a life insurance policy with a sum assured of ₹50,00,000, paying an annual premium of ₹10,000. Sadly, Prince passed away in an accident. His family received ₹50,00,000 from the insurance. They used ₹40,00,000 to repay the home loan and had ₹10,00,000 left for other needs.

Overview of India's Household Debt Landscape (2024)

3. Income Replacement

Life insurance helps replace lost income if the policyholder dies. This ensures the family can continue their daily life without financial stress.

Example:

Srinath, a 35-year-old from Bengaluru, earned ₹8,00,000 per year. He bought a term life insurance policy with a sum assured of ₹80,00,000, paying an annual premium of ₹15,000. Sadly, Srinath passed away in an accident. His family received ₹80,00,000 from the insurance. This amount helped replace his income for 10 years, covering living expenses and his children's education.

Average Monthly Household Expenses in Urban India (2023–24)

Understanding typical household expenditures can provide context for the importance of income replacement. Here is a breakdown based on the Household Consumption Expenditure Survey (HCES) 2023–24:

Note: These figures are averages, and actual expenses can vary based on lifestyle, city, and family size.

4. Funeral Expenses

Life insurance helps cover funeral expenses, easing the financial burden on grieving families. It ensures that loved ones can conduct final rites with dignity, without worrying about costs.

Also Read – The Role of Health Insurance in Financial Planning

Example:

Rohit, a 32-year-old from Delhi, had a life insurance policy with a sum assured of ₹3,00,000, paying an annual premium of ₹5,000. Tragically, he passed away in an accident. His family received ₹3,00,000 from the insurance. They used ₹25,000 for funeral expenses, which is the average cost in India, and the remaining amount helped them during the difficult time.

Average Funeral Costs in India by Religion

Note: These costs are approximate and can vary based on location, specific customs, and individual preferences.

Conclusion

Life insurance is very important for your family’s safety. If something happens to you, it gives them money to pay for food, loans, school, and other needs. It helps replace lost income and covers funeral costs. Buying life insurance means your family won’t struggle financially when you are gone. It is a smart way to protect their future and give yourself peace of mind. Everyone with dependents should consider it.

FAQs

1. What is life insurance?

Life insurance is a plan where you pay premiums, and if you die, your family gets money for financial support.

2. Who needs life insurance?

Anyone with family members who depend on their income should have life insurance.

3. How much life insurance do I need?

It should cover debts, future expenses, and at least 10–12 times your yearly income.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?