Financial planning with life insurance

Financial planning with life insurance

Written by Kenneth Sawyer, In finance, Published On
June 11, 2024

Financial planning is essential to managing your finances, guaranteeing stability, and securing a profitable future. Life insurance is an integral part of this strategy since it is both a safety net and a versatile financial instrument. In India, where family and future security are paramount, including life insurance in financial planning is prudent and crucial. Consider the following scenario: a family’s single breadwinner purchases a life insurance policy, which guarantees their dependents’ financial future in the event of an unanticipated occurrence and supports the achievement of long-term financial goals such as children’s schooling or retirement preparation. Here are some reasons why incorporating life insurance into your financial planning is crucial –

Financial planning with life insurance

Financial planning with life insurance

  • Risk coverage

Life insurance helps your beneficiaries by paying out the policy amount to your dependents in the event of your death.

  • Wealth creation

Some life insurance policies, like those that include one-time investment plans, enable long-term wealth creation to meet financial objectives.

  • Tax benefits

Life insurance premiums are tax-exempt under Section 80C of the Income Tax Act, offering a dual security and tax savings benefit.

  • Loan options

Most life insurance policies allow the policyholder to borrow money against the policy, which may be helpful in an emergency without disturbing other investments.

  • Retirement planning

Some life insurance products are designed to assist you in saving for your retirement so that you can be financially stable once you have retired.

  • Estate planning

Estate planning is another crucial area that may benefit from life insurance as it outlines a transparent and efficient means of passing on your wealth to your loved ones while minimising taxes.

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How to do proper financial planning with life insurance?

  • Assess your financial goals

Begin by identifying what specific financial goals you want to set. It could be short-term, such as setting up a holiday for the family, or long-term, like buying a house, educating your children, or preparing for your retirement. Each goal has its own financial requirements and time frame. For example, retirement savings would require a long-term approach to put together a large sum of money over the years, while vacation savings would require a short-term strategy. Understanding these objectives assists in identifying the right life insurance product to purchase.

  • Calculate adequate coverage

The coverage amount should be enough to maintain your dependents’ standard of living and meet all their expenses in case you are no longer around. Factors in current liabilities include loans, day-to-day expenses, future aspirations (education, marriage), and inflation. A typical guideline is to have life insurance, which is ten times your annual earnings. However, it is recommended that you consider this regarding your financial position and objectives.

  • Understand different policies

Life insurance policies come in various forms, each serving different purposes –

  • Term insurance offers protection for a given period and provides a payout if the insured dies while still within the policy’s term. It is an excellent choice for those who want to secure maximum protection with minimal outlay.
  • Whole life insurance provides benefits for the insured’s entire lifetime, and payouts are made to the beneficiaries when the insured dies. These policies can be costly but accumulate cash value throughout the policyholder’s lifetime.
  • Endowment plans: They are savings-based life insurance policies under which the sum assured is paid either on the policyholder’s death within the policy period, or if the policyholder does not die within the policy period, the sum assured is paid at the end of the term. They are ideal for use where financial needs such as children’s education or marriage are concerned.
  • Read the fine print

Knowing all the policy details is essential to prevent being surprised when making a claim. Learn what is included and what is not (exclusions), when the policy can be claimed, and what other incentives are offered. For instance, some policies may exclude deaths that are associated with some forms of diseases or undertakings.

  • Opt for riders

Riders are additional benefits that can be attached to a standard life insurance policy to enhance coverage –

  • Critical illness rider: This rider offers a cash benefit if the policyholder is diagnosed with any of the listed critical illnesses.
  • Accidental death benefit rider: Provides extra protection in the event of an unintentional demise. These riders assist in tailoring your insurance policy to fit your unique needs and potential issues.
  • Review your insurance needs periodically.

Financial conditions and requirements change throughout life. Life changes such as marriage, having a child, or purchasing a home can dramatically alter your financial obligations and insurance coverage requirements. It is also essential to review your policy occasionally to ensure that your coverage meets your needs.

  • Invest early

The cost of insurance premiums is usually lower when one is young and healthy, as the probability of the insured dying within the agreed period is lower. Investing in life insurance at an early age also gives the investment time to appreciate, hence more benefits.

  • Leverage the maturity benefits.

If your life insurance policy contains maturity benefits (as some endowment plans do), it might be a valuable financial resource. Plan how to reinvest this money to continue expanding your wealth, whether in retirement accounts, real estate, or other investments.

  • Maintain a healthy lifestyle.

Insurance companies also tend to offer lower prices to those in good health, who are non-smokers and exercise regularly, as they are less likely to fall ill. Pursuing an active lifestyle, maintaining a healthy diet, and avoiding behaviours that may lead to illness or injury keep your insurance premiums low and your health good.

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Ending note

Life insurance is more than risk mitigation; it is an essential component of a complete financial strategy that provides peace of mind and economic stability. By carefully choosing and administering a life insurance policy, you may protect your loved ones and pave the way to reaching your financial goals. Remember, a well-thought-out life insurance policy is critical to a solid financial future. Take responsibility for now and make good plans for the future.

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