The onset of the COVID-19 pandemic reinforced the importance of having a sound financial plan to secure the family from the risks to life and livelihood. It has also made every individual realize that a robust financial plan needs a strong foundation of a term insurance policy.
Key takeaways
- One of the primary reasons to include term insurance in your financial plan is to provide financial security for your family and dependents.
- Term insurance acts as a valuable income replacement tool.
- Term insurance can be used to settle outstanding debts.
- Term insurance is often more affordable than other types of life insurance, such as whole life or universal life insurance.
A term insurance plan is the most basic form of life insurance. It is a pure protection that provides a death benefit to the policyholder’s family in case of their untimely demise during the policy term. However, you must know that a term plan has no income or savings component. This means if the policyholder survives the policy term, there is no survival benefit upon maturity.
Importance of Term Insurance
Term insurance is a straightforward, cost-effective, and vital tool that provides a safety net for your family in case of your untimely demise. Let us now delve into the importance of term insurance.
Affordable Premium
A term insurance policy is a pure protection policy with no investment element. You can purchase a policy with a high sum assured that offers more protection to your dependents and eliminates future risk to the family at an affordable price.
The earlier you purchase the policy, the more affordable the premium will be. On average, you may spend only 1% of your annual income to purchase term insurance and get protection against the uncertainties of life for up to 10 years or more.
Financial Security for the Family
If you are the only earning member of your family, your sudden demise may leave your family vulnerable financially. The dependent members may struggle to make ends meet, especially if they have additional financial liabilities like a home loan, personal loan, or credit card bills.
The death benefit your family may receive from the insurance company can help them take care of the liabilities and maintain their current lifestyle. Thus, having a robust term insurance policy as part of your financial plan gives you the reassurance that your family’s financial future is secured.
Tax Benefits
Tax saving is a critical aspect of annual financial planning. As a tax-paying individual, you may look for different ways to save your yearly tax liability. Apart from giving your family financial protection against the uncertainties of life and acting as an income replacement, a term cover can help you get tax benefits every year.
The premium you pay for the policy is eligible for tax deduction under Section 80C of the Indian Income Tax Act. As a result, you can get a tax benefit of up to ₹1.5 lakhs in a financial year. Additionally, the payout your family may receive from the insurance company is tax-free under Section 10(10D) of the IT Act.
Also, suppose you have purchased any health protection rider with your term insurance, like a critical illness rider. In that case, you can get an additional tax benefit of up to ₹25,000 on the premium paid under Section 80D of the IT Act.
What Does a Financial Plan Include?
Along with clearly stating your goals, the financial plan should include an investment strategy that will enable you to make consistent progress toward achieving those goals.
For you and your family, a thorough financial plan will include the following:
- All urgent financial requirements.
- Your long-term financial planning goals.
- Strategies for achieving long-term financial planning goals.
- Plans to reduce your tax obligations.
- Your intended retirement age.
- Emergency financial planning contingency.
Objective of a Financial Plan
At the heart of a comprehensive financial plan are the objectives that guide every financial decision and action. They are as follows:
Financial Security
One of the primary objectives of a financial plan is to provide financial security for individuals and their families. This includes creating an emergency fund to cover unexpected expenses.
Wealth Accumulation
Wealth accumulation is a fundamental goal for many people. A well-structured financial plan should aim to build and grow assets over time.
Debt Management
Effectively managing debt is another crucial objective of a financial plan. Reducing high-interest debt, such as credit card debt, and managing other liabilities are essential to economic well-being.
Education Funding
A well-crafted financial plan will outline strategies to accumulate funds for educational expenses, ensuring that children have access to quality education without causing a financial burden.
Why Term Insurance Should be in Your Financial Plan?
One essential component of a comprehensive financial plan is term insurance. It may not be a pleasant topic to contemplate, but it is a responsible and caring step to take to secure the financial well-being of your family. Here is why you should definitely consider including a term plan in your financial planning.
Financial Protection for Your Loved Ones
One of the primary reasons to include term insurance in your financial plan is to provide financial security for your family and dependents. In the event of your passing, the death benefit from your term insurance policy can help your loved ones cover essential expenses, such as mortgage payments, education costs, daily living expenses, and more. It ensures that they are not left financially vulnerable in a time of grief and loss.
Income Replacement
Your income is a critical component of your family’s financial stability. If you are the primary breadwinner, your absence could leave your family in a precarious situation. Term insurance acts as a valuable income replacement tool. The death benefit can replace the income you would have earned, helping your family maintain their standard of living and meet their financial obligations.
Debt Settlement
Most individuals have various financial liabilities, such as mortgages, car loans, and credit card debt. In the absence of a term insurance policy, these debts may become burdensome for your family. Term insurance can be used to settle outstanding debts, ensuring that your loved ones are not left with financial responsibilities they cannot manage.
Affordability
Term insurance is often more affordable than other types of life insurance, such as whole life or universal life insurance. It provides a high coverage amount for a relatively low premium, making it an accessible option for many individuals and families. The affordability of term insurance allows you to get the coverage you need without straining your budget.
Last Words!
In India, where the nuclear family arrangement is increasingly the norm, it is crucial to safeguard your family from threats. When we are young, we typically think that our role in the family is to manage it, but as sedentary lifestyles become more prevalent, even younger individuals are developing serious illnesses and dying young. The absence of a breadwinner not only puts an emotional toll on the family but also has financial repercussions. A term plan ensures that the family will get much-needed financial support and be able to maintain their current standard of living even in the event of the breadwinner’s death. As a result, it needs to be your initial step in financial planning.
A term insurance policy ensures that your family gets the financial cushion needed to survive even in your absence. So, make sure you purchase a term plan as soon as possible.
