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Why You Must Include In Your Financial Planning?

A term insurance plan is the most basic form of life insurance. Read the article to know why you must include term insurance in your financial planning.

  • Dec 22, 2021

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.

A term insurance plan is the most basic form of life insurance. A pure protection plan, term insurance, provides a death benefit to the policyholder’s family in the event 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.

Let us understand that term insurance must be a part of financial planning.

It acts as an income replacement for the family.

Let us understand how term insurance acts as an income replacement with an example.

Mrs and Mrs Tiwari are a young couple in their early 30s. Mr Tiwari is an entrepreneur, and his wife is a homemaker. Mr Tiwari, being an astute financial planner, purchased a term insurance policy early in his life and named his wife as the nominee.

Now, suppose Mr Tiwari meets with an accident and passes away. Though Mrs Tiwari may be distressed about losing her husband, she wouldn’t have to worry about the loss of income as the proceeds from the term insurance would provide her with much-needed financial protection.

Thus, it is quite evident that term insurance is vital to protect your family from the sudden loss of income they may face during your untimely demise.

Affordable premium

A term insurance policy is a pure protection policy with no investment element. This means it is the cheapest life insurance available in the market. Therefore, 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 your 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 be looking 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 Rs. 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 Rs. 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 investments toward achieving those goals.

For you and your family, a thorough financial plan will include the following:

  • All urgent financial requirements
  • List all of your long-term financial planning goals
  • Investment strategies for achieving long-term financial planning goals
  • a strategy to increase your savings
  • Make plans to reduce your tax obligations.
  • Your intended retirement age
  • Emergency financial planning contingency

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 bears 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.

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Ref. No. KLI/22-23/E-BB/2435


- A Consumer Education Initiative series by Kotak Life

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