Should life insurance be a part of your financial planning?

Financial planning involves creating a solid strategy that can help you manage your money in the best possible manner so you achieve your financial goals easily and on time. Creating a financial plan is fairly simple. Here’s what you typically need to do —

• Identify your financial goals
• Choose appropriate investments
• Invest according to your goals and your time horizon

It’s the part about choosing the right financial products that can be a bit challenging. Given the wide variety of investment options we have, some may easily be overlooked in favour of others. Life insurance is one such product — and many people tend to put off purchasing a life cover until it is a tad bit too late.

But is that the right way to go about things? Let’s find out.

First things first — what is life insurance?

Life insurance is a financial contract between you (the insured person) and the insurance service provider (or the insurer). Here, your insurer agrees to pay out a guaranteed sum of money, known as the sum assured, to your nominee in case of your demise. In other words, your insurer offers a cover on your life.

In return for this, you pay regular premiums to your insurer. The life cover offered is typically valid for a specific period of time, known as the policy term. Most life insurance plans offer coverage till the insured person attains the age of 60 or 65.

But if the insured person survives the policy term, the insurer may or may not offer any financial benefits. This depends on the type of life insurance policy that you’ve purchased. Let’s find out what they are.

The different types of life insurance policies

There are different kinds of life covers in the Indian insurance market. Each type of life insurance plan has its own benefits, as you’ll see below.

Term insurance

Term insurance is the simplest and the most affordable type of life insurance. It is a pure life cover, which means that it only offers death benefits. In case you survive the policy term, you do not get any payouts.

Endowment plans

Also known as savings plans, you get the advantage of insurance and savings with these plans. Here, you get a life cover. But if you survive the policy term, you also get guaranteed returns at maturity.

Unit Linked Insurance Plans (ULIPs)

ULIPs combine the benefits of insurance and investments. Here, you can invest in market-linked funds over the policy term. And at maturity, you get the total value of your investments as payouts. These returns are not fixed or known beforehand, but depending on the market performance, they can be quite high.

Whole life insurance

This works pretty much like endowment insurance, but the key difference is that you get a life cover till you attain 99 or 100 years of age.

Annuity plans

Annuity plans or retirement plans give you a life cover as well as annuity payouts. These regular payouts can replace your income after you’ve retired.

So, should life insurance be a part of your financial planning?

Okay, so now that you know what life insurance is and how it works, there’s a crucial question that you need to tackle — should a life insurance policy be a part of your financial plan? The short answer is yes.

But the details are important. Here are 5 reasons a life insurance plan should be a part of your every financial plan.

1. It protects your loved ones financially

If you are the primary earning member or the sole breadwinner, your family likely depends on you for all their financial needs. In case something untoward happens to you, your loved ones will be left without any financial safety net. Here’s where life insurance can help. The death benefits paid out by the insurer can help your family take care of their everyday requirements as well as pay for any major life goals or pending debts.

2. It helps you achieve important financial goals

Even aside from the death benefits, many types of life insurance plans, like endowment plans, ULIPs, and whole life insurance plans, offer payouts at maturity. These maturity benefits can be availed as a lump sum payout, as periodic payouts or as a combination of the two. You can make use of these financial benefits to meet your long-term life goals like your child’s higher education, the cost of their higher education, or the cost of home renovation.

3. It can secure your post-retirement life

Retirement is one of the major milestones in life, and to be adequately prepared for this phase of life, you need a sizable retirement fund. Life insurance can help you with this because the maturity benefits received can be used to build your retirement corpus or replace your primary income. You can also opt for annuity plans for more retirement benefits.

4. It gives you various other benefits in the form of riders

You can enhance the benefits of your plan by purchasing add-on riders along with it. These riders give you financial payouts in case of specific contingencies like a critical illness diagnosis, surgery and accidental death or disability. If you have life insurance riders in your portfolio, you need not create separate emergency funds for these contingencies.

5. It gives you tax benefits

Life insurance also gives you tax benefits. The premiums that you pay are tax deductible up to Rs. 1.5 lakhs per financial year. And the maturity benefits received are typically tax-free (except in the case of ULIPs whose annual premiums exceed Rs. 2.5 lakhs). As for the death benefits, they are entirely exempt from tax in the hands of the nominees.

Conclusion

For these key reasons, always consider including a life insurance policy in your financial plan as early as you can. The younger you are when you buy your cover, the lower the premiums tend to be. You can always start with a basic term insurance plan and expand your coverage with other kinds of insurance as you grow older.