How Term Insurance Can Help in Estate Planning

Estate planning is often not completely understood, especially when you do not have formal financial education. Simply put, it is the process of distributing and organizing your assets so that your dependents and loved ones are secured even in your absence.

In India, it is quite common to ignore diversification when it comes to estate planning. Further, it is often ignored until too late, resulting in disputes and families' financial instability. However, term insurance can be a perfect remedy for this issue as you can not only plan in advance but also have a seamless transfer of assets in your absence.

Let us understand the concept of estate planning and how term insurance can be an excellent tool to help you attain your estate planning goals.

Estate Planning: Explained

You have wealth stored in the form of different assets such as a house, plot of land, jewelry, bullion, mutual funds, stocks, and other investments. Estate planning is a process of organizing all the financial and personal assets in a way that they are managed and distributed according to your wishes after you are not around.

The primary goals of estate planning are wealth preservation, asset distribution, and minimizing tax implications. However, estate planning goes way beyond just writing a will or distributing your assets post-death. A well-structured estate plan has become essential for securing financial harmony and stability.

Role of Term Insurance in Estate Planning

Here is how having a term insurance policy with adequate coverage can be an excellent addition to your estate planning:

1. It creates a safety net for your dependents. As your nominees receive a lumpsum amount in the event of your unfortunate death, they can not only meet the routine expenses but also plan long-term expenses effectively.

Let us come back to Basu’s example. In the absence of term insurance, Basu’s family will find it very hard to meet their ends if he passes away. He has current liabilities of ₹90 lakhs (home and business loan). The higher education of Ria and Vishal shall cost around ₹1.5 crores, and the current monthly expenses are ₹1 lakhs (₹12 lakhs annually). Over the next 20 years, that would accumulate to ₹2.4 crores at 6% inflation.

In case Basu opts for term insurance with ₹3 crore sum assured, it would cost him around ₹30,000 per year, given his age and other conditions. In case of his unfortunate death, the family would receive ₹3 crore, of which ₹90 lakhs will be used to pay off the loans, thereby making the family debt-free. ₹1.5 crores can be earmarked for Ria and Vishal’s education. The family will be left with ₹60 lakhs, which can be invested in a safe investment yielding ₹4.20 lakhs per annum (at 7% ROI). This could supplement their living expenses along with existing savings and assets.

2. Any premium paid for buying and renewing a term insurance policy can be used as a deduction from taxable income under Section 80C of the Income Tax Act (up to ₹1.5 lakhs annually).

3. Term insurance helps in the hassle-free transfer of wealth to dependents by enabling direct nominee payouts. Unlike other assets that may require extensive legal procedures, the claim process for term insurance is straightforward and swift. This eliminates potential delays or disputes among heirs.

Selecting the Right Term Insurance Policy for Estate Planning

You should have a clear idea about your insurance needs. Start by assessing the current wealth and income levels along with the future plans. Based on all the factors, have an adequate coverage amount that should be sufficient to meet the dependent’s needs in case of your unfortunate death.

Also, take into account the policy tenure and premium affordability, as committing to a very large amount for a considerable period can easily jeopardize the existing financial stability. Consulting a financial advisor ensures a tailored approach, helping you choose a policy that secures your family’s future while aligning with your estate planning objectives.

Summing Up

Term insurance is often considered a cornerstone of financial planning. However, people do not completely recognize its role in estate planning. As part of estate planning, having a term insurance policy with adequate coverage ensures that your loved ones are protected from financial instability and unnecessary legal complications. It should be one of the first terms when looking for complete estate planning.

FAQs

How does term insurance simplify estate planning?

Term insurance provides a lump sum payout to nominees, ensuring a hassle-free transfer of wealth and eliminating the need for extensive legal procedures.

Can term insurance help cover outstanding liabilities in estate planning?

Yes, term insurance can be used to pay off debts, such as home loans and business liabilities, leaving your dependents debt-free.

What is the ideal coverage amount for term insurance in estate planning?

The ideal coverage should be enough to settle liabilities, cover future expenses (like education and lifestyle costs), and provide financial stability to dependents.

Is the payout from term insurance taxable in India?

No, the lump sum death benefit received from term insurance is tax-exempt under Section 10(10D) of the Income Tax Act.