Why is Term Insurance important for financial planning?

People often have a limited understanding of the concept of financial planning. It is generally construed as strategies related to investments and building tangible/intangible assets over periods. However, financial planning is way broader than savings and investments.

Let us find out what exactly is meant by financial planning and how term insurance is not just a critical but an integral part of personal financial planning.

What is financial planning?

Financial planning is the process of gaining a detailed understanding of your existing and future financial situation. While planning for the future, an individual chalks out specific strategies to reach different financial milestones, such as building a house, children’s education and marriage, foreign holidays, and retirement.

Financial planning involves a lot of areas, starting with savings, investments, emergency funds, tax planning, retirement, and insurance. Here is what you must keep in mind while creating a financial plan:

1. You must have a clear idea about your net worth. Your net worth includes numerous assets (both depreciable and appreciable) such as bonds, stocks, ULIPs, and physical assets such as residence and vehicles. When you have a clear idea about the existing and targeted net worth, it is easier to make specific plans.

2. You should create attainable financial goals that cater to healthcare expenses, education, estate planning, emergency funds, and retirement plans

3. You should track your cash inflows and outflows which will help in understanding where you are spending the most.

4. Create plans and choose investment strategies to attain your financial goals. At the same time, provide ample financial security for your dependents (in the form of term insurance) to cover their lifestyle expenses and obligations in case of an unfortunate event.

What are the benefits of term insurance in financial planning?

Here are the benefits of term insurance in financial planning, based on which you should mandatorily include it in your strategies:

1. You enjoy peace of mind when you are sure about your family’s financial security. As per the agreement between an insurer and the policyholder, in case of the unfortunate death of the latter, the insurance company pays a pre-decided amount to the survivors, which can be used to maintain lifestyle expenses and pay off any obligations.

2. Term insurance is highly affordable. If you are looking for a security blanket for your dependents, term insurance is the most cost-effective option, even compared to other insurance plans (like endowment plans). Cost-effectiveness makes term insurance accessible to a broader segment of the population, enabling more individuals to secure the financial future of their families without straining their budgets.

3. You are entitled to receive tax benefits under section 80C of the Income-tax Act, up to ₹1,50,000 per annum on the premium paid for term insurance. Hence, if you have paid ₹30,000 term insurance premium for yourself and your spouse, your taxable income shall be reduced by the given amount. This makes term insurance an excellent tax planning tool.

4. There are easy and flexible payment options typically offered by insurance companies. Your insurer can also offer flexibility in payouts based on the specific financial requirements of the dependents in the future.

5. Beneficiaries may choose to receive the death benefit as a lump sum, which can help cover immediate expenses like funeral costs or outstanding debts. Alternatively, they can opt for a staggered payout, receiving a part of the sum assured as a lump sum and the remainder as a regular income.

6. You can take additional riders such as critical illness, accidental death benefits, permanent disability, and women-specific diseases riders that provide you comprehensive coverage in case of a mishap due to the given reasons.

Why starting early is the key?

You are offered a lower premium, and the medical checkup requirements are negligible when you opt for term insurance early in your age (preferably early 20s). The coverage amount is also generous due to your proactive approach. Overall, starting early helps you extract all the benefits of term insurance and contributes massively to your financial plans.

Summing up

Financial planning is more than savings and investments. It is an entire process through which you make your family financially independent. If your financial planning is on point, it is critical to have adequate term insurance. With proper term insurance, you not only get financial stability but also peace of mind, knowing that your family's future is safeguarded against life's uncertainties

FAQs

What is term insurance?

Term insurance is a type of life insurance that provides coverage at a fixed rate of payments for a limited time.

Why include term insurance in financial planning?

Term insurance ensures your family's financial stability by providing a death benefit that can support lifestyle expenses and obligations in your absence.

What are the tax benefits of term insurance?

Premiums paid towards term insurance qualify for deductions under section 80C of the Income-tax Act, reducing your taxable income.

Why should you start term insurance early?

Starting early locks in lower premiums and generally requires fewer medical checks, offering better coverage benefits.