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Essentials of Financial Planning – Term Insurance

Bibliometric Details: Issue No: 8 | Issue Month:August | Issue Year:2022

Financial planning is a systematic strategy to determine if one has adequate assets or resources to achieve one’s financial goals or to cover unanticipated expenses. We are constantly striving to give our loved ones a better future. Life is a long journey filled with various financial objectives and unforeseen circumstances.

The fact is that a sound financial plan really must include life insurance. Additionally, life insurance becomes increasingly crucial when you get older, get married, buy a home, start a family or receive a retirement package. Let us look at why that is the case and how term insurance can be an ideal addition to your financial plan.

The Importance Of Life Insurance Policies In Financial Planning

A life insurance policy is a viable suggestion to pursue as part of your financial planning to give you a financial shield from unforeseen events and accomplish life’s financial goals.

  • Protect those you love – A life insurance policy provides your loved ones with financial security. You receive life insurance against your life as a death benefit in exchange for paying the insurer a certain premium. Your family will get financial support in the terrible case of your passing away, in the form of the sum assured and any other additional benefits (if any) specified in your life insurance policy.
  • Oversee long-term objectives – Long-term goals need to be carefully considered, and early financial planning should be done for things like buying a home, or automobile, sending your kids to college, getting them married, and saving for retirement. You can achieve several long-term financial goals with a life insurance policy that provides adequate coverage and returns.
  • Investments and Savings – Certain life insurance plans work well as a retirement and investment tool. The amount covered increases with various cumulative benefits, such as simple/compound incentives, set bonuses, reward benefits, etc., throughout the life insurance period with the annual, half-yearly, quarterly, or monthly payment of premiums.
  • Control Debt – Manage your risks efficiently against debts and loans are covered when purchasing a life insurance policy. A life insurance policy with a carefully chosen sum assured that is equal to the outstanding debt will reduce the likelihood that loans won’t be repaid in the event of an untimely loss. Therefore, your loved ones won’t be burdened by outstanding loans and mortgages after your passing.

What Is Term Insurance?

Term insurance is a form of life insurance policy that offers protection for a particular  ‘term’  or a set number of years. A death benefit will be paid if the insured passes away within the policy period.

Typically, term insurance is far less expensive than whole life insurance. However, unlike most whole life insurance options, pure term insurance doesn’t offer any financial returns to the policyholder. In some cases, a return of premiums may be applicable at the end of the policy term in case the policyholder survives the policy term.

Why Is Term Insurance Essential To Your Financial Plan?

  • Reasonable premiums: A term plan is pure insurance; no investment or savings component is involved. It is the least expensive type of life insurance offered. This indicates that you can purchase insurance at reasonable prices for a bigger sum assured, providing additional protection for your dependents and removing future financial uncertainties. The premium for a term policy will be less expensive the earlier you buy one.
  • Financial stability: If you are the sole wage earner in the family, your absence may leave your dependents financially vulnerable, particularly if there are any additional liabilities like a home or personal loan. You should have a term plan in place to cover these liabilities. The payout from the term plan can make sure that your loved ones will not be burdened with any debt.
  • Riders: You can tailor the policy to suit your financial needs by including riders to cover any additional dangers. When added to an existing term plan, riders like critical illness, accidental death, and partial or whole disability benefits cost a small sum but offer greater coverage.
  • Tax advantages: Most salaried people try to invest in securities that offer higher returns and tax savings. Their financial planning includes this as a critical component. The amount given to your beneficiaries as a death benefit is eligible for exemption under Section 10D in addition to a tax deduction of up to 1.5 lakh on premium payments for the term policy under Section 80C of the Income Tax Act of 1961. Additionally, benefits from a health-related rider like a Critical Illness rider qualify for additional deductions under Section 80D of the Income Tax Act.
  • Customizable: You can tailor your term insurance plan to your unique needs and goals. You can opt for three different types of coverage as per your needs – level, increasing, and decreasing coverage. You can also choose from various payout options – lump sum payout, part lump sum, part monthly income payout, or monthly income payout. Finally, you can also opt to cover your spouse under the same plan.

How Can You Choose A Suitable Term Plan For Yourself?

Now that we know the crucial information about a term plan and its meaning, let’s look at some essential considerations when buying a term insurance policy.

  • Determine the amount of coverage basis your financial needs and your budget – To determine this, consider the number of dependents you have in your family and weigh their current and future needs. You must also consider any liabilities and debts like a personal loan or a house loan in your name and ensure that the term plan provides adequate cover for these.
  • Select the appropriate insurer by assessing factors like claim settlement ratio, credit rating, solvency ratio, etc. – These factors reflect the insurance provider’s capability to settle your claim (solvency ratio & credit rating) as well as the likelihood of your claim being settled promptly by the insurer (claim settlement ratio).
  • Choose a suitable policy term – Ideally, your term plan should provide you with life cover at least till your retirement. That being said, additional factors like life goals or your liabilities will play a part in the choice of your policy term.
  • Opt for available add-on riders as per your requirement – Riders enhance the scope of your term plan by providing additional benefits. Depending on your insurance provider, you can opt for a number of relevant riders like a critical illness rider, accidental death benefit rider, etc.
  • Determine the suitable premium payment frequency and tenure basis of your budget – An ideal term plan should not break the bank, so you should choose a policy that fits comfortably in your budget. Additionally, depending on your budget, you can opt to pay the premiums monthly, quarterly, half-yearly, or annually.

Conclusion

An inexpensive comprehensive insurance product, a term insurance plan can hugely benefit your financial plan in the long run. You can learn more about the nuances of choosing a term plan online and then use a free online term insurance calculator to get a quote on the premium you’ll be required to pay for the ideal plan.

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