In the wake of increasing inflation and changing lifestyles, it is imperative for every individual to focus on financial planning at an early stage. A financial plan of an individual should be customised to meet one's individual needs at different stages of life and it is important to have a balanced mix of instruments to address the various needs of protection, savings and wealth creation. It is observed that people tend to focus on the 'wealth creation' aspect of financial planning and the 'protection' element often gets compromised or neglected.
Life insurance is still a nascent idea and most people do not think about it until a major life change causes them to consider what might happen to their loved ones in case of any unforeseen circ*mstances. While the main objective of buying a life insurance policy is to protect oneself from unforeseen circ*mstances, it can also help in wealth accumulation, preservation, and give access to liquidity at the right time, if added as a component of financial planning.
Most of us usually get confused on how much to invest and where to invest – stocks, bonds, real estate and many others. Life insurance is a good investment tool, which is comparatively simpler, more affordable and most importantly caters to the different stages of the individual’s lifecycle.
You can buy a pure protection plan (a term plan) at an early stage which is most affordable or a unit linked plan at a later stage which gives you the opportunity of earning higher returns, but involves market risk. There are specific education plans which ensure that your child’s education is not compromised in case of an unfortunate situation and you can also plan your retirement through pension plans.
Too complicated or I still have time
Most people across the world avoid buying life insurance as either they find it complicated, or think it is too early for them. The concerns are information and choice – a lack of the former and an over-abundance of the latter. Both are perfectly capable of clouding the most purposeful mind to falter.
Disciplined saving
Apart from being a protection tool, life insurance also helps a consumer save in a disciplined manner which leads to creation of a good corpus. While other financial instruments may give you exciting returns, there is no other instrument which does as much with so little of a consumer’s involvement, investment or expertise.
Addresses multiple needs
The key objective is to secure your family’s financial needs in your absence. These needs should be scientifically assessed depending on the life stage at which the individual is along with current liabilities, expectation of future liabilities, number of dependents, financial goals, life style etc. A need in mind makes the decision process simpler – be it child’s education or daughter’s marriage or planning for your retirement or loan repayment.
An added benefit
It also helps you avail of various tax benefits which makes it an even more attractive proposition.
How much do you need?
While there are many complex calculations that are available online, there are some simple thumb rules to estimate the quantum of insurance needed for an individual. The most common way is to calculate life insurance as about 20 times of the individual's annual income.
There are many product categories that can cater to the ‘Investment and Wealth creation’ needs of the customers, but none can offer the advantage of protection along with the benefit of sustained and disciplined savings as insurance products do. A financial plan would not be complete without the key element of life insurance so chart out your goals and objectives and make an informed decision.
FAQs
Financial stress can impact your loved ones if they have to struggle to pay bills after you're gone. When you help protect their future with the right amount of coverage, they will not only have help making ends meet, they'll be better able to reach long-term goals like college and the wedding of their dreams.
Why is life insurance important in financial planning? ›
Insurance can help mitigate risk in your financial plan.
Perhaps the most common reason to own life insurance is to reduce risk. If your family's primary income provider passes away, life insurance can help fill the resulting financial void.
How can life insurance help you financially? ›
Buying life insurance protects your spouse and children from the potentially devastating financial losses that could result if something happened to you. It provides financial security, helps to pay off debts, helps to pay living expenses, and helps to pay any medical or final expenses.
What is life insurance Why is it important and how much do you need? ›
Income Replacement
One of the main purposes of life insurance is to replace income. If you are the sole provider for your dependents and bring in $40,000 a year, for example, you will need a policy payout that is large enough to replace your annual income, plus a little extra to guard against inflation.
Why do financial planners push life insurance? ›
There are many reasons why financial advisors might consider selling life insurance as part of the services they offer their clients. These include the ability to better meet their clients' needs by providing more comprehensive wealth planning services and the opportunity to earn commissions.
What are the 6 reasons that insurance is involved in financial planning? ›
6 Ways Insurance Can Strengthen Your Financial Plan
- #1: Insurance can protect your assets and reduce risk. ...
- #2: Insurance can add predictability and stability to your financial plan. ...
- #3: Insurance can enhance your estate plan. ...
- #4: Insurance may provide tax benefits. ...
- #5: Insurance can help secure your retirement.
How Does Life Insurance Work as an Investment? A portion of every premium payment made for a whole life policy is placed into an independent account under the insurance company's control. This fund serves as a tax-deferred savings or investment account that provides the policy's cash value.
Why is life insurance more important? ›
Life insurance provides a safety net to the surviving family members and helps them maintain their standard of living, cover essential expenses and pursue long-term financial goals. It can be used to pay for loan repayments, educational expenses or daily living costs.
How to use life insurance to build wealth? ›
If you're considering how to use life insurance to build wealth, then you can start by looking for a policy with a cash value component. For cash value accounts, the insurer takes part of your insurance premium and puts it into an account intended to increase in value over time.
Do you really need life insurance? ›
Not everyone needs life insurance. People who've accumulated enough wealth to cover their final expenses and who don't have dependents can usually forgo paying for life insurance.
Being prepared for the unexpected will ensure that you can still reach your goals after facing a financial crisis. And an insurance policy will keep you from emptying your emergency fund. Insurance can also protect your loved ones if you're injured in an accident, become sick or disabled or die.
Is life insurance an indication of good financial planning? ›
Life insurance is an indication of good financial planning, since it provides a payment to the policyholder upon his or her death. Life insurance is critical to protect a family's financial situation in the event that a breadwinner dies. If no one else relies on your income, life insurance may not be necessary.
Is life insurance a good financial decision? ›
Key takeaways
Although it may be uncomfortable to think about, life insurance can provide a valuable financial safety net. Policyholders pay into a life insurance policy during their life, and when they pass away, those they specified as beneficiaries receive the policy payout, also known as a death benefit.
What is the main purpose of life insurance provide financial security for? ›
The goal of life insurance is to provide a measure of financial security for your family after you die. A life insurance policy will help them meet the financial needs that your income would have normally covered.
What are the financial benefits of term life insurance? ›
One of the primary benefits of term life insurance is the lower premium payments since it doesn't accumulate cash value like permanent life insurance. This means that no additional costs are added to the premium, making it an attractive option for those looking for affordable life insurance coverage.
