Question

Discuss the importance of appropriate and adequate insurance in financial planning.

Answer 1

Financial planning helps you determine your short and long-term financial goals and create a balanced plan to meet those goals.

If we think of financial planning, main components come in mind such as wealth management, estate planning, retirement planning, tax savings etc. Indeed, planning for our later years, or savings to accomplish certain goals, tend to be the primary focus for many in financial planning. However, importance of incorporating life insurance strategies into a financial plan is equally important that will address specific needs of your loved ones in case of your unfortunate demise.

If you save money in your pension and other investments and have capital in your home. But if you don't know exactly what your life insurance policy covers you're neglecting an important aspect of your financial plan.

Role of insurance in your financial plan:

Life insurance not only provides peace of mind to you and your loved ones but can be an essential part of a sound financial plan.

1) Protection for your loved ones: A life insurance policy acts as a financial backup plan for your loved ones. You pay a fixed amount of premium to the insurer, and in return, you get a life cover against your life in the form of a death benefit. So, in the event of your unfortunate demise, child or aging parents that depends on you for financial support will be financially compensated with the sum assured plus additional benefits(if any) as per your life insurance policy.

2) Funding for education: If you find that you're struggling to set aside money for your child's education while you're alive, how would your spouse manage if you were suddenly gone. You can provide your children a good education by factoring educational expenses into your life insurance policy's death benefit. This can help relive the burden of struggling to accumulating college costs, ensuring the necessary funds for college.

3) Paying off debt: A term insurance policy with a similar policy term as of your outstanding loan will reduce the risk of inability of repayment of loans in the event of your untimely demise. An insurance policy can help provide your family with a lump sum of money to pay off mortgage debt, eliminating this large financial stress, as well as the possibility of a loan default or eventual foreclosure.

4) Savings and investments: A life insurance policy acts as a best saving and investment tool. Insurance plans acts as a saving tool as it provides a guaranteed maturity benefit to achieve various financial goals in your life. Also, you can invest in market linked insurance policies as per your risk appetite.

5) Tax Savings: Insurance policy acts as a tax savings tool as you get deduction for certain policies for the premium which you pay towards your policy. Also, the insurance policy proceeds which you receive from your life insurance policy are also tax deductible.

6) If you’re sick or hurt, long-term disability income insurance can be used to replace your income.

7) Estate equalization strategies using insurance can help parents to treat their children equally in estate distribution especially when it’s difficult to large family asset or business.