Putting Insurance First in the ABCs of Long-Term Financial Planning

More and more Indians are making their first investment at an early age. With favourable market conditions and various investment avenues promising lucrative returns, the attraction has never been greater. Add to that the aspirations of a young India and the kind of goals they have for themselves, and you have a potent mix for a population that saves and spends in equal measure.

However, the mix of financial instruments that one chooses to invest in; the allocation to each and the amount of time that one stays invested in depends on one’s unique situation.

Let’s discuss one financial instrument that must definitely be part of your investment portfolio: life insurance. Often added to one’s financial portfolio as a tax-saving tool or because it was recommended by someone, life insurance is a less understood financial instrument that can have significant benefits in the long term.

Securing your family’s financial future in case of unforeseen events

Term life insurance provides your loved ones with the financial buffer they need in case of any unfortunate demise of the bread-winner/provider. Of course, we’d rather not have anything untoward happen to us or our loved ones but pragmatically, we need to be prepared for it.

How does one decide what kind of term insurance cover would be appropriate for an unforeseen event sometime in the future? Take a look at your current sources of income; prepare a consolidated list of your liabilities; account for inflation and potential future expenses that will need to be met from your income. A term insurance cover that is at least 15-20 times higher than your current annual income is a good starting point.

Life insurance policies also come with additional riders such as accidental death, accidental disability, critical illness, Waiver of Premium (WoP), etc. which provide additional coverage over and above the sum assured. WoP, for instance, enables family members to avail the benefit of not having to pay future premiums for the policy in case of death, disability or critical illness of the policyholder without losing coverage.

Prioritising health and well-being

In the last half decade or so, awareness around health insurance has increased considerably. Individuals are prioritising health and well-being and planning for health emergencies with comprehensive insurance policies. Skyrocketing hospitalisation costs, ballooning medical inflation and growing prevalence of lifestyle diseases make it essential to invest in comprehensive health insurance. Depending on whether you have elders in the family, young children, or members with chronic conditions, opt for policies that provide suitable coverage for all.

Accumulating resources for medium/long-term goals

All of us want to plan for our loved ones’ future such as their education/marriage or other aspirations. Endowment plans or goal specific insurance plans such as child plans are appropriate for such goals. Depending on the type of plan you choose, a schedule of payouts and bonuses is provided at suitable intervals so that the amount received can be used specifically for those purposes.

Even if you may not have any specific goals to plan for but want to secure your family’s financial future, there are several types of endowment plans that could serve as a source of income for the future. They come with comparatively low risks and the advantage of life cover as well in case of untoward events. Guaranteed income plans are designed to ensure savings and steady income; assured capital plans safeguard your investment while combination plans offer both. They are ideal to safeguard your financial portfolio from reinvestment risks in the long term due to market volatilities or interest rate fluctuations.

Providing a financial safety net while earning returns

Unit linked insurance plans, among the most popular savings insurance products, offer the advantage of insurance protection alongside returns. While ULIPs are not a replacement for term insurance policies, they can serve as a wealth creation tool to help your loved ones reap the benefits of your investments. Typically, available with lock-in periods of five years, ULIPs also allow for partial withdrawals and top-ups, so that you can manage your investments as per your needs.

Similarly, guaranteed return plans or money-back plans could also be considered in the same spirit. Structured to offer withdrawals and returns at periodic intervals, these plans offer the advantage of risk cover alongside appreciation of investments.

Securing your grey days

Retirement life insurance plans are specifically designed to help you and your loved ones enjoy a stress-free retirement while ensuring you have a steady source of income for as long as you live and beyond for your partner/loved ones. Within these types of plans, you may opt for a pension plan which you could start investing in as soon as you want and reap the benefits upon retirement. In case you are closer to retirement or have just retired, you may opt for annuity plans that offer payouts immediately after the policy is purchased.

Life insurance as a financial instrument is a versatile tool, one that offers you both savings and life cover. It is important to look at life insurance not as a sunk cost, as is the popular perception, but as an investment in the financial well-being of your loved ones. We only get one chance at life – let us live it to the fullest while making sure we secure our loved ones’ chance at life as well!

The author is Chief Operating Officer, Future Generali India Life Insurance Company Ltd. Views are personal.