Role Of Insurance In Financial Planning

As you walk through different stages of life, your corpus requirements keep changing and similarly your financial goals - starting from your child's education to your retirement. 

A good financial plan will help you create a diversified portfolio spread across several asset classes such that it can meet your return requirements and adhere to your risk constraints. However, while considering the various assets for investing, many people do not take into consideration insurance as a viable investment option. 

Insurance – a critical component of your financial plan

Insurance should ideally form a crucial part of your financial plan. You can achieve your financial goals only if you continue saving and investing as per your financial plan. This means that you need to stay prepared for unforeseen eventualities that can derail your financial plan. There could be various incidents in your life that could result in certain setbacks like the loss of income or reduced income, increase in expenses. These incidents can put a constraint on your finances and impede you from staying on track with your financial plan. In such scenarios, an insurance policy can be very helpful. In case of an emergency, it can help you preserve your emergency fund and provide the necessary finances. In extenuating circumstances like an accident, disability, illness, or even death which would lead to a loss of income, an insurance policy can protect you and your family and ensure that your finances are not inordinately impacted. 

Types of insurance policies

Below, we discuss some of the insurance categories that should ideally form a part of your financial plan.

• Life insurance: Life Insurance is paid to the nominee of a life insurance policy on the death of the insured or the person purchasing the policy. If you have a spouse, children, or any other dependents a life insurance policy can be particularly valuable. It could help them maintain their standard of living, repay debts, and also finance some of the financial goals. Additionally, there are certain life insurance policies like Unit Linked Insurance Plans (ULIPs) that will provide the dual benefits of insurance cover and a sum assured in case you outlive the term of the policy. Under this plan, the cash value or the paid-up value of the insurance policy is determined by the value of the assets in the underlying investment portfolio. When you pay the premium for the insurance policy, the amount paid is divided into two parts: a certain proportion is invested in the asset class of your choice while the balance proportion is invested to provide insurance coverage. Thus, it will not only provide protection but also allow you to generate returns that can help you meet your financial goals. A life insurance policy can also help you increase your savings as the premiums paid for a life insurance policy are eligible for deduction u/s 80C of the Income Tax Act. The policy proceeds received from the life insurance company are also exempt from tax.

• Medical Insurance: Unforeseen medical emergencies and critical illnesses can put you at a disadvantage. Firstly, they can reduce your ability to earn, and secondly, they can increase your medical expenses. The appropriate medical insurance policy can help you mitigate these risks such that you do not have to dip into your savings to meet your medical expenses. There are also medical insurance policies that pay a lump sum amount for the treatment of critical illnesses. This can help you not only meet the expenses but also support your family in case of reduced or loss of income. 

• Auto insurance: While this policy is not for everyone, it can be an important category to consider if you own a vehicle. An auto insurance policy can protect you from considerable liability in the event of auto theft or damage. It can also provide coverage for meeting the expenses of another vehicle that you might have damaged in an accident. Having this policy will ensure that such events do not burn a hole in your savings and investments. 

The insurance policy that you purchase should consider your overall financial plan, your asset and liabilities, the return requirements of your portfolio, and your risk profile. However, before purchasing the policy you must understand all the features, terms, and conditions of the policy to ensure that it fits into your overall financial plan. 

The author is Co-Founder, Turtlemint (an InsurTech Company)