Aditya Birla Sun Life Insurance Company Limited

Module 01 | Chapter: 01

Ch. 1:Role Of Life Insurance In Personal Finance

13 min read
17 Jan 2023
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  • Key takeaways from this chapter

    The words ‘personal finance’, bring to mind a career with high income, goals, investments that compound and beat inflation. You may have goals of becoming wealthy, achieving dreams, buying a house, retiring rich, and so on. These goals can be met through investing in multibagger stocks or through planned, systematic investment in a smart set of investment products that grow better than any other market.
    Now, amidst our planning for personal finance, what many of us overlook is risk management. Every sound plan anticipates the worst-case scenario. You buy a big house in a safe location with robust security, but you do not forget to secure the door with a sophisticated lock just in case a thief sneaks in. Right? Similarly, while planning for your finances and saving and investing for your goals in life, it is important to be prepared for emergencies or unexpected events in life.
    We all know things can go wrong - that is where risk management comes into picture.

    What Is Risk Management?

    Risk management is the art of managing risks efficiently, so that you can improve the chances of achieving your goals, come what may.

    Risk management involves identifying risks, categorising them and managing the ones that can be managed. Now, when you begin to identify the risks involved in personal finance, you will notice that one of the most significant risks in personal finance planning is death.

    You can navigate through every adversity to ensure your family’s goals are met when you are around. But what about when you are not around? How can you ensure your family's goals are fulfilled then? If you have loans and pass away before settling them, you would not want important assets like the house or the car taken away from your family because of the outstanding loans, would you?

    Well, you can ensure your family enjoys a good lifestyle not only when you are around, but also when you are not around - with sound financial planning. One financial product that can help you be prepared and deal with the financial risk associated with death is life insurance. You can buy a life insurance plan to financially support your family and ensure they don't give up on their dreams and goals in your absence.

    How Can Life Insurance Help?

    When it comes to financial planning, most of us get confused about where and how to invest our money - should we invest in stocks, bonds, or real estate, for example. Life insurance is a good investment tool that is relatively simple and more affordable. Not only does it provide you with investment avenues, but it also protects the money you invest and your financial goals with an insurance cover.

    Depending on your financial goals and risk tolerance, you can choose from a variety of life insurance plans. There are plans that will provide you with fixed returns that are exempt from tax. Some plans will offer returns that compound over time and beat inflation. Then, there are plans where the returns are tied to the stock market. And so on.

    Not only returns, but life insurance plans also provide a life cover in case you are unable to continue investing due to a major life disruption such as death, disability, or critical disease. And, in addition to the promised investment returns, most life insurance plans also provide financial security to your family in case of your unfortunate death.

    Benefits Of Life Insurance In Financial Planning

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    Disciplined investment

    Unlike other investment avenues, life insurance investment plans, if bought right, ensure that you are not tempted to withdraw or stop the investment midway through the implementation of financial planning. Most life insurance plans come with lock-ins that prevent you from withdrawing money due to a short-term temptation.
    Life insurance also disincentivizes dropping off midway, and incentivizes long-term systematic investment of savings. This component of life insurance helps the fund managers in investing money more effectively over time, as there are fewer drops and withdrawals when compared to other products without a lock-in or minimum period of investment. It’s as if you are on a diet and you love ice cream - so, you need to create disincentives and a system to prevent you from purchasing an ice cream.

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    Cover from major life disruptions

    We discussed how the most significant risk in personal finance planning is death. Besides death, a serious illness diagnosis and disability are other significant risks in personal finance planning.
    A serious illness or disability can sometimes have a greater financial impact on your family than death. Because not only will you lose your earnings, but there will also be additional expenses you and your family will have to bear as a result of the disease or disability. Life insurance can help you and your family deal with the financial risks associated with death, disability, and disease.

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    Varied investment avenues

    There are several types of life insurance policies available in the market today. And, each option offers goal-based and diverse investment avenues. You have an option of choosing from plans that offer long-term fixed returns to plans that provide market-linked returns. And, the returns you earn have the potential of outperforming the index over the long term and beating inflation.

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    Tax Benefits

    In addition to the benefits mentioned above, you also get dual tax advantages if you invest in a life insurance policy.
    You can claim tax deductions on the premiums you pay every year under Section 80C of the Income Tax Act up to a limit of Rs. 1.5 Lakhs. And, the payout made by the insurance company is exempted from taxation, under Section 10(10D) of the Income Tax Act, 1961.

    Things That Are Covered Under Life Insurance

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    Critical Illness

    Life insurance offers protection against the financial risk caused due to the diagnosis of a serious illness. There is a critical illness rider (add-on benefit) available with most life insurance plans.
    If you are diagnosed with a serious illness listed in the policy document, the critical illness rider will offer a fixed sum of money. This money can be used to cover all extra expenses such as physiotherapy fees, rehabilitation charges, etc. you and your family will have to bear because of the disease. The money will also act as a replacement for the income you might have lost because of the diagnosis.

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    Non payment of premium due to critical illness and accidental disability

    There is a waiver of premium rider available with life insurance policies too. Basically, there are two types of waiver of premium riders insurance companies offer - waiver of premium due to critical illness and waiver of premium due to accidental disability.
    The waiver of premium due to critical illness rider will waive off all your pending premiums if you are diagnosed with a critical disease listed in the policy document. And, the waiver of premium due to accidental disability rider will waive off all your outstanding premium payments if you get disabled due to an accident. So, you can enjoy your life insurance cover for the remaining duration without worrying about the premium payments.

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    Daily hospital expenses and surgical costs

    You can opt for a hospital care rider with some policies. If you are hospitalised and undergo a treatment or surgery, the hospital care rider will offer a daily cash benefit to take care of your day-to-day hospital expenses.
    Similarly, with some life insurance plans, you can also opt for a surgical care rider. If you are hospitalised for a minimum period of 24 hours for a surgery that is medically necessary, this add-on will offer a fixed sum of money. The money that will be paid will depend on the type of surgery you undergo.

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    Death

    Like we discussed above, life insurance offers financial protection to your loved ones in case of your untimely death.
    Now, when we talk about death, we mean every type of death. Life insurance covers all types of deaths except for suicide in the first year of buying the policy. So, death due to accidents, natural causes, participation in risky sports, intoxication, natural calamities, man-made disasters, etc. are all covered under a life insurance policy.

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    Accidental Disabilities

    Just like a critical illness rider, most life insurance plans also allow you to opt for an accidental disability rider. If you meet with an accident that leads to disability, this rider will pay an additional sum of money that can act as an income replacement as well as help you and your family deal with the additional expenses such as making alterations across the house, building a ramp, and so on.

    Life Insurance Plans That Offer Financial Security To Your Family

    Here are a few types of life insurance policies that help in financially safeguarding the future of your loved ones -

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    Term Insurance Plan

    Term insurance is a pure risk life insurance policy that will offer you a life cover for a fixed number of years. If you pass away while the plan is in force, the insurance company will pay a fixed sum of money to your family.

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    Whole Life Insurance Plan

    This life insurance plan covers you for your whole life, i.e., till 99 to 100 years of age. A whole life plan is a sure shot way of leaving a financial legacy for your loved ones as it is less likely that you will survive such a long term.

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    Endowment Plan

    An endowment plan is a blend of insurance and savings. It provides financial protection to your family as well as helps in saving for your long-term financial goals.
    It allows you to systematically invest in a low-risk financial instrument, and build wealth to cover various goals, like your child’s education, purchasing a house, retirement, etc. besides helping you in financially securing the future of your loved ones.

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    Unit Linked Insurance Plan

    A Unit Linked Insurance Plan is a combination of insurance and investment. So, in addition to offering financial security to your family, it also gives you an opportunity to invest your premiums in several funds of the stock market that may yield high returns over a long period of time.
    It offers a life cover that is usually 10 times the annual premium you pay. The life cover can also be 15 or 20 times the annual premium - depending on the product and insurer you choose.

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    Child Plan

    This plan provides financial security to your child and is specifically designed to cater to their future financial needs, such as their education, wedding, etc.
    Child plans come with an in-built premium waiver feature that ensures that your child’s goals are protected - in case you pass away before your child’s dreams are fulfilled. The insurer will waive off all the remaining premiums under the policy in case of your unfortunate death during the premium payment duration. So, besides offering financial protection to your child, a child plan also ensures that all your child’s goals are taken care of - without creating any financial burden on them.

    Important Things to Note Before Buying Life Insurance Plan

    Here are 3 important things you must keep in mind while buying a life insurance plan -

    Inadequate cover is almost equal to no cover
    You buy a life insurance plan to either cover your long-term financial goals or to protect those who rely on your earnings, from any financial disruptions, when you pass away.

    So, it is important that you buy a cover that will be enough to achieve your goal or support your family financially in your absence. You will have to carefully assess the financial risk of your death - so that you don't end up buying a cover that will be inadequate in the future. You can also talk to a competent and experienced financial advisor for this.

    Factor in inflation
    Next, it is very crucial that you do not buy the life insurance cover simply to cover the immediate risk. While calculating the cover amount, ensure you factor in inflation of 6% to 8% for a period of at least 12 to 15 years. Why? So that the money you invest today is sufficient for you and your family in the future.

    And, in case you are not able to buy the calculated cover amount due to eligibility restrictions, you can choose features such as the increasing cover option, etc. With such features, your life insurance cover amount will keep on increasing automatically until it reaches a maximum limit specified under the policy. This ensures that your cover amount is sufficient for your future needs as well as in line with inflation.

    Pay premiums on time
    Just buying a life insurance policy is not enough. You will have to ensure that you keep paying the premiums under it regularly so that it remains active. To streamline your premium payment process, you can -

    • Select the e-SI (electronic standing instruction) option while buying the life insurance plan. This option will ensure that your premiums are transferred to the insurance company directly. or
    • Put standing instructions on your bank account to ensure that your premium payments are made to the insurance company on time.

    So, that is all about the role of life insurance in personal finance planning. We hope you have now understood why it is important to include life insurance in your financial plan. In the coming articles, we will learn about life insurance in depth - the types of life insurance plans available in India, how each plan works, the benefits, and customisation options available with the plans, how you can go about buying them, how you or your family can redeem the plans, and so on.

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    Looking to buy Term Plan
    ABSLI DigiShield Plan

    Life cover up to 100 years of age.

    Joint Cover Option

    Inbuilt Terminal Illness Benefit

    Tax Benefit^

    Return of Premium Option~

    Life Cover

    ₹1 crore

    Premium:

    ₹542/month 1

    ABSLI DigiShield Plan. This is a non-linked non-participating individual pure risk premium life insurance plan; upon Policyholder’s selection of Plan Option 9 (Level Cover with Survival Benefit) and Plan Option 10 (Return of Premium [ROP]) this product shall be a non-linked non-participating individual life savings insurance plan. UIN: 109N108V11
    1LI Age 21, Male, Non Smoker, Option 1: Life Cover, PPT: Regular Pay, SA: ₹ 1 Cr., PT: 10 years, Premium paying term: 10 years, Annual Premium: ₹ 5900/- ( which is ₹ 491.66/month) Premium exclusive of GST. On death, 1 Cr SA is paid and the policy terminates.
    ^Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.
    ~Available only on regular pay
    ADV/12/22-23/2411