Ch. 1:Role Of Life Insurance In Personal Finance

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.

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.

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.

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.