Importance of Insurance in Financial Planning There are 5 key essential components of a financial plan Insurance Planning, Retirement Planning, Investment Planning, and Tax Planning.
Simply said, financial planning entails taking control of your finances. This entails mapping out your earnings, outlays, assets, liabilities, and financial objectives. After that, you build a financial portfolio and make investments in a variety of sectors to achieve your objectives. Insurance seems necessary given the impending high inflation costs and the higher cost of living, particularly with India’s shift toward nuclear households.
Insurance As The First Step In Financial Planning
Before you can develop your financial planning, you must first decide on your goals, their timeline, and the amount of money you have accessible (income – expenses). The following stage is to allocate your available resources among different investment options in order to create a fund for goal achievement. But how should you approach insurance in all of your planning? You may need to determine how crucial insurance is and whether it is important at all.
Insurance becomes essential to support financial planning for your home from any financial hardship while you are absent. Here are some explanations as to why it could be wise to consider purchasing the insurance right now. Your safety net is insurance.
Insurance in Financial Planning: The Value
When it comes to protecting your finances, insurance is a useful tool. Listed below are some factors that make insurance a crucial component of your financial plan:
- 1. Risk Protection: Insurance is a method for reducing risk. Therefore, it trains you to handle any financial loss you might experience in the event of an unforeseen circumstance like a hospital stay or death.
- 2. monetary stability: Insurance policies give you financial stability by covering the losses you incur in an emergency. Knowing that the insurance coverage would cover the loss if an emergency arises gives you peace of mind.
- This aids in financial planning and corpus building for goals. Additionally, it makes sure that the intended corpus is safe and is not called upon in an emergency.
- Insurance policies give you financial stability by covering the losses you incur in an emergency. Knowing that the insurance coverage would cover the loss if an emergency arises gives you peace of mind.
- This aids in financial planning and corpus building for goals. Additionally, it makes sure that the intended corpus is safe and is not called upon in an emergency.
- 3. Various strategies for various needs To cover the various dangers you can encounter, there are various sorts of insurance products. The risk of an early demise is covered by life insurance, whilst medical emergencies are covered by health insurance.
- The danger of car theft or accidents on the road is similarly covered by auto insurance plans, while trip-related emergencies are covered by travel insurance plans.
- You may thus create a full 360-degree layer of economic stability for yourself by selecting several plans according to the dangers you face.
- 4. Tax benefits: Plans for health and life insurance can help you save on taxes. Health insurance costs can be written off under Section 80D, whereas life insurance premiums can be written off under Section 80C. You can reduce your taxable income by INR 2.5 lakh thanks to both of these deductions. This deduction allows you to avoid paying INR 75,000 in taxes if you are in the 30percentage tax rate.
- The death benefit under a life insurance policy is also entirely tax-free. Under the terms of Section 10, even the maturity gain is tax-free (according to individual limits and conditions) (10D). This implies that you can arrange your taxes by purchasing insurance policies.
- 5. Mental tranquility: You can rest easy knowing that, in the event of an emergency, your cash reserves would not be at risk thanks to insurance coverage. You and your wife and kids now have financial independence thanks to this.
There are 5 steps involved in financial planning.
Maslow’s Hierarchy of Needs was the inspiration for the economic planning pyramid, which classifies the five levels as follows:
- 1. Managing your money: This entails paying for regular expenses, paying down debt, and creating a steady cash flow.
- 2. Creating a safety net: where the emphasis is on saving money, increasing emergency funds, and selecting adequate life and health insurance coverage.
- 3. Creating wealth: This focuses on increasing your stock portfolio, retirement savings, and effective use of tax breaks and exemptions.
- 4. Preserving wealth: This strategy focuses on achieving financial independence by maximizing pension earnings and converting retirement assets into income.
- 5. Leaving behind a legacy: This topic focuses on philanthropy, succession planning, and estate planning.
These are the 5 phases of financial planning, and the second stage is insurance before asset accumulation.
Insurance Planning Types You Must Have in Your Portfolio
The health insurance you select will depend solely on your needs. Before choosing the best insurance options to protect against those hazards, you must first assess the financial risks you face. There are, however, some insurance products that demand a place in everyone’s portfolio. The plans are as follows:
1. Term protection: The word insurance plan is a straightforward life insurance strategy that protects against the possibility of an early demise. Life insurance is given if the insured person passes away within the policy’s stipulated term, which is included in the cost of the policy.
- Just because death is unpredictable makes term insurance plans essential. The family may experience a large financial loss if the family’s primary provider passes away too soon. The loss is covered by a term plan.
- It provides a death benefit to the family, allowing them to cover lifestyle costs and achieve their objectives. Additionally, current term plans are now all-inclusive.
- There are several coverage options available that can protect you against the risk of not only early death but also serious illnesses, terminal illnesses, and unintentional fatalities.
- Alternatively, you can choose the whole life option, which provides insurance until you reach 99 or 100 years old.
- 2. Health coverage: Due to the frequency of medical emergencies and the coverage these plans offer, health insurance plans are relevant. A health plan will pay for your medical expenses if you get sick or get hurt in an incident and need to go to the hospital.
- Medical expenses are significantly rising and quickly becoming out of reach for the majority of families in the modern world. Official inflation data show that the cost of medical care increased from 3.8% in December 2019 to 8.4% in May 2021.
- The survey also noted an 8.6% YoY increase in the price of medications and a 6.2% YoY increase in the price of medical testing. In a similar vein, hospital fees rose 5.9% YoY while consulting fees rose 4.5%.
Having health insurance is now necessary for this situation. It guarantees financial security in the event of medical emergencies.
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- 3. Vehicle coverage: If you possess a vehicle, motor insurance coverage becomes important. A motor insurance plan is required under the terms of the Motor Vehicles Act of 1988, regardless of whether you drive a two-wheeler or a four-wheeler.
- Motor insurance policies shield you from potential financial obligation in the event that you cause someone else harms or damages to someone else’s property. The strategy manages the financial commitment and makes up for the third party’s loss.
- Additionally, if you choose comprehensive plans, you will also be covered for any damage your car sustains in an accident or other disaster. The plan also provides coverage for car theft and offers you a lump sum payment to assist you in purchasing a replacement vehicle.
You should not skip these three investments because they are essential to your financial portfolio. In the event of an emergency, they assist you in securing your finances.
