4 Benefits of Including Insurance in Your Personal Finance Strategy

We have several financial goals at different life stages and come across various unexpected events that require us to prioritise the well-being and security of our loved ones. Accordingly, it is crucial to have a solid financial plan that could help attain financial stability and ensure a brighter future for them. While people often create solid financial plans by setting their goals and investing across diverse asset classes, many of them fail to recognise the importance of including insurance in their personal finance strategy.

Insurance serves as a critical tool to shield you and your family from unforeseen circumstances and provide financial security when needed. Different insurance policies, such as Health Insurance, Life Insurance, Car Insurance, Home Insurance, and Liability Insurance, cater to diverse needs and situations. Incorporating insurance into your financial planning helps mitigate risks, protect your assets and loved ones, and achieve long-term financial goals with peace of mind. This article will delve into the significance of insurance planning in personal finance and why it is a vital component of any financial strategy.

What Is Insurance Planning?

Insurance Planning involves the careful selection of best-suited insurance policies that can provide financial protection against unexpected losses to you, your family members, assets, and more. This process typically involves identifying insurance providers and plans that can offer financial support during a crisis. The primary aim of Insurance Planning is to alleviate the financial strain that arises from unforeseen life events. Essentially, Insurance Planning mitigates the financial impacts of unfortunate occurrences, reduces financial stress, and provides peace of mind.

How Does Insurance Planning Help in Financial Planning?

In order to achieve your financial goals, it is essential to have insurance as a critical element of your financial plan. Saving and investing according to your plan is necessary to attain your financial goals, but it is equally important to be prepared for unforeseen circumstances that may derail your financial plan. Various incidents in life, such as a job loss, disability, accident, loss of an earning family member, illness, or other setbacks, can hinder your progress. During such times, having an insurance policy can prove to be beneficial. It can help you preserve your emergency fund and provide the necessary finances in case of an emergency. By having an insurance policy in place, you can ensure that your finances are not overly affected and that your loved ones are protected.

What Are the Benefits of Including Insurance in Your Personal Finance Strategy?

1. Provides Coverage Against Risks:

Insurance functions as a tool for managing risk by preparing you for potential financial losses resulting from unforeseen events such as hospitalisation, accident, death, etc. It essentially helps to mitigate the financial impact of such events.

2. Provides Financial Security:

Insurance policies offer financial security by compensating for any loss that may occur during an emergency. Knowing that an insurance policy will cover such losses can provide a sense of security. This can enable you to plan your finances and accumulate funds towards your goals without worrying about potential emergencies. Furthermore, having insurance in place ensures that unforeseen circumstances do not deplete your planned funds and remain secure for their intended purpose.

3. Provides Tax Benefits:

As you may know, Life Insurance and Health Insurance Plans also provide tax-saving benefits. Premiums for Life Insurance Plans are eligible for deductions under Section 80C of the Income Tax Act 1961, while Health Insurance premiums qualify for deductions under Section 80D. These deductions can help reduce your taxable income by up to Rs 2.5 lakh (Rs 1.5 lakh under Section 80C and up to Rs 1 lakh under Section 80D). If you fall under the 30% tax bracket, this deduction can help you save up to Rs 75,000 in taxes. Moreover, under Life Insurance Plans, the death benefit is entirely tax-free under the provisions of Section 10(10D). Therefore, by investing in Insurance Plans, you can also plan your taxes and receive tax benefits.

4. Provides Peace of Mind:

Insurance Plans provide a sense of security and peace of mind, as you can rest assured that your savings will not be jeopardised in an emergency, helping promote financial independence for you and your family.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

What Are the Types of Insurance Plans You Should Consider Buying?

1. Life Insurance:

Life Insurance is a crucial element of financial planning, offering families both financial security and peace of mind in the event of a loved one's passing. While there are several types of Life Insurance policies, it is advisable to cover yourself with a basic form of Life Insurance - a Term Insurance Plan that provides maximum coverage at an affordable premium.

A Term Plan provides coverage for a set period called "term." During this term, the policyholder pays regular premiums, and if he/she passes away during the term, the sum insured/death benefit would be paid to their nominee.

Upon your death, your beneficiaries receive a predetermined sum of money known as the death benefit, which can help ease the burden of living expenses and ensure your family's long-term financial goals are achieved even in your absence. Life Insurance coverage also serves as a risk management tool for outstanding debts. If the policyholder passes away, the beneficiary can use a portion of the death benefit to repay any outstanding debt, thereby reducing the financial burden on your loved ones. With adequate Term Insurance coverage, you can rest assured that your family will not face financial difficulties when you are no longer there to take care of their finances.

Take note that, unlike other types of Life Insurance, Term Plans do not come with a savings component and do not accrue cash value over time. The coverage and premiums remain the same for the entire duration of the policy. If the policyholder survives the term, the coverage ends, and no benefit is paid.

2. Health Insurance:

Health Insurance is a type of insurance that offers protection against unforeseen medical emergencies resulting from accidents, illnesses, or injuries. This type of insurance covers various medical expenses, such as hospital bills, consultation fee, medication costs, etc. Health Insurance premiums are typically influenced by three significant factors -- the insured's age, the sum insured, and their health habits.

Individual Health Insurance Plans and Family Floater Health Insurance Plans are the most common types of Health Insurance:

Individual Health Insurance Plans provide coverage to only one person. Therefore, if you wish to insure all the members of your family, you will have to purchase a separate policy for each individual. This type of policy is suitable for unmarried individuals and those who are not qualified for Family Floater Health Insurance.

The Family Floater Health Insurance Plan covers the entire family with one policy. By paying a single premium, the coverage is extended to multiple family members. The coverage is shared among all the insured members and can be used by one person or multiple persons in a policy year. The Family Floater Plan is particularly suitable for small families consisting of two adults and up to three children.

3. Car Insurance:

Buying Car Insurance is essential to secure yourself against financial losses due to significant damages, theft, accidents, natural calamities, and other issues.

As per the Motor Vehicles Act 1988, Third-party Car Insurance is mandatory for driving a vehicle on public roads. It offers financial protection against damages or losses caused to a third party's property, death, or bodily injury caused by the insured vehicle. If an accident occurs and a third party gets injured, or their vehicle is damaged, your insurance policy will pay for their medical expenses and vehicle repair costs.

A Comprehensive Car Insurance Policy provides you with all the benefits of Third-party Insurance while protecting your car and yourself. It covers damages or losses incurred by accidents, theft, burglary, fire, explosion, and transport. If an accident occurs, it covers medical expenses for both you and the third party and your car repair or replacement costs and any damages caused to the third party's property. While many car owners only purchase Third-party Insurance due to its affordability, it is advisable to get a comprehensive car insurance policy to secure your vehicle from unexpected events and meet all your motor insurance requirements.

4. Home Insurance:

Home Insurance, or Homeowners Insurance, is a form of property insurance that protects a private residence. It offers financial coverage for physical losses and damages that may occur to your house, its contents, and other residential assets. The coverage of the Home Insurance policy may differ from insurer to insurer and depends on the type of policy chosen. However, it typically covers losses and damages caused by events such as;

- Fire

- Lightning and rain

- Riots and strikes

- Aircraft damage

- Missile testing

- Storms, floods, cyclones, and hurricanes

- Earthquakes, rockslides, landslide

- Burglary, theft, etc.

5. Disability Insurance:

While Health Insurance policies cover medical expenses, the disabled person may still have to pay fixed expenses such as rent, school fees for children, loan EMIs, etc., which can be an enormous financial burden when the income stops suddenly. Disability Insurance offers monetary protection to individuals who suffer from a permanent or temporary disability and are unable to work. Essentially, it replaces lost income resulting from an inability to work for an extended period due to sickness or injury and covers medical costs.

6. Critical Illnesses Insurance:

Basic Health Insurance Plans generally exclude coverage for severe illnesses such as cancer or kidney failure, which can be quite expensive to treat. Critical Illness Insurance offers protection against all such critical illnesses at an affordable premium. Certain insurance providers allow you to purchase critical illness coverage as an additional feature to your Basic Health Insurance Plan. However, before buying the policy or an add-on, it is advisable to carefully review the list of critical illnesses that are covered by the insurer, as the list may vary from insurer to insurer.

To conclude:

The significance of having both Life Insurance and Health Insurance as part of your financial plan is evident. To avail the advantages of these insurance policies, you need to select the best Life Insurance and suitable Health Insurance Policies for your needs and incorporate them into your financial plan. By doing so, you can ensure the safety and protection of your financial future and your family.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.