Why Term Plan is the Cornerstone of a Solid Financial Plan

Life is a continuous journey filled with many different financial goals and unexpected events. As you navigate your life, it is essential to prioritise the well-being and security of those you love. Having a solid financial plan in place can help you achieve financial stability and ensure a brighter future for your loved ones. It is an important aspect that ensures a secure future for yourself and your family. With numerous financial products and options available in the market, it can become overwhelming to decide which one suits your requirements the best. However, there is one financial product that should not be overlooked when it comes to securing your future - Term Insurance.

This article elucidates why term insurance should be an essential part of your financial planning and how it can benefit you in the long term.

Starting with the basics, first, let's see what a Term Plan is:

Term Plan is a basic type of life insurance that provides coverage for a specific period, called 'term'. The policyholder pays regular premiums during the term, and in case of his unfortunate demise during this period, the death benefit will be paid to the nominee/beneficiary.

It is a cost-effective way to provide financial protection to your loved ones in the event of your untimely death. Unlike other types of life insurance, term plans do not have a savings component and do not accumulate cash value over time. The coverage and premium remain fixed for the entire policy term. If the policyholder survives the term, the coverage will end, and no benefit will be paid.

The importance of term plan in financial planning:

Life insurance is an important component of financial planning, providing families with peace of mind and financial protection in the event of a loved one's death. There are several reasons why life insurance should be a top priority when it comes to financial planning, including:

1.Financial protection for your loved ones:

A term plan acts as a safety net for your family. By paying a predetermined premium, you are insured against the possibility of your untimely death. In the event of your death, your beneficiaries will receive a predetermined sum of money, known as the death benefit as well as any additional benefits specified in your life insurance policy. This financial support can help reduce the burden of living expenses and ensure your family's long-term financial stability.

2. Ensure your family does not have to compromise on their goals:

You plan for your future considering the long-term goals, such as buying a home, paying for children's higher education, saving for retirement, etc. Similarly, your spouse and children may have certain dreams and goals. However, in case of the untimely demise of the breadwinner, the family may not be in a financial position to achieve their goals. But with the right life insurance coverage, you can ensure that your family lives a comfortable life without compromising on their goals.

3. Manage your debt:

Adequate term insurance coverage acts as a risk management tool for outstanding debts. In case of the unfortunate demise of the policyholder, the beneficiary can use a portion of a death benefit to repay your outstanding debt. This will ensure your loved ones will not have any financial burden when you are not around anymore to take care of the finances.

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4. Tax saving:

The premiums paid towards life insurance are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. Furthermore, the insurance proceeds the beneficiary receives are tax-free under Section 10(10D) of the same act.

5. Additional benefits:

While term plans usually do not offer any other benefit apart from death benefit, many insurers nowadays have started providing additional benefits, such as disability cover and critical illness cover. Some insurers provide these covers under their basic plans, whereas others require you to buy separate add-ons for a slight increase in the premium.

6. Term plans can be customised as per your requirements:

Not many individuals know that they do not have to buy the standard term plan and they can customise it as per their requirements. You can choose sum assured, policy tenure, premium payment frequency, etc., based on your financial situation. Moreover, you can also choose to pay only for a specified period and get insurance cover for a longer tenure. There are also term plans that offer to return the premiums paid on survival.

Should you buy term insurance despite having a contingency fund?

A contingency fund is an emergency fund set aside for unexpected or unforeseen events. It can help you cover unexpected expenses arising due to several reasons, such as a medical emergency, job loss, etc., without having to rely on loans or credit cards. Having an adequate contingency fund can provide financial security and peace of mind as it can help you weather unexpected financial challenges without incurring debt. However, the size of a contingency fund is typically 12 to 24 months worth of living expenses, and one should decide the exact amount considering their own financial situation.

Hence, while having a contingency fund is essential, it may not fully protect your financial future in the event of unexpected circumstances such as death or disability. Term insurance, on the other hand, provides a lumpsum amount to the beneficiary in case of an unfortunate event during the policy term, helping to ensure financial security for your loved ones.

Additionally, a contingency fund may not provide enough financial coverage in the event of a catastrophic event, while term insurance provides a substantial death benefit that can help repay any outstanding loans and achieve long-term financial goals.

While a contingency fund and other financial strategies are important, term insurance provides comprehensive protection that cannot be replicated by other means. Hence, having both a contingency fund and a term plan can provide comprehensive financial protection.

To conclude:

Term insurance plays a crucial role in financial planning by providing financial security and peace of mind to individuals and their families in the event of death or disability. A term plan provides a lumpsum amount to the beneficiary, which can help cover various expenses. It is the most cost-effective way to protect your loved ones from financial hardship in the event of an unexpected loss.

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.