In India, usually, your income or credit score is seen as a proxy for your financial well-being. However, either of these metrics isn’t comprehensive enough to assess your full financial credibility or the extent of your financial planning.
For example, knowing about your income alone wouldn’t give much idea about expenses, net worth or debts, especially if your income is volatile and varies from one week to another.
Overall, financial planning is much more than being able to pay off any present-day or future debts and managing your day-to-day expenses. Let us see how your financial planning can vary with your needs and life goals and how does term insurance fit into the bill.
Hierarchy of Financial Needs
As soon as you start earning, the first thing you do is to pay for all the stuff necessary for your survival such as accommodation, travel and food items. You may also look to incur a debt in the process, but it is all good in the short-term. With time, however, as you start a family and your responsibilities increase, you feel the need to improve your financial condition. Therefore, you look to take on a newer job that pays you more. Once your day-to-day expenses are met, and you have some money in excess, then you feel the need to maximise your savings and look towards broader life goals.
In other words, your financial needs can be broken down into below mentioned five hierarchical levels (in the order of which they are usually fulfilled) –
Regarding financial obligations, the most basic necessity is to get an income to cover day-to-day living expenses such as housing, food and utilities. Income can have many forms, ranging from dividends and wages to benefits sanctioned by the government or even gifts from family. Overall, income forms the basis of financial security.
You need some form of financial security or insurance to protect your earnings from unforeseen situations and setbacks. This, in turn, comprises taking stock of your cash, belongings and health, and securing them against theft, loss, damage or illness.
At some point in life, you will need credit to acquire assets such as a home, car, or education, which are otherwise unattainable through income in normal conditions. This requires you to have a credit history, high credit score and an ability to leverage low-cost capital.
When you save, you put away financial resources for specific life goals. Being able to keep a part of your income does demonstrate discipline, a sense of achievement and engenders confidence for oneself and others.
Perched at the very top of this pyramid, lies the ability to realise the dynamism of one’s economic potential. At this stage, you are ready to invest in instruments that carry risks as well as significant potential for returns.
It is a representation of your inclination towards making investments to generate income, instead of relying only on earned salary. Thus, it is through investing that you have the opportunity to achieve crucial life goals such as financial security for your loved ones and a secure retirement.
How does the Term Plan Fit the Bill?
Financial planning is not just about accumulating funds or reserves to fulfil your financial objectives or to meet any unforeseen contingencies. It is also about securing those finances against all the odds.
Which is why term insurance takes the spotlight as a cost-effective means to secure a better tomorrow for your loved ones. Term insurance helps you extend a financial cover over your family against life’s uncertainties while assisting you to accomplish your family’s life goals. Overall, buying term insurance online affects your financial planning in the following ways:
- Protection for your loved ones
A term insurance plan functions as a financial backup plan for your family. You pay a fixed premium amount under the plan, and in return, you avail an insurance cover against your life. So, in the case of your untimely demise, the death benefit from the plan would be disbursed to your family in the form of a sum assured plus additional benefits (if any).
- Manage Risk Against Debts
By investing in a term plan, you can manage the risk against any ongoing debts and loans. Whenever you avail a home loan or any such liability, you must purchase a term insurance plan that is worth more than the total outstanding loan amount. Doing so would help you minimise the risk of the inability of loan repayment, in the event of your sudden demise. Thus, the burden of outstanding debts and loans will not be passed to your family after your death.
- Tax Saving
A term plan also serves as a tax saving tool since the premium paid towards the policy qualifies for tax deduction under Section 80C. Further, the proceeds from the term insurance policy, which your nominee receives are tax-exempt under Section 10 (10D).
Enhance Your Financial Planning with a Term Plan
While financial planning is a crucial step towards a prosperous tomorrow, making term insurance a part of your financial plan does help secure the efficacy of the strategy. Further, adding a term plan into the mix that already has some of the best short-term investment options, would help maximise both your investment and insurance benefits.
Before purchasing term insurance, however, it is crucial that you compare between different term plans from reputable insurers such as Max Life Insurance. This will only make sure that you select a plan that comprises all features and benefits, necessary for accomplishing your financial goals. Remember, a term plan is a safe and secure form of saving, that is more beneficial if bought onboard at an early age. Moreover, it must be reviewed periodically to align your insurance cover with the changing objectives of your life.