Financial goals such as buying a house, funding a marriage, higher education of a child and retirement, matter a great deal in our lives. While working to achieve these financial goals, life insurance along with other financial products, play a key role.
Financial goals & insurance
Earning and saving are important, but true peace of mind comes from being financially prepared for the future. A clearly defined financial goal, such as retirement, can help individuals pursue it in a more disciplined manner and with greater confidence.
Most individuals face two financial risks – living too long and dying too early. While the former can be addressed by building a large wealth pool, the later requires insurance. Some family financial goals cannot be compromised. Even in the absence of the primary breadwinner, a child’s education and the long-term financial security of the spouse must remain protected.
Sustained exposure to screens may lead to serious anxiety issues and stress. These may induce obesity, hypertension and other health issues in the long term. Exposure to inappropriate content and social media-induced fear of missing out (FOMO) among teenagers are also serious consequences of excessive screen use. It can hinder the overall personality development of the child.
Incorporating adequate insurance can help to achieve the financial goals, even if the bread winner is no longer around.
Life insurance and protection
Almost all financial plans are incomplete without adequate life insurance. As more households opt for credit to fulfil their dreams, life insurance become indispensable.
For households with borrowings and a long list of financial goals, buying a term life insurance policy on the life of the breadwinners, with adequate coverage, becomes a must.
A term life insurance policy pays a lump sum in case of death of the life assured during the policy term, in return for payment of a small regular premium. While buying a term life insurance policy, consider opting for ‘add-on’ covers that offer to pay an additional lump sum in case of accidental death, disability or critical illness.
In case of eventuality, the large sum paid to the nominee, can be used to retire debt and achieve financial goals, in addition to meeting regular income needs of the family. This arrangement can ensure that the family has adequate resources to achieve its future financial goals.
Term life insurance must be reviewed regularly. If required, buy an additional term life insurance policy when the financially dependent persons increase due to marriage or childbirth. Similarly, before taking a large loan, say a home loan, review your insurance coverage and if necessary, consider purchasing a dedicated term life insurance policy.
Life insurance and wealth creation
While life insurance products effectively address the protection needs, their in-built wealth creation features also help build large wealth pools. Unit Linked Insurance Plans (ULIP) offer to invest in various funds that allocate money to bonds and stocks as per the fund mandate. These offer market-linked returns and can generate returns that beat inflation. Over the long term, ULIPs can help build a large corpus for specific requirement, such as funding a child’s higher education, charitable cause or retirement. Savvy investors utilise top-up facilities to boost their investments during market downturns. ULIPs allow seamless movement between bonds and equities without attracting any taxes. ULIPs also offer life cover.
For investors who are not comfortable with market-linked returns, purchasing an endowment plan can facilitate disciplined investing over the long term, with assured returns.
Taxation
The best feature of combining investment and insurance through ULIP and other investment products is that the returns are tax-free, subject to the applicable taxation rules. For example, proceeds from a ULIP are tax-free if the annual premium outgo is less than Rs 2.5 lakh and the premium paid is at least 10% of the sum assured. Similarly, payouts by term life insurance policies are tax-free.
To sum up, including life insurance in your financial plan helps you achieve financial goals without much stress. A tax-efficient approach to a diversified portfolio along with financial protection makes journey towards achieving financial goals much smoother.
Review regularly
Importantly, monitor the investments on an ongoing basis. Ideally, at least once a year, take stock of the situation and assess whether your investments are on track. Regular monitoring helps identify gaps, if any, between the investment plans and the actual requirements. It also hands over opportunities to deploy additional funds. For example, a sudden downward move in equities can be an opportunity for long-term equity investors.
As you move closer to the financial goal, gradually reduce exposure to risky assets such as equities by increasing allocation to bonds, fixed deposits and bond funds available under ULIP.
To sum up, a well-defined financial goal of building an education corpus for your child’s higher education can be achieved with meticulous planning and disciplined execution. Start early and give your child the financial foundation required to pursue their dream education with confidence.
**The calculations in this article are illustrative and assume monthly investments made at the end of each month. The assumed rates of inflation and return are not guaranteed. Actual education costs and investment returns may vary. Taxes, charges and product-specific conditions have not been considered. Investment decisions should be based on individual goals, financial circumstances and risk profile. Please consult a qualified financial adviser before making any investment decision.
