Insurance Advantages: Understanding Types And Benefits

When it comes to funding future financial goals, there is a wide range of vehicles available, each with its own set of benefits and considerations. While low-risk instruments like bank deposits and small savings offer stability but lower returns, higher-risk products such as equity can potentially yield higher returns. However, insurance stands out as a favorable investment option for several reasons.

Life Insurance for Goal Planning

Certainty: One of the significant advantages of using a life insurance policy to fund a future goal is the assurance it provides. In the unfortunate event of death or critical illness, the sum assured from the policy can still be utilized to fulfill the policyholder's objectives.

Tax efficiency: Insurance policies offer tax benefits, making them an attractive choice. Maturity benefits from most insurance policies are tax-free under Section 10 (10D) of the Income Tax Act, 1961. Additionally, the premium paid towards the policy is eligible for deduction under Section 80C of the same act.

Flexibility: Insurance products, particularly Unit Linked Plans (ULIPs), provide flexibility in terms of asset allocation, policy durations, premium payment terms, and fund switching options. ULIPs allow investors to customize their policies to match their risk appetites and specific requirements.

Diverse options: Depending on the time horizon, desired returns, and risk appetite, Unit Linked Plans offer a broad spectrum of asset allocation choices between equity and debt. Investors can tailor their policies to suit their unique goals.

Liquidity: Many insurance products offer good liquidity after a lock-in period, enabling policyholders to access funds in case of emergency requirements. However, it's important to note that there might be charges associated with unnecessary encashment, discouraging frequent withdrawals.

Earmarking: Insurance policies are often taken with specific goals in mind. This serves as a deterrent against using the funds for other purposes and encourages continued contributions towards the designated objective.

Insurance for Financial Security :

Apart from goal planning, insurance also plays a crucial role in providing financial security in various areas:

Term insurance: This simple form of life cover pays the sum assured in the event of the policyholder's death. It ensures the family's survival and can also be assigned to cover the repayment of a policyholder's debt. Loan Cover policies are a variant where the sum assured decreases in line with the loan balance.

Health insurance: These policies provide coverage for major healthcare expenses such as hospitalization, surgery, and critical illnesses. The benefits can be in the form of fixed payouts during hospitalization or a lump sum upon diagnosis of specified critical illnesses.

Accident benefit: An additional cover available with basic policies, this pays an additional sum assured to the beneficiary in the event of death due to an accident. It helps cover unforeseen expenses that may arise, such as relocation, debt servicing, or other financial needs.

Retirement Planning :

With the advancement of medical facilities, life expectancy has increased significantly. However, factors like lifestyle-induced illnesses and a competitive job market may limit one's ability to work for an extended period. As a result, our retirement phase may last as long as our active working years. To ensure a comfortable retirement, it becomes essential to build a solid corpus during our earning years.

Pension plans provide a solution for retirement planning by allowing individuals to accumulate savings over their working lives. These plans offer a lump sum upon retirement, which can then be invested in an annuity to provide a regular retirement income.

In summary, life insurance presents several advantages when it comes to funding future financial goals. It offers certainty, tax efficiency, flexibility, a variety of options, liquidity (with some considerations), earmarking benefits, and the ability to provide financial security and retirement planning.