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Know how Term Insurance plays an important role in Financial Planning


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Oct 27, 2021

By : Bajaj Allianz Life

If satisfying your life goals is your number one priority, then planning your finances appropriately is the right way to go. But then, when we talk about financial planning, many individuals seem to think that it is all about investing judiciously in the right investment options.

As a matter of fact, in addition to wealth creation, financial planning also involves accounting for contingencies and unexpected emergencies. And one of the preferred ways to do that is through a term insurance plan. And that’s precisely why it is crucial to include a term life insurance policy in your financial plan.

If you’re wondering about the importance of term insurance in financial planning, this article may just be able to help you out. But before we explore the various reasons why having a term insurance plan is important, let’s just quickly take a look at what it is.

 

What is term insurance?

 

Also known as a term life insurance policy, term insurance is a type of a life insurance plan where an individual enters into a contract with an insurance service provider, who agrees to provide a life cover to the individual for a specific period of time, known as the policy term.

If the individual happens to die within the policy term, the insurer would then be obligated to pay a predetermined sum of money to the deceased individual’s nominees. This predetermined sum of money that’s paid out is known as the death benefit. Now, in exchange for this life cover, the individual has to make periodic payments, known as premiums, to the insurer throughout the policy term.

Here’s where term insurance differs from other types of life insurance plans. A term insurance plan doesn’t come with any maturity benefits whatsoever. This means that if the individual happens to survive till the end of the policy term, the premiums paid under the term insurance plan will not be returned and no payouts will be made to either the individual or their nominees.

 

How does term insurance play an important role in financial planning?

 

Now that you know what a term life insurance policy is, let’s get down to the main part of this article. Here are some of the reasons why term insurance is considered to be important in financial planning.

 

1. It provides financial security to your family

 

Term insurance is all about protecting your family from the loss of income that they would have to suffer if something untoward were to happen to you. Whether you’re the sole breadwinner of your family or not, losing an income stream would in most cases put a stop to your family’s life goals.

With a term insurance plan, you can ensure that your family is well taken care of even during your absence. And that they’re left with a sizable financial corpus to satisfy their life goals without any compromises.

 

2. It can be enhanced through riders

 

Did you know that the payout from your term insurance plan can be enhanced? By opting for term insurance riders, which are basically addons, you can cover any other risks that you perceive enhance the level of protection offered by your term insurance for an additional premium.

For instance, if you’re worried about developing a disease such as cancer, you could opt for a Critical Illness Rider, which would ensure that you receive a payout upon first diagnosis. This payout that you receive through this rider is over and above the death benefit under the base plan and can be used to cover the treatment expenses.

 

3. It can be customized according to your requirements

 

Term insurance is not a one-size-fits-all insurance policy. In fact, everything about a term insurance plan is customizable. Right from the death benefit sum assured and policy tenure to the premium payment frequency and payout option. You can tailor the plan to be in accordance with your needs and requirements.

 

4. It is very cost effective

 

Since term insurance offers no maturity benefits, the premiums that you’re required to pay tends to be quite nominal when compared with other types of life insurance plans. This allows you to opt for a much higher death benefit sum assured for relatively affordable premiums.

 

5. It provides multiple tax benefits

 

Financial planning is as much about saving tax as it is about wealth creation. And term insurance plans excel when it comes to providing you with tax benefits. According to section 80C of the Income Tax Act, 1961, the premiums that you pay towards a term plan can be claimed as deductions from your total taxable income to the tune of up to Rs. 1.5 lakhs in a financial year. That’s not all. The death benefit payout that your family receives is also completely tax-free as per section 10(10D) of the Income Tax Act 1961. These above-mentioned are subject to the conditions specified in the Income Tax Act 1961.

 

Conclusion

 

Hope you’ve now understood the importance of term insurance in financial planning. Every individual interested in providing financial security to their family may consider investing in a term insurance plan as one of the options. Even if you’re already covered under a group term life insurance plan, you may still prefer to purchase a separate individual term life insurance policy. This way, you can ensure that there are no loopholes in your financial plan.

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The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.