In the vertical of financial planning, the role of term insurance extends beyond mere risk mitigation. It serves as a foundational element in an individual’s investment portfolio, offering security, protection, and tangible financial benefits. This article discusses the practical aspects of term insurance and an in-depth comparative analysis between term insurance and other investment-linked products.
Reasons to include term insurance in your investment portfolio
Affordability
Early in one’s career, financial responsibilities might be high, leaving limited room for significant investments. Term insurance offers a solution by providing substantial coverage at affordable premiums. This affordability empowers individuals, especially those starting their professional journey, to secure their family’s financial well-being without straining their current financial obligations. This aspect makes term insurance an accessible choice, regardless of one’s current income level.
Family Protection
Imagine a family where the primary earner unexpectedly passes away. In such a scenario, the family witnesses not just the emotional loss but even future financial uncertainties. A term plan serves as a lifeline, allowing families to receive a hefty lumpsum amount. This financial support provides a crucial buffer during an emotionally challenging time, helping them cover immediate expenses, outstanding debts, and ongoing living costs. It ensures that the family’s quality of life remains intact, allowing them to grieve without the added burden of financial stress.
Debt management
Suppose an individual has availed a home via a home loan. If this person dies prematurely, the family may have to witness the burden of repaying the outstanding dues, and in the case of inadequate repayment, it may result in the loss of their current shelter. Term insurance intervenes here, ensuring that the outstanding loan amount is settled through the policy payout. This ensures that the family’s shelter and security remain intact, even in the absence of the primary breadwinner.
Tax efficiency
Balancing tax planning with family security is a priority for many. Term insurance offers a win-win scenario by providing both tax benefits and financial protection. The premiums paid towards term insurance are eligible for tax deductions under Section 80C of the Income Tax Act. This allows individuals to optimise their tax liabilities while simultaneously ensuring that their family’s future remains secure.
Income replacement
The untimely demise of the primary earner can thrust the family into a precarious financial situation. A term insurance policy bridges this gap by providing a pay-out that mirrors the lost income. This financial support safeguards the family’s lifestyle, future goals, and aspirations. From education expenses to routine bills, the payout acts as a steady source of income, ensuring that the family can continue to pursue their dreams despite the absence of the primary earner.
Riders for comprehensive coverage
Term insurance policies can be customised through riders, offering an added layer of coverage tailored to specific needs. Critical illness or disability riders, for instance, extend the policy’s scope to cover unforeseen medical expenses. This versatility allows individuals to address potential financial vulnerabilities, ensuring that the policy aligns closely with their unique circumstances.
Critical illness support
In the unfortunate event of a critical illness diagnosis, medical expenses can strain even the most robust financial plans. A term insurance policy can ease this burden by providing a lump-sum payout upon diagnosis. This financial support can cover medical treatment, rehabilitation, and other associated costs, allowing the policyholder to focus on their recovery without worrying about the financial implications.
Peace of mind
The emotional tranquillity that comes from knowing that your family is financially safeguarded is invaluable. In the occasion of your unanticipated death, a term plan endows the assurance that your dependents will not witness dire financial shortfalls. This mental peace permits you to lead a confident life, as you know the future of your family is secure regardless of financial uncertainties.
Inflation-adjusted sum assured
Over time, the purchasing power of money diminishes due to inflation. Term insurance policies that come with an inflation-adjusted sum assured counter this challenge effectively. By factoring in the impact of rising living costs, these policies ensure that the coverage amount retains its relevance over the years, providing the intended financial protection despite economic fluctuations.
Estate planning facilitation
For individuals with substantial assets and wealth, efficient estate planning is vital to ensure a smooth transition of wealth to heirs. Term insurance can play a role in this process by providing a significant payout that can be directed towards beneficiaries. This facilitates the seamless transfer of wealth, helping preserve the legacy of the family.
Difference between term insurance policy and other investment options
Term insurance vs. gold
Gold investment for long has been considered a traditional investment product owing to its historical and cultural stability provision. However, investments in gold are vulnerable to market movements and might not offer constant returns.
In contrast, term policy, assures to offer consistent support financially to the beneficiaries of the policyholder. Irrespective of the market movement, the lumpsum payment stays intact. Such stability can be essential for those dependents who depend on the income of the policyholder for their well-being.
Term insurance vs. mutual funds
Mutual funds are instruments that pool funds from various retail investors to make investments in diversified asset classes such as bonds, securities, and stocks. They endow market-linked returns, inferring their performance is based on the financial market’s ups and downs. While mutual funds can potentially yield substantial profits, they also come with inherent risks, as market fluctuations can lead to losses.
Term insurance, on the other hand, works on a fundamentally distinct premise. It assures a fixed amount of payment to the beneficiaries in the event of the death of the policyholder. This pay-out is not influenced by market conditions; it remains consistent regardless of economic fluctuations. This reliability is essential for offering financial stability to the family in times of uncertainty.
Real estate vs. term insurance
Real estate investment involves purchasing property with the expectation of capital appreciation or rental income. However, real estate assets lack immediate liquidity. In case of urgent financial needs, converting property into cash can be time-consuming and complex.
In contrast, term insurance offers prompt access to funds through its lump-sum payout. This liquidity can be vital during emergencies or to fulfil immediate financial obligations. If the policyholder passes away, the family can swiftly access the insurance payout to cover expenses like outstanding debts, funeral costs, or immediate financial needs.
Stocks vs. term insurance
Stock investment endows the potential to generate considerable returns, but it even comes with substantial risks. The stocks’ value can fluctuate considerably owing to economic conditions, market dynamics or company-linked parameters.
In contrast, a term policy is designed to meet the financial risks that your dependents may face. Term insurance, on the other hand, is designed to mitigate financial risks for dependents. While it doesn’t offer the prospect of market-linked gains, it ensures that the family’s financial needs are met even if the policyholder’s income ceases due to unfortunate circumstances.
Fixed deposits vs. term insurance
Fixed deposits (FDs) are a conservative investment option where individuals deposit a lump sum with a bank or financial institution for a fixed tenure at a predetermined interest rate. FDs provide fixed returns, ensuring income stability but potentially offering lower yields compared to riskier investments.
Term insurance, while not designed for returns, focuses primarily on protection. It guarantees a pay-out to beneficiaries upon the policyholder’s demise, prioritising financial security over returns. This makes term insurance particularly relevant when the primary concern is safeguarding the financial interests of dependents.
Conclusion
Term insurance policy is an important constituent in a portfolio, ensuring not just the financial security and stability of dependents but even offering risk mitigation and tax benefits. The detailed comparative analysis helps to understand how the policy is distinct from other products and serves brilliantly the purpose of protecting families against financial shortfalls. By adding this policy, investors can attain financial stability and resilience for their dependents in their absence.
Also Read: 5 Top Secrets to Choose the Best Term Insurance Policy
