Insurance As The First Step In Financial Planning – Forbes Advisor INDIA


Financial planning simply means you need to take charge of your finances. This includes you charting out your incomes, expenses, assets, liabilities along with your financial goals. Thereafter, you create a financial portfolio and invest in different avenues to meet your goals. With high inflationary expenses looming and the rising cost of lifestyle, insurance appears inevitable, especially with the shift toward nuclear families in India..

As a first step towards creating your financial plan, you need to identify your goals, their horizon and your disposable income (income – expenses). Next you need to allocate your disposable income to different investment avenues to create a fund for goal fulfilment. However, in all your planning, where does insurance fit in? The question that you may need to answer is insurance important, and if yes, how important?

To protect your family from any form of financial stress in your absence, insurance assumes importance. Insurance works as your safety net and it could be a good time to consider taking an insurance plan, here’s why. 

Importance of Insurance in Financial Planning

Insurance, as a product, is beneficial in safeguarding your finances. Here are some reasons which make insurance a quintessential part of your financial portfolio: 

1. Risk coverage

Insurance is a risk mitigation tool. So, it prepares you to face the financial loss that you may incur in any unforeseen event such as death or hospitalization.

2. Financial security 

By compensating for the loss that you suffer in an emergency, insurance policies provide financial security. You are secured in the knowledge that if an emergency strikes, the insurance policy would shoulder the loss. This helps you plan your finances and accumulate a corpus for your goals. It also ensures that the planned corpus is secured and is not used in emergencies.

3. Different plans for different needs

There are different types of insurance plans to cover the different types of risks that you might face. Life insurance policies cover the risk of premature death while health insurance policies cover medical emergencies. Similarly, motor insurance plans cover the risk of road accidents or theft of the vehicle and travel insurance plans cover trip-related contingencies.

You can, thus, choose different policies based on the risks that you face and create yourself a 360-degree layer of financial protection.

4. Tax benefits

Life and health insurance plans are tax saving too. Life insurance premiums qualify for a deduction under Section 80C while health insurance premiums qualify for deductions under Section 80D. Both these deductions help you lower your taxable income by INR 2.5 lakh (INR 1.5 lakh under Section 80C and up to INR 1 lakh under Section 80D). If you fall in the 30% tax bracket, this deduction helps you save a tax of INR 75,000.

Furthermore, under life insurance plans, the death benefit is completely tax-free. Even the maturity benefit is tax-free (subject to specific terms and conditions) under the provisions of Section 10 (10D). This means, by investing in insurance plans, you can also plan your taxes.

5. Peace of mind

Insurance plans give you peace of mind knowing that your savings would not be threatened in emergencies. This gives financial independence to you and your family.

Financial Planning is a Five-Step Process 

According to the financial planning pyramid, a derivation from Maslow’s Hierarchy of Needs, the five steps can be categorized as:

  1. Managing your money: where the focus is on your daily expenses, reducing debt and establishing a stable cash flow
  2. Building a safety net: where the focus is on creating your emergency corpus, growing savings and opting for adequate insurance coverage- both health and life.
  3. Accumulating wealth: where the focus is on growing your investment portfolio, retirement corpus and utilizing tax benefits and exemptions efficiently.
  4. Preserving wealth: where the focus is on enjoying financial independence by converting retirement corpus into income and maximising pension earnings.
  5. Leaving a legacy: where the focus is on estate planning, succession and continuity planning along with philanthropy.

These are the five stages of financial planning wherein insurance comes in the second step, before accumulating wealth. 

Must-Have Insurance Plans in Your Portfolio

The choice of insurance policies depends entirely on your needs. You need to assess the financial risks that you face and then buy suitable plans to insure such risks. However, some insurance plans are universally relevant and demand a place in everyone’s portfolio. These plans are as follows: 

1. Term insurance

A term insurance policy is a basic life insurance plan that covers the risk of premature death. The policy comes with a specified tenure and if the insured dies during the tenure, a death benefit is paid.

Term insurance plans are a must simply because of the fact that death is uncertain. If the breadwinner of the family dies prematurely, the family might suffer a considerable financial loss. A term plan covers such loss. It pays the family a death benefit enabling them to meet their lifestyle expenses and also fulfil their goals.

Moreover, modern-day term plans have become all-inclusive. You can find different coverage variants that not only secure you against the risk of premature death but also against critical illnesses, terminal illnesses and accidental deaths. You can also opt for the whole life option and enjoy coverage up to 99 or 100 years of age.

2. Health insurance

Health insurance plans prove relevant because of the incidence of medical contingencies and the coverage that these plans provide. If you suffer an illness or are injured in an accident and require hospitalization, a health plan covers your medical bills. 

In today’s age, medical costs are increasing considerably and are rapidly becoming unaffordable for most families. According to official inflation data, medical inflation jumped to 8.4% in May 2021 compared to 3.8% in December 2019. The report also stated that the cost of medicines jumped 8.6% YoY while those of medical tests increased by 6.2%. Similarly, hospital charges jumped 5.9% YoY while consultation charges increased by 4.5%. 

In such a scenario, having a health insurance plan has become a must. It ensures financial protection when medical emergencies strike.

3. Motor insurance

A motor insurance policy becomes relevant if you own a vehicle. Whether you drive a two-wheeler or a four-wheeler, a motor insurance plan is mandatory under the provisions of the Motor Vehicles Act, 1988. 

Motor insurance plans protect you from the financial liability that you might face if you injure someone else or damage third party property. The plan handles the financial obligation and compensates the third party for the loss suffered.

Furthermore, if you opt for comprehensive plans, you also get coverage for the damages that your vehicle suffers in an accident or in any other calamity. The plan also covers the theft of the vehicle and provides you with a lump sum benefit to help you replace the stolen vehicle. 

These three policies are a must for your financial portfolio and should not be given a miss. They help you secure your finances if an emergency strikes. 

How To Choose Optimal Coverage

The problem of underinsurance is very common in India since the penetration and the density is below the global average. Moreover, when it came to health insurance, General Insurance Council’s data showed that between March 2020 and 14th May 2021, policyholders paid 40% of their medical bills out of pocket despite having health insurance.

Numbers don’t lie. First, the penetration of insurance is low and, second, even those who have insurance are grossly underinsured. In such situations, buying optimal coverage is as important as buying insurance in the first place. If the coverage is not sufficient, the whole purpose of insurance stands defeated.

When buying insurance, opting for optimal coverage is important. Here are some simple formulae to consider:

  1. Term insurance 

Opt for a sum assured of at least 10 to 12 times your annual income. For instance, if your annual income is INR 25 lakh, you need coverage of at least INR 2.5 to 3 crore.

  1. Health insurance

Opt for a sum insured which is equal to 50% of your annual income and the aggregated hospital bills over the last three years.

So, if your annual income is INR 25 lakh and you have suffered hospitalisation over the past three years the bill of which amounted to INR 2.5 lakh, your sum insured should be at least INR 15 lakh.

Remember, these are basic calculations that do not take into consideration other variables. Ideally, the coverage should depend on your financial needs that can be ascertained from different factors. Some such factors are as follows: 

  1. Your lifestyle expenses
  2. The number of dependents that you have
  3. Existing assets and liabilities 
  4. Your financial responsibilities or goals

So, when buying insurance, do not make a hasty decision. Assess how much coverage you need and then pick the right plan. 

Bottom Line

The best-laid plans can go awry. Life has a tendency to throw the regular curveballs your way. You, thus, need a contingency plan. Insurance is that contingency plan which helps your portfolio absorb the financial shocks of emergencies. 

Emergency planning is the first step of financial planning and insurance plans allow you to do just that. So, before you make elaborate savings and investment plans for your goals, do the insurance planning groundwork. Lay the foundation of secured financial planning, immune to emergencies. Thereafter, embark on your financial planning journey, plan your portfolio and watch your investments help you meet your goals. 



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Divyansh Singh

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