Term Insurance as an Important Part of your Financial Planning

2024-08-02

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Term insurance is like that raincoat you have lying in a corner of your closet, you only recall on an occasional rainy day when you have no other option but to step out in the rain. What more, the money you invested in this raincoat is so nominal that you don’t even feel it on your purse?

The best term insurance plans are just like that, lying in a corner unnoticed until the need arrives. But, in the time of need, just like that inexpensive raincoat, a term plan is the most valuable asset for the family. But how important the best term insurance policy would be in your financial plan?

Objective of a Financial Plan

What is a financial plan for your family? Why should you have a financial plan? If you know the answers to these questions your financial life is pretty much sorted. However, when you are planning, what exactly should the plan achieve for you and your family?

You have enough money for your needs and goals as and when you need it, and hopefully for your aspirations too.

This is what your financial plan must achieve for you and everyone dependent on your income in your family. So, once complete, your comprehensive financial plan will be like a roadmap to navigate you to all your destinations.

What does a Financial Plan Include?

Remember that your financial plan will include all of this not just for you, but even for your children and spouse dependent on your income. The financial plan will not just define your goals in a scientific manner; it should also have an investment plan to achieve the goals with regular investments.

A comprehensive financial plan will include the following for you and the family members:

1. All short-term financial needs

2. List of all the long-term financial goals

3. Investment plans to reach the long-term financial goals

4. A plan to maximise your savings

5. Plan for lowering your tax outflow

6. Your plan for retirement goal

7. Contingency plan for emergency financial needs

For example, your child’s higher education goal should be defined as needing Rs. 50 lakhs 20 years from now. Once you have the time and a goal in numbers you can decide how to invest your present savings to achieve this goal.

What does a Financial Plan not Include?

From the above list, it may seem like that your financial plan will have pretty much everything you will ever do with your income. However, it is not completely true. You can draw the financial plan at any given point in time, and you can only include everything to the best of your knowledge at that moment.

1. Any Future Liabilities

Thus, your financial plan may not include transactions like home loan EMIs or the car loan which you may not have considered for now.

2. Actual Cashflow in the Future

It also, does not include an accurate estimate of your future income, savings and expenses. Although you will create an expected cash flow statement, it is still based on your current income and expense levels. Also, count the actual performance of your investments.

Because of this gap, the financial plan will either look like a perfect dream or will show many shortages for the goals.

3. Contingencies which have not Happened

The plan also will not include a scenario of a contingency like treatment for a terminal disease. This is where contingency plan comes in the picture. You can anticipate the possible risks to your income and financial status of your family and take measures to avoid them.

This is where all the insurance plans, including term life insurance, also comes in.

What should your Term Plan Cover?

Contingencies are unpredictable events with financially adverse effects on a family. The ideal term insurance plan will cover the following:

1. Family’s needs for regular expense like kitchen and lifestyle

2. Family member’s important future goals, for example, the child’s education and marriage

3. All the present financial liabilities

4. Any other possible costs associated with death or disability of the breadwinner, for example, estate transfer costs, funeral expenses, etc.

The best way to provide for the regular expenses of the family is through a regular income. Ideally, this income should also grow over time to accommodate inflation in living costs.

Thus, your ideal term plan should cover the following for your family if anything happens to you:

1. Provide lump sum money for investing towards future goals and pay-off any present loans and liabilities

2. Protect their lifestyle in the long run by providing a steadily growing income

3. With term plans like iSelect Smart360 Term Plan from Canara HSBC Life Insurance, you can divide your total sum assured into two parts:

Payable as a lump sum amount,
Used for creating a monthly income stream for the family

4. Without the term insurance cover, your sudden demise will make the financial plan of the family null and void. As the major part of the family’s income disappears, they will need some fall-back cushion so that they can at least maintain their lifestyle and meet their important financial goals to continue their financial growth from where you left them, instead of falling below that status.

So, in a way, the term insurance plan is that backup pillar in your financial plan which will ensure its validity even in your absence.

How to Buy and Revise your Term Insurance Cover?

Term insurance is one of the first investments you will make after completing the financial plan for the first time. As discussed above, this plan cannot include future liabilities and life events until they have happened. Therefore, even the term insurance cover will not include any future liabilities or added goals.

Thus, you will need to revisit the term plan whenever such a life event occurs. This revision will be not only for the cash flow estimates and new investment plans, but your contingency plan as well.

Following life events have large enough financial impact on your life to modify your financial plan:

a) Addition of a new family member; i.e. marriage and birth of a child

b) Taking a large loan, like a home loan, or business loan

c) A significant change in the family’s income

This is where you may feel the importance of your term cover in your plan. Whenever you have revisions in your plan, you also need to revise your term life cover to meet the new demands. These timely revisions will ensure that your family’s financial plan always remains relevant.