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Insurance Consulting

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 need

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 oncreating your emergency corpus, growing savings and opting for adequate insurance coverage- both health and life.

  3. Accumulating wealth: where the focus is ongrowing 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. 

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