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Financial Planning
Insurance: The safety net your money needs
Insurance is a key to a solid financial plan. Learn how much coverage you need to protect your life, health, and assets to secure your future.
Key takeaways
- Insurance protects your financial plan by covering unexpected expenses due to setbacks like illness, accidents, damages, or death.
- It helps keep your financial plan on track by mitigating financial risks, offering tax benefits, managing debt obligations, and replacing lost income during a crisis.
- The amount and type of insurance you need varies on your lifestyle, income, and responsibilities.
One moment everything is fine, and the next, an unexpected event could throw your finances into chaos. A medical emergency, an accident, or even the sudden loss of a loved one can happen anytime. How do you ensure financial security? This is where Insurance comes in.
What is Insurance?
Insurance is like a safety net that protects you from financial loss in case of accident, illness, property damage, or death. You pay a small amount, called a premium, to an insurance company. In return, they agree to compensate you financially if something goes wrong.
Why is Insurance important in financial planning?
Financial planning is creating a plan, based on your current financial position, to manage money efficiently to achieve your financial goals. A good financial plan includes saving, investing, and protecting your money. Insurance can help protect you and your assets against financial loss in an unexpected situation.
The role of Insurance in financial planning is that it can help you:
- Mitigate financial risk: Insurance reduces your financial risk by providing compensation for unforeseen events like illnesses, accidents, or death. By covering these risks, it prevents sudden expenses from disrupting your budget.
- Secure your financial plan: Insurance ensures that your financial plan stays on track by covering major expenses without draining your finances.
- Provide tax benefits: Life and Health Insurance policies may offer tax benefits under Sections 80C and 80D of the Income Tax Act, if you opt for the old tax regime. This could potentially reduce your taxable income while protecting your money. Tax benefits are subject to changes in tax laws.
- Support you and your family in a crisis: In unfortunate events, like a critical illness, disability, accident, or death, Insurance helps your family cover daily expenses and future needs.
- Manage debt: If you have outstanding loans like a home loan or a personal loan, insurance can help settle them. This ensures your family doesn’t have to bear the burden of repaying your loan.
- Replace income: Life Insurance acts as an income replacement tool by providing financial support to your family in case you are unable to work due to injury, illness or death.
Types of Insurance
The most common types of insurance you may want to consider:
- Life Insurance: It plays a significant role in financial planning, especially if you are the primary earner in your family. It provides financial support to your family in case of your untimely death.
- Health Insurance: Medical emergencies can be very expensive. A Health Insurance policy helps cover medical expenses, hospitalisation, doctor’s fees, medical tests, medicines, and other healthcare-related costs.
- Auto Insurance: It gives you financial protection if your car or bike suffers damages due to an accident, natural disaster, or theft.
- Home Insurance: It covers any damages due to unforeseen events like a fire, theft or natural calamity.
How much Insurance coverage do you need?
The amount of Insurance you need depends on your lifestyle, income, and responsibilities.
- Life Insurance: A common rule is to have at least 10-15 times of your annual income. E.g. if you earn ₹10 lakhs per year, then you should take a cover of ₹1-1.5 crores. But you should also consider other factors like your outstanding debts, family expenses, dependents, inflation, and future goals.
- Health Insurance: It's often suggested to have a cover of at least half of your annual income, considering factors like your age, lifestyle, medical history, location, and budget. E.g. If you earn ₹10 lakhs in a year, you should take a health cover of ₹5 lakhs.
- Auto Insurance: While buying a new car or bike, you should take comprehensive Car/Bike Insurance. It not only covers third-party liabilities but also damages due to unforeseen events like accidents, theft, or calamities.
- Home Insurance: Your Home Insurance premiums depend on the value of your house and the belongings in it.
Things to keep in mind when buying Insurance
- Buy early: Insurance premiums are generally lower when you are young.
- Compare plans: Compare different plans before buying.
- Read the terms: Check the terms and conditions of the policy.
Conclusion
The role of Insurance in financial planning is crucial. It can help protect your savings, support your family, and provide peace of mind. Take some time to review your current insurance policies. A little effort today can save you from big troubles tomorrow!
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
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