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Advantages of Insurance - Types and Benefits

Advantages of Insurance - Types and Benefits
November 04, 2016
A wide range of vehicles are available to fund future financial goals. These could be low risk-low return instruments like bank deposits and small savings, or higher risk products such as equity, which can offer potentially higher returns. Insurance scores over other investment vehicles in a number of aspects

Life Insurance for Future Goal Planning

  • Certainty

    Once a goal has been identified and a value for it has been crystallized, a life insurance policy is an excellent vehicle to fund the goal. This is because one can be rest assured that even in the unfortunate event of death or even critical illness, the sum assured will fund a future goal of the policyholder.

  • Tax efficient

    Maturity benefits of most insurance policies are tax free under Section 10 (10D) and the premium paid is eligible for deduction under Section 80C of the Income Tax Act, 1961.

  • Flexibility

    Insurance products, especially Unit Linked Plans, provide flexibility in terms of asset allocation to suit specific risk appetites, policy durations, premium payment terms and fund switching options.

  • Wider options

    Depending on the time horizon of the goal, the return required and the investor's risk appetite, a broad spectrum of asset allocations between equity and debt is possible in a Unit Linked Plan. An investor may tailor his policy to suit his requirement.

  • Liquidity

    Most Insurance products offer good liquidity after the lock-in period to take care of any emergency requirement of funds. But they do have inherent deterrents in the form of charges to discourage unnecessary encashment.

  • Earmarking

    Very often an insurance policy is taken for a specific goal. This therefore can become a deterrent against utilizing these funds for any other purpose and also encourages continued contributions.

Insurance for Financial Security

Insurance helps you to provide for contingent liabilities like hospitalization, critical illness, debt redemption, etc. in a cost efficient manner.

  • Term insurance

    Term insurance is the simplest form of life cover, which pays the sum assured on death. This is useful to simply provide for a family's survival in the unfortunate event of demise of the bread winner. This can also be used to cover repayment of any debt of a policy holder by simply assigning the policy to the creditor. Upon maturity or claim on the policy, the proceeds are paid to the creditor. Loan Cover policies are a variant where the sum assured keeps reducing in line with the loan balance.

  • Health insurance

    These policies provide cover against major health care expenses like hospitalization, surgery, critical illness, etc. The benefits could be in the form of fixed pay-outs on hospitalization or a lump sum on diagnosis against some specified critical illnesses.

  • Accident benefit

    This is usually an add-on cover over a basic policy and pays an additional sum assured to the beneficiary in case of death due to accident. Since accidental death is sudden and unforeseen, the family could be faced with issues like relocation, debt servicing and other requirement for funds.

Retirement Planning

Indian life expectancy has improved dramatically over the years due to availability of advanced medical facilities. However, a longer working life may not really be possible due to occurrences of life-style induced illness and high burn-out rate. The evolving demographic balance with plenty of young talent becoming continuously available may also be a deterring factor to a longer working life unless one is self-employed.

Consequently, our retirement life span could well be as long as our active working life span. This means that we have to build a solid corpus during our active life to maintain our life style for the long post retirement life if we are to enjoy the true meaning of the word "retirement". Pension Plans help us build up our savings during our earning years and provide us a lump sum on retirement. This lump sum can then provide us a retirement income by investing in an annuity.

Provide Post Retirement Income

The worst situation that a retiree can face is to run out of funds late into retirement. Such a situation may force him to seek help from friends / relatives or liquidate his fixed assets which essentially are a compromise of self-respect. This is where insurance offers the best solution in the form of an annuity. Annuities bought from the retirement corpus can either be used to provide regular post retirement income for a fixed term or for the entire life.

A pension scheme may be broadly divided into two phases, namely accumulation (pre-retirement) and distribution or consumption (post-retirement). In the above graph*, we assume a 30-year old who plans to retire at the age of 60 years and expects to live till the age of 80 years. His accumulation phase is between the age of 30 and 60 years when he builds his retirement corpus and distribution phase is between the age of 60 and 80 years when he drfaws down this corpus for his living. Pension Plans ensure that the distribution phase of your life is as comfortable as your earning years.

* This is only to explain the point and the figures are not based on any calculation.

Insurance as Inflation Shield

Inflation lowers the purchasing power of money and makes a dramatic cumulative impact over the long term. It reduces our real income year after year as our cost of living keeps increasing. So, it must be taken into account while framing financial goals.

The following illustration depicts the impact of inflation on income and prices.

Insurance products such as Unit Linked Plans help us combat the impact of inflation on our financial goals by providing the option to invest in equity, which is known to deliver one of the best returns from all asset classes, over the long term. Ignoring inflation would result in our savings falling short of the estimated value of future goals, especially over the long term.

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