Insurance: The new gen savings account in financial planning

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 fulfillment.

What is the difference between insurance and savings plan.

A personal savings plan is a plan for saving money that typically revolves around distinct financial goals. A comprehensive savings plan may include both short-term and long-term financial goals and is customized to your income, time horizon, and ability to save.

Savings plans in insurance offer you an opportunity to save and build a corpus to meet your future needs. These are designed to help policyholders develop regular savings habits, as well as give significant returns when they need them. In addition, savings plans offer insurance coverage, which means your family's financial needs are met even if you are not around to support them. 

Savings plans usually give a fixed amount of maturity benefit when the policy term ends. Some savings plans also ensure a regular income throughout the duration of the policy or as a part of maturity proceeds. Savings plans essentially help you in reaching your life goals, protect your family in case of any unforeseen circumstances and help create a corpus to pay liabilities in the future. 

Savings-linked Insurance plan

Importance of investing in a savings plan

An insurance product that can act/double up as an investment plan can offer several benefits. Some of these have been discussed below:

Financial stability: Life can be uncertain at times. Situations may arise when one may lose their job, someone in the family suffers from a medical ailment, injury, etc, which results in a sabbatical from work or a decrease in income. Such situations don’t take away the fact that you will still have to support your family. Besides recurring costs such as food, clothing, fuel, education of children, other household expenses, adverse situations may call for increased expenses. Saving investment plans can help in such conditions by providing you with financial stability in life. These plans offer guaranteed income, so you are never without a safety net, and you can feel secure in diverse situations.

Life protection: A life insurance savings plan has two components. The first is the savings component that lets you plan for different financial goals as well as emergencies, and the second is the life cover that protects your loved ones. Any loss of life has an effect on a family. When a family loses an earning member, other family members can be left without financial cover. The loss of income can disrupt the lives of parents, siblings, spouse, children, or anyone dependent on the earning member for money. If you have loans, the responsibility to deal with creditors and repay your debt will also fall on your next of kin.This is where a life insurance savings plan can help. The proceeds from a savings policy can help your loved ones substitute your income and, at the same time, pay your debts, if any and can help you carry on with the same standard of living as before. What's more, some plans come with a Waiver of Premium clause that waives premium payments under certain conditions, that ensures the continuity of the insurance cover even in adverse situations.

Tax benefits: A life insurance savings plan has many tax benefits too. The premium paid towards a savings plan can be used as a tax deduction of up to Rs. 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. This helps you lower your taxable income and save money for several years, depending on the term of your policy. The insurance benefit paid to the plan’s nominee in the unfortunate event of death is also exempt from income or capital gains tax subject to the rules under Section 10(10D) of the same act. 

Peace of mind:Above everything else, a saving investment plan can provide you with peace of mind, knowing you have a corpus to rely on in your hour of need. This removes the pressure of financial instability. Moreover, savings plans offer a systematic way to save for the future. Therefore, you are not burdened with saving lump sum money during the later stages of your life, like retirement. If you start saving early in life, you can slowly but steadily save small amounts over time and enjoy financial liquidity throughout life. 

Diversifies your investment portfolio: A good investment portfolio is made up of several investments that can range from equity, debt, and cash to real estate, commodities, and even cryptocurrencies. Every asset class has a unique risk factor. Equities can be high risk, but they are known to deliver high returns. On the other hand, debt can carry low risk but tend to deliver low returns. Saving plans bring stability, tax benefits and wealth creation to your portfolio. These plans offer a guaranteed income option, guaranteed fixed returns in a reducing interest rate scenario and tax benefits on both premium payment as well as maturity proceeds.

Flexible options: A savings policy can offer many flexible options in terms of premium payment terms, payout modes, policy terms, etc. You can receive regular income or lump sum income, pay the premium over the term or in a single payment, or select a long or short policy term. The plan can be personalised to suit your needs, income, and limitations. This makes these plans ideal for all age groups, genders, income groups, and professions.  

Policy Loan Option: Once a savings policy reaches its surrender value, you can take a loan against it. As compared to other loans, policy loans offer better interest rates. If you need money in an emergency, a policy loan option can help you make the necessary arrangements.

ULIP : Unit Linked Insurance Plan

Speaking of long term investment, another insurance product that deserves a befitting mention is Unit linked plans or ULIPs that offer tax efficient and seamless transfer from debt to equity and back. Barely five years ago, ULIPs were much criticized for their high fee structure and misselling by distributors for the lure of high commissions.

This forced a whole host reformatory measures that were made applicable to ULIPs. As a result, under the ambit of the new guidelines, ULIPs as an insurance cum investment product come with very low charges and are even cheaper than their corresponding mutual fund products. ULIPs therefore are now an excellent solution for risk cover, tax benefits and long term investment opportunity rolled into one.

Investors can choose an appropriate plan based upon their risk appetite as ULIPs offer a whole range of low, medium and high risk options under the same policy. Consumers also have the flexibility to choose the investment ratio and the sum assured in the annual targeted premium and can also avail of the benefits of one time enhancement in their investment portfolios through top ups.

For those investors who want to reap the benefits of long term market linked growth without having to go through the trouble of direct investment in the stock market, ULIPs can be the ideal solution. What's more ULIPs help consumers inculcate a regular habit of savings and offer the benefit of partial withdrawal every five years.

Closing note

Thus as we have illustrated, life insurance products can be used as savings tools that can not only generate regular income but can also help you plan for important events in your life. Apart from that, when you use ULIPs as a long term savings products, you can create wealth over a period of time, even if you are risk averse and do not want to go the whole hog by investing directly in equities. All you need therefore is a good financial plan that accommodates such insurance products based on your risk appetite and over a period of time you will have successfully built a portfolio to be proud of.