Insurance As The First Step In Financial Planning
Financial planning simply means taking charge of your finances. This comprises a breakdown of your income, expenses, assets, and liabilities, as well as your financial objectives. Following that, you establish a financial portfolio and invest in various avenues to achieve your objectives. With rising inflationary costs and the rising cost of living, insurance should come to the forefront.
As a first step in developing your financial plan, you must determine your goals, their time frame, and your discretionary income (income – expenses). Finally, you must distribute your discretionary income to various investment opportunities in order to develop a fund for goal achievement. Yet, where does insurance fall into all of your planning? The question you may need to address is if insurance is vital, and if so, how crucial it is.
Insurance is essential for protecting your family from financial stress while you are away. Insurance serves as a safety net, and now could be a good time to think about getting one.
Insurance's Significance in Financial Planning
Insurance is a product that can help you protect your finances. Here are some of the reasons why insurance should be a vital component of your financial portfolio:
1. Risk protection
Insurance is a risk management tool. As a result, it prepares you to handle any unforeseen financial loss, such as death or hospitalization.
2. Financial stability
Insurance plans provide financial security by paying for losses incurred during an emergency. You can rest assured that if an emergency occurs, insurance coverage will cover the loss. This allows you to arrange your budget and save for your goals. It also assures that the intended corpus is safe and will not be used in an emergency.
3. Different plans for different needs
There are several insurance policies available to cover the various types of dangers that you may face. Life insurance products protect against the chance of death, whilst health insurance policies protect against medical emergencies. Similarly, auto insurance plans cover the danger of car theft or road accidents, while travel insurance plans cover trip-related risks.
You may thus select different plans based on the dangers you face and establish a 360-degree layer of financial protection for yourself.
4. Tax advantages
Life and health insurance plans are also tax-deductible. Life insurance premiums are tax-deductible, however, health insurance premiums are not.
Furthermore, the death benefit from a life insurance policy is totally tax-free.
5. Mindfulness
Insurance products provide you with the peace of mind that your funds will not be jeopardized in the event of an emergency. This provides you and your family with financial independence.
Financial planning consists of five steps.
According to the financial planning pyramid, which is based on Maslow's Hierarchy of Needs, the five steps are as follows:
Money management: when the emphasis is on daily costs, debt reduction, and establishing a consistent cash flow
Creating a safety net includes establishing an emergency fund, increasing savings, and selecting suitable health and life insurance coverage.
Accumulating wealth: where the emphasis is on increasing your investment portfolio, retirement corpus, and maximizing tax benefits and exemptions.
Preservation of wealth: the goal is to achieve financial independence by transforming retirement savings into income and maximizing pension earnings.
Leaving a legacy is concerned with estate planning, succession and continuity planning, and charity.
These are the five stages of financial planning, wherein insurance comes in the second step, before accumulating wealth.
Insurance Policies You Must Have in Your Portfolio
Your insurance policy selection is entirely dependent on your requirements. You must identify the financial risks you face and then purchase appropriate insurance coverage to cover those risks. Certain insurance plans, on the other hand, are universally relevant and must be included in everyone's portfolio. The following are the plans:
1. Term life insurance
A term insurance policy is a basic life insurance policy that protects against the chance of death. The policy has a certain tenure, and if the insured dies during that time, a death benefit is given.
Because death is unpredictable, term insurance policies are a necessity. If the family's breadwinner dies prematurely, the family may incur a significant financial loss. Such a loss is covered by a term plan. It provides a death benefit to the family, allowing them to satisfy their living needs while still achieving their aspirations.
Furthermore, modern term plans have become all-inclusive. There are several coverage options available that protect you not just against the risk of early death, but also against critical illnesses, terminal illnesses, and accidental deaths. You can also choose whole life insurance, which provides coverage up to 99 or 100 years of age.
2. Medical insurance
Health insurance plans are important due to the frequency of medical emergencies and the coverage that these plans provide. A health plan will cover your medical expenses if you get sick or are injured in an accident and need to be hospitalized.
In conclusion
Even the best-laid intentions can go wrong. Life has a habit of throwing you regular curveballs. As a result, you'll require a backup plan. Insurance is a backup plan that assists your portfolio in absorbing the financial shocks of crises.
The first stage of financial preparation is emergency planning, and insurance products enable you to do just that. Do the insurance planning groundwork before you establish comprehensive savings and investment plans for your goals? Set the groundwork for sustainable financial planning that is impervious to emergencies. Following that, start your financial planning journey, plan your portfolio, and see how your investments help you achieve your goals.
