What is insurance planning?
Insurance planning is the process of carefully selecting insurance policies to financially protect yourself, your family members, assets, etc., against unexpected losses. It includes finding one or more insurance providers who can financially support you in case of a crisis. In a nutshell, insurance planning helps to ease the financial burdens related to unfortunate life events.
Why is insurance planning important?
Without thorough insurance planning, you can be financially exposed to uncertain life events. Proper planning lets you identify the key risks that may impact your life and choose the insurance policies that cover those risks. This sort of preparation and management of life risks is essential to monetarily safeguard yourself and your family in the long run.
Benefits of insurance planning
Here are the key benefits of insurance planning.
1. Coverage against risks
A well-planned insurance policy helps to minimise the financial risks associated with illness, accidents, death, etc. You and your family feel prepared to face such unforeseen challenges without having to compromise the quality of your everyday lifestyle.
2. Different types of insurance coverage: You can choose various kinds of insurance policies for different kinds of risks.
There are health insurance plans that offer coverage for medical emergencies, hospitalisation expenses, medications, doctor consultations, etc.
You can choose life insurance plans or personal accident insurance for coverage against premature death.
Motor insurance allows you to cover your vehicles against theft, road accidents, third-party liabilities, etc.
There are travel insurance policies to provide coverage against contingencies associated with your trips.
With a well-thought plan, you can pick the best-suited combination of policies to create a 360-degree shield of financial protection around yourself and your family.
3. Financial security
Insurance planning provides financial protection by compensating for the losses you face due to covered emergencies.
4. Tax benefits
You get to save tax by purchasing certain insurance plans. For instance, the premium paid for a health insurance policy qualifies for tax deductions under the Income Tax Act. Hence, you can reduce your taxable income by buying specific insurance policies.
5. Mental peace
With a well-planned insurance portfolio, you don’t have to worry about losing your savings due to unforeseen events. You can plan for the financial well-being of your family even after your death using the term and life insurance plans.
Must-have insurance policies
The selection of insurance plans comes down to your lifestyle and associated needs. You must conduct a thorough assessment of the potential financial risks that may arise in your life. Based on the conclusions of that assessment, you can select relevant insurance policies. However, in a broad spectrum of insurance planning, the following are the must-have policies.
1. Health insurance
Health insurance policies are relevant due to the fact that medical emergencies are a part of everyone’s life. Such plans provide much-needed coverage to cover the costs related to disease management, hospitalisation, etc., depending on the terms of a policy.
Healthcare costs are constantly increasing and turning unaffordable for many families. Patients are paying a lot of money for quality healthcare, expert consultations and medications. Health insurance can help in this regard by offering timely financial assistance.
2. Motor insurance
The Motor Vehicles Act, 1988 states that all two and four-wheelers must be insured with at least third-party insurance. A Third-party Insurance Policy covers third-party liabilities like property damage.
Beyond that, you can choose a Comprehensive Motor Insurance policy for coverage against vehicle damages, vehicle loss, vehicle theft, and other calamities. It can be car insurance, bike insurance, etc., depending on the types of vehicles you own. Such a policy allows you to enhance the coverage with add-ons.
3. Term insurance
With term insurance, you get financial coverage against the chances of premature death. Such a policy contains a specific tenure. The compensation specified in the policy is paid to the nominees if the insured person dies within the tenure of the policy.
The uncertainty of life makes this type of insurance important, especially if you are the bread-earner of your family. In case the earning member of the family dies, the compensation under the policy helps the family to remain financially stable. You can look for all-inclusive term insurance policies that provide coverage against various instances such as accidental deaths, terminal illnesses, and critical diseases.
How to select optimal insurance coverage
Choosing optimal policy coverage is the most important aspect of insurance planning.
Ideally, your insurance coverage should align with your financial requirements. You can understand these needs by considering the following factors.
Emergency expenses: Look into the percentage of income you spent on healthcare, vehicle repair, and other emergencies in the last three years. It will give you an estimate of the coverage amount you need to opt for when buying policies.
Dependents: When choosing health or term insurance, you must decide the coverage amount based on the number of dependents in your family.
Financial portfolio: Insurance planning can support your overall financial portfolio. But you need to balance it with other financial goals and responsibilities. Look closely into the existing liabilities and assets to figure out the optimum amount you can spend on insurance.
How to avoid common mistakes in insurance planning
Making mistakes in insurance planning can lead to insufficient coverage or deriving less value for money. Hence, you must think about the following factors to avoid making insurance-related mistakes.
Assess all aspects of your life where you need insurance.
Understand the coverage of a policy in detail.
Look into the add-ons or value-added services offered by an insurance provider.
Ask the insurer about the payment plan in different scenarios included in your policy.
Understand ways you can obtain discounts on premiums paid to an insurer.
Get quotes from different insurance providers and compare benefits before choosing one.
How to estimate a budget for your insurance portfolio
With time, insurance needs often evolve depending on the changes in your lifestyle, gathered assets, family size, and other factors. Hence, you must anticipate your future needs to determine a budget for your insurance portfolio effectively. In general, you can follow these steps to estimate a budget for insurance.
Step 1: Make a list of all the insurance policies you currently hold and policies you want to buy.
Step 2: Starting from your current age, think of insurance goals for every 10 years. For example, if you are 20 years old today, you must set goals for ages 30, 40, 50, 60, etc.
Step 3: Adjust goals based on the changes you expect in your life, such as getting married, having children, buying a car, potential medical needs, etc.
Step 4: Assign an average amount you think is required for each goal right now.
Step 5: Add increments to those estimated amounts for every 10 years of your life.
Frequently Asked Questions (FAQs)
The following are common questions and their answers that may further help you with insurance planning.
Why is insurance planning important for financial planning?
Insurance planning offers the much-needed financial security from various risks and emergencies you may face in life. Without timely support from insurance policies, you may end up losing your hard-earned savings while dealing with emergencies.
What should I look for in a health insurance plan?
You must ensure that your health insurance plan aligns with all potential medical needs you or your family members may have. The policy should be able to cover the following.
Different medical requirements at the time of hospitalisation.
Transportation needs that arise due to medical emergencies.
Coverage related to pre and post-hospitalisation expenses.
Cost of ambulance trips.
Expenses of day-care treatments.
Is it possible to save money on medical consultations using health insurance?
Yes, you can save medical consultation costs depending on the terms of your health insurance policy. In fact, certain insurance providers offer free doctor consultations for their health insurance policyholders. Hence, you must check with an insurance provider about medical consultations before making a policy-buying decision.
How should I choose motor insurance for my car?
First and foremost, you need a Third-party Insurance Policy for your car. It is mandatory by law for motor vehicle owners to buy this policy and cover third-party liabilities.
Apart from that, you should consider a Comprehensive Insurance Policy that can cover you from different kinds of financial risks associated with owning a car. The risks can be accidental damages, theft, etc. An ideal insurance plan should include coverage for third-party liabilities, accidents, theft, fire/explosions, natural/man-made calamities, etc.
What should be the average sum insured of my term insurance cover?
In general, it is recommended to keep the sum insured 10-12 times of your annual earnings while buying term insurance. For example, if you earn about 25 lakhs every year, your coverage should be somewhere between 2.5 crores and 3 crores at least.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet and is subject to changes. Please go through the applicable policy wordings for updated ACKO-centric content before making any insurance-related decisions.
Subrogation in Insurance
What are Consequential Damages in Insurance
First Notification of Loss in Insurance
As a seasoned insurance professional with extensive expertise in insurance planning, I can attest to the importance of carefully selecting insurance policies to provide financial protection against unexpected losses. My knowledge is grounded in practical experience, having assisted individuals and families in navigating the complexities of insurance planning to ensure comprehensive coverage.
Now, let's delve into the concepts discussed in the provided article on insurance planning:
1. What is Insurance Planning?
Insurance planning is the meticulous process of selecting insurance policies to offer financial protection against unforeseen losses. This involves identifying potential risks and choosing suitable insurance providers to provide support in times of crises.
2. Importance of Insurance Planning:
Proper insurance planning is crucial to avoid financial vulnerability to uncertain life events. It helps identify key risks, allowing individuals to choose policies that cover those risks. The benefits include coverage against various risks, financial security, tax benefits, and mental peace.
3. Benefits of Insurance Planning:
- Coverage Against Risks: Minimizes financial risks associated with illness, accidents, and death.
- Different Types of Insurance Coverage: Various policies for health, life, motor, and travel insurance.
- Financial Security: Compensates for losses due to covered emergencies.
- Tax Benefits: Certain insurance plans offer tax deductions under the Income Tax Act.
- Mental Peace: Provides peace of mind, ensuring financial well-being for the family even after the policyholder's death.
4. Must-Have Insurance Policies:
- Health Insurance: Covers medical emergencies and healthcare expenses.
- Motor Insurance: Mandatory coverage for vehicles, including third-party liabilities and comprehensive coverage.
- Term Insurance: Provides financial coverage against premature death for a specific tenure.
5. How to Select Optimal Insurance Coverage:
Choosing optimal coverage involves considering factors such as emergency expenses, dependents, and your financial portfolio. It should align with your financial requirements and balance with other goals and responsibilities.
6. How to Avoid Common Mistakes in Insurance Planning:
To avoid mistakes, assess all aspects requiring insurance, understand policy coverage, explore add-ons, inquire about payment plans, seek discounts, and compare benefits from different providers.
7. How to Estimate a Budget for Your Insurance Portfolio:
Estimate a budget by listing current and desired policies, setting goals for every 10 years, adjusting for life changes, assigning amounts, and adding increments based on age.
8. FAQs on Insurance Planning:
- Importance for Financial Planning: Provides financial security from various risks.
- Choosing Health Insurance: Should align with potential medical needs, covering various requirements.
- Saving Money with Health Insurance: Possible depending on policy terms, with some providers offering free consultations.
- Choosing Motor Insurance: Mandatory third-party coverage, with comprehensive plans for additional risks.
- Average Sum Insured for Term Insurance: Generally recommended as 10-12 times annual earnings.
The provided content is generic, informational, and subject to change. It's advisable to refer to applicable policy wordings for updated information.
For further exploration, topics like subrogation in insurance and consequential damages in insurance are also mentioned in the article.
Feel free to inquire if you have any specific questions or need more detailed information on any aspect of insurance planning.