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Can a savings plan replace your income for your family?

dateKnowledge Centre Team dateJanuary 18, 2021 views200 Views
Can a savings plan replace your income for your family?

Remember the time we were little and used to get pocket money from our parents? What would we do? Initially, we spent all the money that we would get, in buying chocolates and other goodies. But as time passed, we started doing the smarter thing- We started saving up!

Even if the pocket money we got at that time was as less as Rs. 50, we would keep Rs. 20 aside and spend the rest. Slowly the money that we kept aside would accumulate to a substantial amount. And we could finally afford to buy that pretty doll, comic books, battery-operated car or that cricket set like we always wanted. We have always been taught to save up!

A savings plan is any financial scheme that will help you save money or grow your finances. The money you save can be used for a considerable expense in the future such as buying a new house, funding a child's education, marriage or a medical emergency in the family.

What must you consider while investing in savings plans?

It is essential to assess all the available options and finalize the best-suited to your goals and requirements. You can speak to an insurance expert to help you out in this. Buying a savings plan is a significant investment and needs proper planning and evaluation.

Here are some factors you must take into consideration while buying a savings plan:

Start early

Consider this example: If you are a 20-year old individual and your financial goal is to accumulate Rs. Five Crore by the time you have reached retirement age (60 years), you have to save Rs 4,207 per month for the next 40 years from your income, assuming that the return rate is 12%. If you delay 25, you will have to save Rs—7,698 (almost double the amount) for the next 35 years.

Hence If you start saving early, your money gets more time to grow exponentially. You also get a chance to explore more savings options as you can afford to take risks.

Risk analysis

It is essential to do a risk analysis before you invest in a savings plan. Various factors such as age, income, financial goals etc. play an essential role in determining the number of risks you can take. Usually, people in their 20s and 30s can opt for aggressive plans and go for a more risk plan. Needless to say, as your age increases due to the increase in responsibilities and financial requirements, it is better to go for a more conservative option that has a money-back guarantee, although it is low on returns. Again, this is not a hard and fast rule and may vary from person to person.

Investment tenure

Depending on your financial goals, you must choose a tenure for your savings plan. Long-term plans always guarantee you the best returns, but it is also essential to consider any other requirements you might have.

Features of the plan

Every savings plan has different features. For example; Financial cover for your entire life, fixed cover ranging from 5 to 35 years, allowing partial withdrawals, better tax-saving features, market performance bonus, accidental disability, critical illness coverage, demise etc. It would be best to look for a plan that gives you maximum cover and good returns.

Flexibility

A long term guaranteed savings plan can give you the best returns and financial cover. But we cannot predict the future. What if some emergency comes up and you require a significant amount of the corpus you have put in your savings? The plan must be flexible enough to allow you to take care of unexpected short-term financial needs, such as a medical emergency.

Final goals

When you choose a savings scheme, your final financial goals must be clear. You can have objectives such as creating a retirement fund, buying a new property, saving up for a child's education or marriage etc.

Tax benefits

Many savings schemes and investment plans come with additional tax benefits. They help you reduce your tax liabilities under sections 80C and 80D of the Income Tax Act. In addition to this, any payouts that you receive from your insurance policy are entirely tax-free (This is only if your premium does not exceed 10% of your Sum Assured, annually).

Do not forget inflation.

While deciding to invest in a savings plan, it is crucial to consider inflation's effect on your savings. Simply put, inflation is the price rise. It means that things will become expensive as the years pass, and the number of things you can buy with Rs. 1,00,000 today will be much less after 30 years.

Who should buy a savings plan?

Savings plans help accumulate your savings and help you towards a bigger goal. They are ideal for you if:

  • You are a young investor
  • You are nearing retirement
  • You have a steady income
  • It would help if you accumulated wealth for the future
  • You want comprehensive coverage

Advantages of savings plans

More and more people are realizing the importance of life insurance and opting for various schemes to provide them financial cover and help accumulate wealth. Reports suggest that in 2019, the insurance industry's total investments in India were over 38 trillion rupees compared to approximately 34 trillion rupee investments in 2018.

Investing in savings plans has the following advantages:

  • Hassle-free
  • Long-term wealth accumulation
  • Tax-saving
  • Guaranteed returns to support your financial goals
  • Financial cover for the whole family
  • Tax-saving benefits

Types of savings plans available in India

Endowment plans

An endowment plan has dual benefits. It helps cover the insured's life and helps the policyholder save regularly over a specific period. The amount received on maturity is a lump sum amount of money that can be used for retirement, medical expenses or a child's education. They are of two types- with profit and without profit plans.

People who have a regular income currently, but those who need a lump sum amount after some years are best benefitted by taking an endowment policy. An endowment plan is almost risk-free and offers a steady amount of money on a fixed date as long as the premium is paid.

Money-back plans

Money-back plans are very similar to endowment plans. The only difference is that you get the sum-assured at period intervals if you take a money-back plan. The advantage of taking a money-back plan is that you have the flexibility to utilize your savings at regular intervals.

A money-back plan is one of the best-guaranteed savings plans, as it assures long-term investment benefits, gives you financial cover and offers good tax benefits.

Unit-linked insurance plans (ULIPs)

A ULIP plan is much more transparent as compared to other insurance plans. These are market-linked savings plans and allow you to modify the sum assured during the policy term. They offer tax benefits at the time of investment as well as maturity. ULIPs are structured similar to that of mutual funds. They pool investments with those from other investors and are managed with a specific investment objective.

ULIPs can be classified into single/regular premium plans, guarantee/non-guaranteed plans, life stage-based/non-life stage-based plans.

In a ULIP insurance plan, a portion of your premium is paid to life insurance while the remaining is used to invest in your choice funds. ULIP plans are best if you want to invest for a more extended period.

Can a savings plan replace your income?

If the biggest worry you have is: "Who will look after my family when I am gone?", you are not alone! This is especially true if you are the sole earning member of the family. Losing a loved one affects emotional stability, and it is hard to get over the loss. To add to it, worrying about day-to-day expenses, children's education, marriage, paying off loans etc. can put an additional emotional burden on the family.

In such situations, a good savings scheme can create a financial cushion for the family. It can help the family sustain during trying times. However, just a guaranteed savings plan alone cannot replace your income. Inflation is one of the primary reasons for this. As things will keep getting costlier, the buying capacity will decrease significantly.

Hence it is essential to have a savings plan cover along with other investment plans for complete security. It is best to have a good portfolio of investments and savings plans to ensure that your family is well taken care of even if you are not around.

We can help you find the best insurance solutions.

A reputed and credible insurance services provider can help you plan your finances. They can give you the right guidance about growing money by investing it in the best way possible. Please speak to our team of expert insurance advisors to get solutions for all your insurance-related queries.

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Frequently Asked Questions (FAQs) for Term Insurance

This being a term plan doesn't offer any payout after maturity or expiration date.

Each insurance company has its own term insurance premium calculator. If you want to check out the premium quote, go for the iSelect Star term plan calculator. It gives a premium amount based on your age, gender, habits, education, and annual income.

You can purchase an iSelect Star term plan anytime between 18 to 70 years of age.

It depends on your needs. For example, if you want to cover a child's education or wedding expenses, you have to include them in your coverage. Your premium will be calculated accordingly.

If your key purpose is to give your Family financial protection, go for the term insurance plan. And if you want some savings, in the end, go for a traditional life insurance plan.

Go for at least 12 times cover than your annual income. Or you can go as far as 20 times coverage as per your needs.

The right time is when you don't have anything to keep your Family safe from financial storms, and they rely on you for financial needs.

If you are unable to make the payment or suffering from a terminal illness, a term plan pays a part of the sum insured to treat your disease.

Term insurance riders are attachment or endorsements made, while taking the term insurance policy, as a supplementary coverage to policyholders. Apart from the core death benefit, term insurance riders offer below-given additional benefits:

  • Accidental Death Rider When a person suffers from a terminal illness, his/her family ends up spending a significant amount in treatment and medical expenses. Accelerated death rider pays a part of the sum insured in advance to cover such costs and save the family from running out of cash.
  • Accidental Disability Rider If the policyholder can't pay the premium because of an accident or permanent disability, a sudden disability this pays the premium on behalf of the policyholder till completion of policy term or for a defined duration.
  • Critical Illness Rider If the insured person gets a heart attack, cancer, or any other critical illness, this rider pays a lump sum on valid diagnosis.
  • Premium Waiver Rider If the policyholder is unable to make payments due to income loss or disability, a premium waiver rider waives off all future premium payments. And the term policy remains active until the expiration date.
  • Income Rider: The rider ensures that your family receives regular income + sum insured in case of unfortunate demise of life insured.

Anyone can go for life insurance as it offers some savings after the maturity date, but it doesn't cover the protection of your family . The best term insurance plan is solely designed for taking care of loved ones if something happens to you. Term plans act as a shield between your family and sudden financial fall. They make sure that your family lives a healthy life even after you. With a little amount paid per year, you can be worry-free from the family's financial conditions.

Questions that you need to ask while buying Term Insurance?

  1. 1. Amount of premium you have to pay based on your age, habits, education, and monthly income
  2. 2. The total number of benefits covered in the term plan. Do they include benefits that you care about the most?
  3. 3. How to save money on tax if you pay for the term plan?
  4. 4. Do they offer regular income options?
  5. 5. Can you change the coverage and premium in the future?
  6. 6. Does the claim consider valid if death occurs outside India?
  7. 7. Which kind of death is not covered by insurance?
  8. 8. Can NRIs take term insurance? If yes, what are the conditions?
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