Financial Planning Guide 2025

Q2.How to use insurance to hedge the risk associated with a financial plan?

Insurance in its purest sense is protection against a financial loss/uncertainty, which includes the risk of illness, disability, property damage, and the final of them all – one’s demise.
From a planning perspective, insurance serves as a risk management and optimization tool for your plan. Let’s look at the following scenarios to understand it further:

1. Mr A’s plan has multiple goals that align with the well-being of dependent family members. Being the only income earner in the family, the success of these goals depends on Mr. A’s savings contribution. In the event of Mr. A’s demise, which is an unexpected risk associated with the execution of Mr. A’s financial plan, insuring Mr. A with a term plan becomes an essential component of Mr. A’s Financial plan.
2. Medical emergencies are common, and they can happen to any member of the family who is a beneficiary of any family’s financial plan. The rising cost of healthcare already pushes close to 7% below the poverty line. The risk associated with medical emergencies is that not having the right medical plan with sufficient coverage can disrupt all financial goals.L
3. Live in a locality or city that has a high risk of flooding during the rainy season. Protecting the value of your house with property insurance can be an ideal strategy to incorporate into your financial plan.

Insurance plans and a Financial plan

A term policy is a straightforward life insurance that provides a sum assured in the event of the policyholder’s unfortunate demise. Most people are not in favour of a term policy, as it only provides a death benefit. Additionally, it is believed that since insurance is only available for a specific term, after which coverage is no longer in effect, it is not a comprehensive policy.

Endowment Policies: These are traditional policies offered by Insurance companies.  An endowment policy covers risk for a specified period, at the end of which the sum assured is paid back to the policyholder, along with the bonus accumulated during the policy term. The returns one can get from their endowment policies may not be sufficient to keep pace with inflation.

Unit-linked insurance Plans: These are insurance policies with an investment component. In these policies, the policyholder pays premiums (or a single premium), a portion of which is invested, and another part is used to provide the life insurance coverage. ULIPs, therefore, combine insurance protection with wealth creation opportunities.

What should you opt for?

One should always opt for a pure insurance product rather than combining insurance with investments, such as those found in market-linked insurance policies, i.e., ULIPs. Additionally, it is observed that traditional policies, including endowment policies and money-back policies, often provide inadequate returns that fail to keep pace with inflation.

It is also advisable to opt for the following policies, in addition to your term policy:

• Health Insurance (Mediclaim) – This is a must-have for every family member. It can be taken as an individual policy or as a family floater. This will cover regular hospital expenses in case of any hospitalization.
• Personal Accident Policy – This will cover you in the event of a loss of income due to an accident. This is a standard policy for those who are employed, as it partly covers you against loss of income.
• Critical Illness policy – this will pay out a lump sum upon diagnosis of any critical illness from the defined list of diseases stipulated. This policy can be opted for by any member of the family – it is not meant only for people who are employed as a critical illness might strike anyone, and the costs incurred in case of such diseases can be very high.

It is advisable to opt for insurance because it is a cover from risk, and while you might believe that something will not happen to you, that is often exactly what your neighbor is thinking. In case of an unfortunate circumstance, insurance can be a financial boon to you or your family members.

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