Choose the right insurance policies

Completion of one’s graduation and getting a job for the very first time is quite a feat in itself and is the very first step into adulthood. At this stage in life, when you are setting milestones to purchase a car or a bike, buy a house and so forth, it is also necessary to recognise and set targets to fulfil financial goals.

The first step of financial planning is purchasing insurance plans that are essentially designed to protect you from the vagaries of life. However, with so many options to choose from, feeling overwhelmed is completely normal.

To alleviate your confusion, let’s start with the basics. The reason insurance should be the first and one of the most integral parts of your financial planning is because it is a financial instrument designed to manage ‘risks’ of various kinds that we are exposed to. For a periodic fee (premium) that you pay an insurance company, it provides coverage for expenses that will come forth if you were to suffer a loss.

The first thing you should therefore understand and preferably with the help of a financial planner who can help you assess your risk profile, is your life stage and future financial goals. The assent of these factors will lead you to the answers of whether you should focus on protection plans or term plans, unit linked plans or traditional long-term plans that kick-start disciplined savings.

Financial prudence however, says that when you are at the very beginning of your career you need to make investments where you can start small savings and get maximum returns out of the same. In the fragile world that we live in today, it is advisable to lay the foundation for your financial plan with pure protection plans or term insurance.

Protection plan

The biggest advantage of purchasing a protection plan is that it is cost effective and offers a high life insurance coverage for a premium component that is comparatively low. Also, when you are starting out in your career, you are at a vantage position because of your age and thus get to purchase insurance at cheaper rates. The older you are the more expensive insurance gets.

Another advantage of investing in a protection plan is that it gets you ahead on your tax planning as the premium payment on such plans qualify to offer tax benefits under Section 80C.

You can therefore get a tax deduction of up to Rs 1.5 lakh by paying premiums on term plans. Furthermore, modern term plans come with a critical illness rider that offer an additional deduction of Rs 25,000 under Section 80 D of the Income Tax Act.

As mentioned above, term plans come with riders such as critical illness riders that offer protection against cancer, major organ diseases, accidental death, or protection against disability.

Coverage is limited

However, the point to remember in the case of such riders is that though they may look cheap upfront their coverage is limited and do not allow much flexibility. Therefore, it is a better idea to opt for a standalone health insurance policy that offers far more exhaustive coverage.

A financially conscientious person should incorporate health as a part of his long-term financial planning, so it is advisable not to ignore health insurance even when you are at the beginning of your career.

As you are already aware there is a plethora of options to choose from even in protection plans, therefore carry out adequate research, assess your insurance needs with the help of a professional and choose the right insurance policies that provide you the platform you need to get your financial plan started.

As you grow older, and your financial goals change, you must keep adding insurance coverage as per your needs.

(The writer is Executive Vice  President, Product Management,  at Exide Life Insurance)