A wide range of vehicles are available to fund future financial goals. These could be low risk-low return instruments like bank deposits and small savings, or higher risk products such as equity, which can offer potentially higher returns.
Insurance scores over other investment vehicles in a number of aspects.
Life Insurance for Future Goal Planning
Insurance for Financial Security
Insurance helps you to provide for contingent liabilities like hospitalization, critical illness, debt redemption, etc. in a cost efficient manner.
Indian life expectancy has improved dramatically over the years due to availability of advanced medical facilities. However, a longer working life may not really be possible due to occurrences of life-style induced illness and high burn-out rate.
The evolving demographic balance with plenty of young talent becoming continuously available may also be a deterring factor to a longer working life unless one is self-employed.
Consequently, our retirement life span could well be as long as our active working life span. This means that we have to build a solid corpus during our active life to maintain our life style for the long post retirement life if we are to enjoy the true meaning of the word “retirement”.
Pension Plans help us build up our savings during our earning years and provide us a lump sum on retirement. This lump sum can then provide us a retirement income by investing in an annuity.
Provide Post Retirement Income
The worst situation that a retiree can face is to run out of funds late into retirement. Such a situation may force him to seek help from friends / relatives or liquidate his fixed assets which essentially are a compromise of self-respect.
This is where insurance offers the best solution in the form of an annuity. Annuities bought from the retirement corpus can either be used to provide regular post retirement income for a fixed term or for the entire life.
A retirement plan may be broadly divided into two phases, namely accumulation (pre-retirement) and distribution or consumption (post-retirement).
In the above graph*, we assume a 30-year old who plans to retire at the age of 60 years and expects to live till the age of 80 years.
His accumulation phase is between the age of 30 and 60 years when he builds his retirement corpus and distribution phase is between the age of 60 and 80 years when he drfaws down this corpus for his living. Pension Plans ensure that the distribution phase of your life is as comfortable as your earning years.
* This is only to explain the point and the figures are not based on any calculation.
Insurance as Inflation Shield
Inflation lowers the purchasing power of money and makes a dramatic cumulative impact over the long term. It reduces our real income year after year as our cost of living keeps increasing. So, it must be taken into account while framing financial goals.
The following illustration depicts the impact of inflation on income and prices.
Insurance products such as Unit Linked Plans help us combat the impact of inflation on our financial goals by providing the option to invest in equity, which is known to deliver one of the best returns from all asset classes, over the long term.
Ignoring inflation would result in our savings falling short of the estimated value of future goals, especially over the long term.