Securing Tomorrow: The Power of Early Insurance and Smart Choices

Are you ready to embark on a journey to financial wisdom? Welcome to ThriftyOwl.Club, where we explore financial mental models and hacks, helping you enhance your financial acumen one hoot at a time! Today, let us decode credit scores and understand how it can transform your financial future.

Let's meet Tanya and Jay, our fictional neighbours who will take us through their journey of unlocking financial complexities, teaching us essential concepts in simple, concise terms. Read more.

When Tanya wanted to start an insurance, her friends laughed at her. They called her too calculative and even trolled her sometimes calling her a boomer for planning her future and overthinking into the future. But little did they know how important it is to start early, especially regarding investments and insurance. Tanya didn’t mind their words and started her research about insurance policies and how to identify the best among them.

What is Insurance?

Life insurance is a contract between a life insurance company, and a policy owner, A life insurance guarantees the insurer and their beneficiary a sum of money, in the incident of the insured’s death or maturity in some cases. In insurance policies, you have to pay premiums monthly, quarterly or annually for a certain period of time as per the policy.

How Does Insurance Help Someone?

When young, people never think about disasters or casualties. We feel confident about our future and our ability to tackle unseen circumstances. But, when reality hits they would be swept away in the tide of emergencies and financial instabilities that can arise with any unforeseen circumstances. How does insurance help you from these? Insurances are like your backup plan.

Here are three ways insurance helps you.

Financial stability

You might think, you have your life planned, but one small glitch and all your plans, savings and wealth could all collapse in a few days. In case of an untimely death, your student loans, and new auto loans might all burden your family, also their source of income might be cut off. Though no amount of money can repair heartbreak it can save them being financially broke.

similarly, a health insurance can save you from cost of huge medical bills. Insurance cover for you and your loved ones is essential.

Security About Future

Presently, you might have a stable income and have a content life. but, to ensure that this continues even in the future and at times of crisis, you need extra help. Insurance lends you an extra hand when you most need it. With insurance you also need for worry about the future and sleep every day with peace of mind, it gives the strength to face any situation.

Doubles Up as Investment

Most of the counter-arguments against insurance are that, if nothing happens the money spent on premiums will go to waste. But, except for term life insurance policies most of the policies have living bonuses and benefits, the money you pay is either returned with a bonus as maturity or paid back to you as an endowment to help you during retirement.

Encourages Savings

The need to pay a premium every month without defaulting creates a healthy habit of savings. As mentioned earlier, this encourages savings, which will help you in future during either a crisis or even during maturity.

Now that we have understood the need for insurance, Let us learn more about it to find the right policy for us.

How to Choose The Right Plan?

While choosing your insurance plan, you need to take into account several factors. These include your needs and future goals, the number of people your insurance should cover and the expected liabilities or expenses like higher education of children, marriages, and medical care for elders.

Identify the answers to the following questions and you will arrive at your right insurance.

What are your Future Goals?

The money you might need for particular goals should be calculated keeping in mind inflation rates too. Assess the age and year you might be getting married, becoming parents and planning your child’s future etc.,

How many dependents do you have?

At a very young age, you might not be sure about the number of people you might have to take care of. However, you can calculate all the possible variables and arrive at a possible amount for a comfortable lifestyle.

What are your Current or Future commitments?

Do you currently have any loans or plan to take any in the future? It's important to include them in your life insurance to avoid burdening your family with EMI repayments. Also, keep in mind your future commitments like car, or home loans you might get.

What Health Problems Must be accounted for?

Apart from the death benefit extended by a term plan, some plans offer additional cover in the form of riders. Riders like disability cover, loss of employment cover, and waiver of premium cover should be added by paying a small amount of added premium. These riders add considerable value to the basic term plan purchased.

Why Invest Early In Insurance?

Here are a few advantages you can gain by starting early.

Health Quotient and Premium Affordability:

• Good health leads to lower premiums.

• No medical exams are required for healthy applicants.

• Example: If a 40-year-old has to pay INR 22,185, a 20-year-old has to pay only INR 5,428 annually for a 40-year term policy with INR 1,00,00,000 sum assured.

Benefits of Compounding in ULIPs:

• Compounding: Reinvesting base capital and interest for wealth growth.

• ULIPs(Unit Linked Insurance Plans) offer this benefit.

• Longer tenure amplifies returns.

• Example: 25-year-old investing INR 2,50,000 annually for 10 years at 8% earns INR 1,89,87,106 at maturity. 45-year-old earns INR 48,56,025 due to a shorter investment period.

Financial Certainty for Dependents:

• Insurance provides financial security for the family.

• Term insurance at a young age ensures the family's comfort and lifestyle continuation in case of the policyholder's demise.

Protection Against Income Loss and Whole Life Insurance:

• Whole life insurance plans secure lifetime coverage.

• Plans provide regular income to cover expenses, and debts, supplement income, and also plan for retirement.

• More affordable and feasible at 25 than at 50.

Now that you have understood the importance of insurance at an early age and how to choose one, you will have also understood how right Tanya is in her insurance research. Start your research and your investment journey right now.