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Life Insurance Policies: A Strategic Tool for Wealth Management and Succession Planning

Life Insurance Policies: A Strategic Tool for Wealth Management and Succession Planning

Source: Businesswire India

Business Wire India

Life insurance policies can be an excellent addition to a wealth management plan. Depending on the type of policy, they can provide life insurance and help generate financial resources. However, there are different life insurance types, each serving a different purpose.

  • Term Insurance Plans: Such plans provide an affordable means of securing life insurance coverage for a specified period. In case of the policyholder’s demise within the policy's term, the sum assured is paid to the family members.
  • ​Whole Life Insurance Plans: These plans offer whole life coverage with a saving component. They guarantee a payout on the insured's death, or a lump sum is paid to the policyholder if the plan reaches maturity.
  • ​Endowment Plans: These plans combine insurance and investment. They provide financial protection to the policyholder's family in the event of death during the policy term. In addition, if the policyholder survives until the maturity date, they receive a lump sum payout.
  • ​Unit-Linked Insurance Plans (ULIPs): These plans combine insurance and investment. The premium goes into equity or debt markets, which is aligned with the long-term financial goal of the policyholder in terms of wealth creation. Both market-linked returns and life insurance coverage are offered under these plans.

​Wealth Management with Life Insurance
An effectively chosen life insurance plan ensures the financial security of one’s family and can also serve as a strategic tool for wealth creation over time.
 
  • Capital Growth and Protection​
​Specific life insurance policies have developed into investment products through which wealth can be generated. Savings are built through the systematic payment of premiums, with returns being guaranteed or market-related, depending on the policy.

For example, ULIPs are market-linked products, so they are best suited for risk-taking individuals who want to generate wealth and also have insurance coverage. Endowment policies are stable and predictable in nature, so they are best suited for those who want safety and financial security.
 
  • Tax Benefits​
Tax planning is yet another broad aspect of wealth management. The premium paid is eligible for a tax deduction under sections 80C and 10(10D) of the Income Tax Act.

Role of Life Insurance in Succession Planning
Succession planning is the systematic transfer of assets and wealth to the heirs, thereby lessening the chances of conflict and maximising value. The following ways describe how life insurance helps in succession planning:
 
  • Seamless Wealth Transfer
Life insurance policy funds are often distributed to beneficiaries relatively quickly, without probate, hence avoiding delays and complexities.
 
  • Maintaining Financial Liquidity
Often, heirs receive fixed or non-liquid assets. In such situations, the payout of life insurance plans ensures they have immediate financial resources for discharging expenses, including estate taxes, medical bill payments, and settling debt obligations.
 
  • Creating an Equal Estate
Life insurance can balance inheritances among several heirs. For example, when one child takes over the family business, and another does not, payments from the insurance company can create equality in the estate for the recipients.
 
  • Supporting Family Businesses
Life Insurance policies are crucial in ensuring that family-owned businesses continue uninterrupted and run smoothly, especially at critical transition points. The payback may be used to buy out shares from other external stakeholders or secure working capital to ensure sustainable operations during the transition period following the death of a critical stakeholder.

4 Things to Keep in Mind When Purchasing Life Insurance

Life insurance policies are smart financial tools, but without thoughtful choices, it will lack the impact it should be providing. Here are four important things to consider.

  • Needs and Goals: The life policy should match the current income, dependents' financial needs, and future goals.
  • Start Early: Investing in insurance as early as possible reduces the premium.
  • Diversify: Use a combination of policies to ensure comprehensive strategies of robust wealth management and succession planning.
  • Review Periodically: Life circumstances evolve. Regularly reassessing the insurance coverage and premiums ensures the policy continues to meet changing financial needs.

Life insurance is more than mere protection. It comes in various forms, from term and whole life insurance to endowment plans, each providing exclusive features and benefits in light of a comprehensive financial planning approach. Investing in appropriate life insurance policies, such as an ACKO Life Insurance plan, can open the gates to a financially secure tomorrow for those who want to secure their family’s future, protect their estate, and leave behind their legacy.

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