How Term Insurance Can Help with Estate Planning?

Term Insurance – a Cornerstone of Estate Planning

Vinay’s story is a reminder that estate planning is not just about organising your assets; it is also about effectively planning for liquidity and protecting assets. Term insurance can play a crucial role in this. Let us look at how term insurance supports transferring the legacy to heirs/next generation.

Role of Term Insurance in Transferring Legacy

Term insurance is a powerful tool against the uncertainties of life, and it plays the following vital roles in effective estate planning:

Immediate Liquidity for Dependents

In case of the untimely demise of the owner of the assets or the breadwinner of the family, the dependents may not be able to meet the urgent expenses such as living expenses, taxes and debts. Despite having an owner’s will, dependents cannot liquidate assets like business holdings, property and gold immediately. In this situation, term insurance plays a critical role in offering immediate liquidity to dependents to meet urgent needs. With the lump sum compensation paid by the term insurance policy, dependents can:

• Repay debt (for example: business loan, home loan, etc.)
• Medical expenses
• Daily living expenses of the dependent family
• Children’s ongoing education expenses
• Payment of estate transfer cost (applicable in future)

Repayment of Liabilities and Loans

Estate planning is not just about leaving a legacy behind. Effective planning involves managing what you owe (debt). Many people have business loans, home loans, and other debts. As per RBI data, India’s household debt has been steadily rising, reaching 42.9% of GDP at the end of June in FY 2024. That means many Indian families carry a long-term debt burden.

In case of untimely death, these debts won’t disappear and need to be repaid by the dependents. Hence, having a term insurance plan helps in this scenario. While you transfer the assets to your dependents, ensure to protect the wealth with an adequate term insurance plan. The lump sum compensation can be used by dependents to clear the outstanding debt.

Protects Your Estate

Without immediate liquidity, dependents or heirs are forced to sell the estate–family property, gold or stocks, sometimes below market price to cover the urgent expenses or costs. This can lead to disputes among dependents and can erode generational wealth.

Having sufficient term insurance coverage can protect your estate from forced selling in case of untimely demise. With adequate death compensation paid by the term insurance plan, dependents can meet urgent financial obligations without having to make a rushed selling decision of the family estate.

Fair Distribution of Inheritance

One of the major concerns in estate planning is equalising the distribution of inheritance. It’s common to have unfair distribution, specifically when it comes to immovable property. In such cases, term insurance can be a good tool to use for equalising inheritance. For example, let us assume one legal heir inherits the family business, and the other gets the immovable property of a lesser share. In that case, term insurance can ensure that another is compensated with a financial payout, preventing future disputes.

At Jio Insurance Broking, you can compare various term insurance plans offered by the different leading insurance companies. You can compare their features, premium, additional benefits and riders to make the right choice that fits into your needs and budget.

It is important to note that term insurance premium gives the tax benefits and can be claimed for deduction under Section 80C of the Income Tax Act, 1961. Your dependents also receive the tax-free compensation as it qualifies for tax exemption under Section 10 (10D) of the Income Tax Act, 1961. Ensure to list the right nominee and choose adequate coverage considering your income, debt and family’s future financial requirements.

Conclusion

To conclude, term insurance is a simple yet powerful tool to help in the transfer of your legacy. It gives immediate liquidity, reduces disputes among dependents, helps to repay loans and protects your family estate from forced selling. Regardless of complexities and delays in the legal process of the transfer of estate, term insurance ensures the family’s peace of mind is intact with immediate financial support.