Managing Financial Risk: The Essential Role of Term Insurance in Securing Your Future
Risk retention involves accepting certain financial risks and covering potential losses personally
By : Rohit Tatkare
Update: 2025-03-12 07:15 GMT
Risk is an inevitable part of life, and managing it effectively is crucial for long-term financial stability. In a financial context, risk can be addressed through three key strategies: risk retention, risk mitigation, and risk transfer.
Risk retention involves accepting certain financial risks and covering potential losses personally. For example, maintaining an emergency fund allows individuals to handle unexpected expenses without external assistance. Risk mitigation focuses on reducing the likelihood or impact of financial risks, such as diversifying investments to minimise market fluctuations or following a disciplined budget to avoid overspending. However, some risks — especially those related to income loss — cannot always be mitigated or retained, making risk transfer an essential tool in financial planning.
One of the most effective ways to transfer financial risk is through term insurance, which provides a financial safety net in the event of an income earner’s untimely demise.
Consider a scenario where Mr. A is the sole breadwinner for a family of three — himself, his wife, and their child. He has long-term financial goals, such as funding his child’s education and mee-ting recurring expenses.
Additionally, he has an ongoing home loan. While his accumulated assets might cover some of these financial commitments, they may not be sufficient to address all his goals and liabilities. In this situation, term insurance plays a crucial role by ensuring that his family remains financially secure despite his absence.
Without insurance, his dependents might struggle to meet essential expenses such as loan repayments, daily household costs, and future financial goals. The insurance payout serves as a protective buffer, preventing financial distress.
It is recommended to have a term insurance cover that is at least 10 to 12 times of your annual income. By incorporating term insurance into financial planning, individuals can safeguard their families against unforeseen hardships. It ensures financial security and allows individuals to focus on building wealth.
Key Takeaways
It is recommended to have a term insurance cover that is at least 10 to 12 times of your annual income.
Premium increases with age and is cheaper to buy at the earliest possible .
Consider current income, expenses and lifestyle, how they might change over time, home or education loans, dependents and their future needs.
One of the most effective ways to transfer financial risk is through term insurance, which provides a financial safety net in the event of an income earner’s untimely demise.
Consider a scenario where Mr. A is the sole breadwinner for a family of three — himself, his wife, and their child. He has long-term financial goals, such as funding his child’s education and mee-ting recurring expenses.
Additionally, he has an ongoing home loan. While his accumulated assets might cover some of these financial commitments, they may not be sufficient to address all his goals and liabilities. In this situation, term insurance plays a crucial role by ensuring that his family remains financially secure despite his absence.
Without insurance, his dependents might struggle to meet essential expenses such as loan repayments, daily household costs, and future financial goals. The insurance payout serves as a protective buffer, preventing financial distress.
It is recommended to have a term insurance cover that is at least 10 to 12 times of your annual income. By incorporating term insurance into financial planning, individuals can safeguard their families against unforeseen hardships. It ensures financial security and allows individuals to focus on building wealth.
Key Takeaways
It is recommended to have a term insurance cover that is at least 10 to 12 times of your annual income.
Premium increases with age and is cheaper to buy at the earliest possible .
Consider current income, expenses and lifestyle, how they might change over time, home or education loans, dependents and their future needs.