Understand why life insurance is very important for your family's financial security.
The reasons people buy life insurance are various ranging from tax saving, investment, protection. The first and most important reason for buying it must be to protect your family against financial insecurity in case of your death.
Term insurance is the cheapest way of doing this. It’s also the easiest to understand. You pay an annual premium to an insurance company in return for a term insurance plan. The plan guarantees a “sum assured” or, the amount your family will receive in case of your death. The higher the sum assured, the higher the annual premium you have to pay.
Consider an example (and it could very well be you), of a person we’ll call Anand who is 39 years old. Take some basics about Anand:
|Income||Monthly net salary||Rs. 60,000 /-|
|Wife's net salary||Rs. 25.000 /-|
|Expenses||EMI on home lone||Rs. 25.000 /-|
|Other household expenses||Rs. 30.000 /-|
|Assets||PPF & Fixed Deposite||Rs. 5 lakhs|
|Other saving product||Rs. 5 lakhs|
|liabilities||Home lone outstanding||Rs. 20 lakhs|
|Any Other Lone||None|
|Protection||Life insurance cover (sum assured)||Rs. 10 lakhs|
|Helth insurance (company provided)||Rs. 3 lakhs|
Now, if I was in Anand’s place, I would also feel very unsure of committing to any regular payments that I have to make. Already, my expenses use up almost my entire salary and we need to dip into my wife’s salary to save for our 2 children and all other goals. We haven’t even started thinking about retirement planning.
However, consider the possibility of Anand passing away unexpectedly – be it an accident or a sudden health ailment (like Cancer) that was growing but was unknown all this time. While the family would have to deal with the shock of death, Anand’s spouse will also be hit by a big financial problem. Anand’s life insurance choice was made primarily keeping tax saving and returns in mind. Unfortunately, at this moment all his wife gets is the sum assured (and some more if the policy was bought way back and the corpus has grown). So, in all likelihood, Anand’s wife will get Rs. 10 lakhs as the life insurance amount. There’s a home loan of Rs. 20 lakhs outstanding. Imagine your spouse having to decide between selling off the home to pay off the home loan or having to encash every rupee of your savings just to hold onto your home (since her salary is inadequate to cover all expenses including the EMI).
Like Anand, you should pick one of the 3 choices with respect to life insurance – not doing anything is not a valid choice (even though many Indians take that one!)
1. Get life insurance cover equal to the current home loan outstanding. This is the least everyone should have and any compromise on this is just unacceptable. In Anand’s case (he’s a non-smoker), a Rs. 20 lakh term insurance plan bought online will cost well less than Rs. 500 per month (or Rs. 6000 per year). While too many additional expenses seem difficult to commit to at such time, surely, Rs. 500 per month is doable
2. Get life insurance cover enough to cover for current expenses (after adding an expected inflation rate for the family after you’re gone). In most cases, this is likely to be the ideal case
3. Get life insurance cover to replace your current income (after adding an expected annual increase in the same). In most cases (typically in cases where expenses are comfortably lower than income), this would be considered very safe but might not be easily affordable. If possible, it could be a great option though.
Life insurance is not among the most interesting topics to discuss. However, given that death isn’t either but must be faced up to, you may as well give the subject your full attention and do the right thing. After all, isn’t your family worth it?