“We all run two risks in life – die too early or die too late”

We dedicate our entire lives towards ensuring the well-being of our family and ourselves. While death is certain, the two biggest risks in our lives are dying too early (untimely death of sole earning member) or dying too late. Both scenarios are equally terrifying if you aren’t prepared for the consequences.

Mortality is a fact, and not something to fear. However, you need to plan to face both situations. The solutions for both scenarios are different yet incredibly simple. To mitigate the risk and consequences of dying early, you need to buy protection, a lifesaver of sorts. Similarly, to handle the extraordinary longevity of life, you need to build wealth that can generate enough money to help your loved ones live a comfortable life. 

Let’s dig deeper.

Life Insurance: The Guardian Angel

As the sole breadwinner of my family, securing my loved ones in case of my untimely death has always been my top priority. Therefore, I bought life insurance at the age of 30. It is a pure term plan for up to 80 years with a flat premium amount paid every year. In this way, if I die, the sum assured comes to the family and if I don’t (hopefully, I don’t), I keep cutting insurance premium cheques every year. There is no money back, no bonus, nothing if I continue to survive. It is simple and pure risk protection. 

Similarly, you need to think about your family and how they would cope with daily expenses, education expenses, medical expenses etc. if you were to pass on. However, the quantum of sum assured has always been a dilemma. 

Let’s say your expenses amount to Rs. 5 lacs a year. To generate that money at the interest rate of 5% per annum, your family will need Rs. 1 Cr. (5% of 1 Cr. is Rs. 5 Lacs). This is the value of the term insurance you need to purchase.

However, the sum assured is determined based on your current earnings and insurance companies may not provide you with the desired quantum if your income levels are low. But, you can always start with a smaller policy and increase the sum assured as you progress in your life.

Term Insurance is the most affordable and straightforward insurance policy you can buy to ensure a hefty payout for your family, in case of your unexpected demise. At the age of 30, with a nominal premium amount of ~Rs. 10,000 per year, you can buy term protection of around Rs. 1 Cr. At the age of 40, this may cost you around 17,000 per year. As you can see, a small premium creates a large capital value (sum assured) in case of any untoward event in your life.

With life’s unpredictability, you never know when things go south. Therefore, you must secure your family without a second thought.

Medical Insurance: To secure your savings

If the current pandemic has made anything clearer is a need for health insurance. Many people have lost their savings due to hefty medical bills presented by hospitals. As a result, the livelihoods and dreams of people have been thrown out of balance. As a COVID survivor, I can tell you firsthand how paying for medical insurance saved me from losing thousands in savings. 

Healthcare is not going to get any cheaper. Therefore, it is absolutely necessary to have health or medical insurance. Health Insurance plans cover medical expenses in case of hospitalisation. Furthermore, you need to pick a plan that protects your entire family (family floaters are the best) as anyone can fall sick at any time. It will allow you to protect your capital and still cover all the medical expenses, if required. 

Insurance is not about Tax Saving or investing

Many financial advisors endorse insurance for tax saving or as an investment. However, It is not an investment at all. Investments need to be handled separately. 

Insurance is a risk management product designed to protect you from any form of adversity including death and illness so that you and your family remain secure.

Therefore, you can simply buy a term plan for the protection of life and medical insurance for the protection of your savings.

Similarly, you should never buy insurance to save tax. While tax saving could be a consequence of buying insurance, as insurance premiums are allowed to be tax-deductible, it can’t be the reason to buy insurance.

Other Insurance Products

While life and health insurance is the basic level of protection to be purchased at all costs, you can also consider protecting other assets that you own to avoid creating a hole in your pocket. You can protect your home with home insurance, your car with car insurance, mitigate travel-related risks with travel insurance and much more. 

Analyse the existing risks in your life and buy products based on your needs. However, whenever you buy insurance think only risk protection and not investment or tax saving.

For extraordinary longevity of life

Once you know you have effectively planned for the unexpected, you can move on to plan for the risk and uncertainty of dying later. You can analyse your remaining income to make strategic, recurring and long term investments. These investments could include pension plans, mutual funds, equity investments, or availing portfolio management services to customise your portfolio and direct your investments towards creating long term wealth over time.

The time to be practical is now!

While your goal in life should be the creation of long term wealth, it should come after you have ensured your family’s economic well-being in case something unexpected happens to you today. Buy simple products – term insurance and medical insurance with no survivor benefits. And, don’t buy insurance as an investment or tax-saving product. That way, you can plan on better wealth-building knowing that your family is secure in every way. 

Wish you great health, and happy risk protection!

By Manish Bansal

Manish is the Managing Director of SME Value Advisors, a platform that connects businesses with curated professionals who can deliver solutions. You can connect with him on manish@smevalueadvisors.com.

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