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Or has he? Though his investments are doing very well and he has a steady job, Gupta has no life insurance, which leaves his family unprepared for an unforeseen event. He is the primary earning member of the family, bringing in almost Rs.2.2 lakh of the total Rs.2.7 lakh monthly household income. There is a sizeable Rs.31.5 lakh outstanding home loan, and another Rs.5.5 lakh loan for a car. If something untoward happens to him, his wife and daughter will be left in the lurch.
Life insurance is the most crucial aspect of financial planning because it protects all other goals, says Amit Jhingran, Managing Director & CEO of SBI Life Insurance (see interview on page 4). “Don’t look at insurance as an expense. It’s crucial for your family’s financial future,” he says. However, this critical component is often missing in the average financial plan. According to this year’s India Protection Quotient survey by Max Life Insurance, 32% of respondents admitted they did not have sufficient life cover.
For most people, it’s hard to imagine what their family will go through if they die. It’s a scenario they should seriously consider. The lifestyle will be severely curtailed if the sole breadwinner is no more. Mutual fund SIPs will stop, so will the loan EMIs. If there is a large outstanding home loan and not enough assets to repay it, the family may even lose the house.
How to protect all your goals
Will Rs.1 crore insurance be sufficient to protect your goals? Experts say that the life insurance plan should be big enough to replace the income of the individual, pay off all debts, and provide for future, big-ticket expenses (see graphic). The good news is that it takes very little to secure the financial future of one’s family. Pure protection term plans cost very little. A 30-year-old needs to pay less than Rs.1,000 a month for a cover of Rs.1 crore for 30 years. This works out to as little as Rs.32 a day, the price one pays for a soft drink. “The cost of life insurance is actually very small compared to the safety net it provides,” says Casparus Kromhout, Managing Director and CEO of Shriram Life Insurance.The bad news is that people find enough reasons to not buy life insurance. Gupta understands the importance of insurance because he has bought a health plan in addition to the group health cover from his employer. He also knows that he needs life insurance, but hasn’t bought it yet. “I know a term plan is necessary, but I haven’t been able to decide which company to go with,” he says. This indecision can prove very costly if something happens to him. “If you know how important life insurance is, but keep putting it off, it’s time to switch gears,” says Kromhout of Shriram Life Insurance.The delay will also cost Gupta even if nothing happens to him. At 37, he is only three years away from turning 40, an age when medical conditions start appearing and premiums shoot up. If Gupta buys a cover of Rs.2 crore now, the premium would be around Rs.26,000 a year. This is around 2% of the Rs.12 lakh he puts into mutual funds and small savings schemes every year for his child’s education and wedding. Once he crosses 40, the premium will shoot up to Rs.45,000. It could rise even more if he develops a health condition.
Keep in mind that the money required for household expenses and future goals will keep rising due to inflation. If you are worried about inflation, buy a plan that increases the life cover to keep pace with rising prices. The Yuva Term Plan launched by LIC last week offers this option to buyers. “The cover remains unchanged for the first five years and then increases by 10% every year till the fifteenth year. By the fifteenth year, the insurance cover would have doubled,” says insurance consultant Vivek Laghate.
Get sufficient cover
Even those who have bought insurance may not have a sufficient cover. Meet Dharmendra More (see picture), who bought two term plans with a combined cover of Rs.35 lakh on the advice of a friend. Like Gupta, More is the primary earning member in his family. His wife Sakshi’s income is enough to pay for household expenses, but won’t cover the outstanding home loan of Rs.13.5 lakh and foreign education expenses for their two daughters. More is not buying any more insurance because his age and occasional smoking have pushed up the premium to unaffordable levels. If he didn’t smoke, a cover of Rs.1 crore for 10 years would have cost him Rs.64,000 a year. As a smoker, it is about 50% higher at Rs.1 lakh.
It is quite expensive, but More should keep in mind that if something were to happen to him, his family would be financially vulnerable. He should consider reducing other investments and buying life insurance to safeguard his family’s future. “Saving is important, but financial protection ensures that your family is covered no matter what happens,” advises Kromhout.
Himanshu Gupta,37, Noida
Household income
Rs.2.7 lakh per month
Outstanding debt
Rs.37.5 lakh
Financial goals
Rs.60 lakh for child’s education.
Rs.40 lakh for child’s wedding
Life insurance
Nil
He understands the need for insurance, but has not got down to buying it. This delay is putting at risk the financial future of his family. He should buy a term cover of at least Rs.2 crore before he turns 40 and medical conditions start showing up.
Though pure protection plans provide substantial coverage at low cost, insurance agents are reluctant to recommend these policies. This is because they pocket more commissions on endowment policies and even Ulips. A distributor gets 25% of the annualised premium as commission in the first year of a 30-year endowment policy. In the second and third years, the commission is 7.5%, and from the fourth year onwards, it is 5%. The low premiums of term plans means lower commission for the distributor.
Not everyone needs insurance
Life insurance is important, but not everybody needs it. If you do not have any dependants or have built up enough assets, you don’t need life insurance. Priyanka Joglekar (see picture) is single and her parents are financially independent. Instead of buying a term plan, she should consider buying a Ulip to build wealth. Ulips have higher charges than mutual funds, but they are also more tax-efficient. If the combined annual premium of all Ulips bought after 1 February 2021 is below Rs.2.5 lakh, there is no tax on gains. There is also no tax implication for switching from one fund to another in the Ulip. Such switching leads to taxation in mutual funds.
Dharmendra and Sakshi More, 53 & 47, Mumbai
Household income
Rs.1.75 lakh per month
Outstanding debt
Rs.13.5 lakh
Financial goals
Rs.60 lakh for daughters’ foreign education.
Life insurance
Rs.35 lakh each
A friend advised Dharmendra to buy a term insurance plan of Rs.35 lakh three years ago. Sakshi also bought a term plan of Rs.35 lakh. He does not want to buy additional cover because the premiums have shot up due to his age and smoking habit.
Ulips usually give a cover of about 10 times the annual premium. However, in recent months, some insurers have launched Ulips that give a cover of up to 100 times the annual premium. Kotak TULIP (term-linked, unit-linked insurance plan) is one such policy that buyers can consider. However, this high cover will cost you more. The mortality charges of a Tulip are higher than that of a Ulip. “While these plans offer a combination of high life cover and savings linked to market returns, Tulips can’t replace pure protection term plans,” contends Vaibhav Kumar, Senior Vice-President at Max Life Insurance.
Priyanka Joglekar,26 years, Pune
Her income
Rs.65,000 per month
Outstanding debt
Rs.1.2 lakh personal loan
Financial goals
Rs.10 lakh car purchase next year, and an overseas holiday.
Life insurance
Nil
She is single and has no dependants, so she does not require a large term insurance cover. Instead, she should go for a Ulip that can help her build wealth without worrying about the tax on capital gains.