Life insurance is one area where a thorough assessment of an individual's situation must be made prior to taking a prudent call
It took months, but Divya Mehta finally agreed to purchase the life insurance policy her cousin had being badgering her to buy. While social and familial obligations did force her to give the nod for the purchase, she was not entirely convinced whether the investment-oriented insurance policy was the best option for her.
And she is not alone. Many people believe insurance is a forced form of saving. The key message that is forced on them is that insurance will not only provide a cover for their family in times of emergencies, but it will also hand them a substantial amount upon maturity.
For those like Divya, the question that keeps popping up is whether they really require insurance. To find an answer, let’s first understand what life insurance exactly means. Life insurance is primarily a tool by which an individual can transfer the financial risk (to his/her family) on his-her early or untimely demise to the insurance company.
The next step is understanding what constitutes financial risk in the case of loss of life. Divya would do well by asking herself: “Will my family have sufficient amount of finances to maintain standard of living and achieve financial goals, in the event that something happens to me?” To get an accurate answer to this question requires thorough introspection and analysis. People experience tremendous emotional and financial loss when the earning member of the family passes away. Even if there is surplus money, poor planning can cause the family to see tough days ahead.
Life insurance is a largely personal decision and should be bought in the event that the person’s death is likely to have a significant economic impact on the individual’s family.
As such, it is important for a homemaker to consider the following:
- Is my spouse’s income sufficient to cover my children’s needs, family goals and liabilities?
- Are there any immediate or recurrent expenses that might come up, should something happen to me today?
- Does my spouse have adequate cover? If he/she does, how much and what kind of expenses, goals and liabilities would I need to address in the event of his/her untimely death?
For a homemaker, ensuring that their spouse has adequate cover is way more important than having a sufficient cover for themselves. This is because when the spouse has adequate life cover, there is no need for the homemaker to purchase any life insurance at all.
If one must buy life insurance, it is best to opt for a simple term plan, which provides a good cover for a low premium. Most companies would refuse a pure term plan, either in the name of financial justification or moral hazard, or give a low cover around the value of Rs 5 lakh. For a 35 year-old woman, a term cover of Rs 5 lakh would cost Rs 1,700 per year.
Premiums will vary from one company to another but in general, there is no need to pay a premium significantly higher than this. This amount ensures that you can comfortably steer clear of investment-oriented policies. Insurance agents believe since homemakers are not earning members of the family, the point about replacing income upon their death doesn’t arise at all. Inversely, they readily hand out insurance if one opts for an investment-oriented insurance policy.
The right approach to buying life insurance begins with considering whether the risk holds the potential to jeopardize the family’s future. Divya began by estimating if there would be any financial loss her family would experience, in addition to the emotional toll, upon her death. She then listed down all the expenses expected to come up in her absences under a few broad categories – caretaker for the children, tuition teacher for the kids and household help.
Upon further analysis, she figured that her husband’s income was not just enough to cover all of above needs but would also leave aside a tidy figure each year for investment purposes. She also realised that if something were to happen to her husband and her, her husband had adequate life cover to provide for their dependents. This thought process, coupled with a few calculations made it easy for Divya to make a decision. She decided to invest more of her savings and look around for an insurance company who would issue her a low-cost term plan.
Undoubtedly, the duties a homemaker carries out are selfless and incomparable. While most of their responsibilities might be related to household matters, life insurance is one area where a thorough assessment of an individual’s situation must be made, prior to taking a prudent call.
(The author, a certified financial analyst, is the founder and chief happiness officer, HappynessFactory.in)