Or is it? Although his investments are doing well and he has a steady job, Gupta has no life insurance, leaving his family unprepared for any unforeseen event. He is the family’s main earner, contributing nearly Rs 220,000 to the total monthly household income of Rs 270,000. He also has a sizable mortgage loan of Rs 315,000 outstanding and another loan of Rs 550,000 for a car. If something unforeseen happens to him, his wife and daughter will be left in the lurch.
Life insurance is the most important aspect of financial planning as it protects all other goals, says Amit Jhingran, Managing Director & CEO, SBI Life Insurance (see interview on page 4). “Don’t think of insurance as an expense. It is crucial to your family’s financial future,” he says. However, this important component is often missing from the average financial planning. According to this year’s India Protection Quotient survey by Max Life Insurance, 32% of respondents admitted that they do not have adequate life insurance.
For most people, it is difficult to imagine what their family will go through when they die. It is a scenario they should seriously consider. Lifestyles will be severely curtailed when the sole breadwinner is no more. Mutual fund SIPs will stop, so will loan instalments. If there is a large outstanding home loan and there are not enough assets to repay it, the family may even lose the house.
How to protect all your goals
Is a Rs 10 million policy enough to secure your goals? Experts say that life insurance should be large enough to replace the individual’s income, pay off all debts and provide for future, major expenses (see graphic). The good news is that you need very little to secure the family’s financial future. Pure term life insurance policies cost very little. A 30-year-old has to pay less than Rs 1,000 a month for a Rs 10 million cover for 30 years. That’s just Rs 32 a day, the price you pay 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 not to buy life insurance. Gupta understands the importance of insurance because he has purchased health insurance in addition to his employer’s group health insurance. He also knows he needs life insurance but has not yet taken it out. “I know I need term insurance but I have not been able to decide which company to take out,” he says. This indecision can prove very costly if something bad happens to him. “If you know how important life insurance is but keep putting it off, it’s time to switch,” says Kromhout of Shriram Life Insurance. The hesitation will cost Gupta dearly even if nothing happens to him. At 37, he is only three years away from his 40th birthday, an age when illnesses start to set in and premiums start to skyrocket. If Gupta takes out a Rs 20 million policy now, the premium would be around Rs 26,000 a year. That’s about 2% of the Rs 1.2 million he puts into mutual funds and small savings plans annually for his children’s education and weddings. Once he reaches 40, the premium will increase to Rs 45,000. It could increase even further if he develops a health problem.
Remember that the need for money for household expenses and future goals will continue to rise due to inflation. If you are worried about inflation, buy a plan that increases the life insurance cover to keep up with the rising prices. The Yuva Term Plan launched by LIC last week offers buyers this option. “The cover remains the same for the first five years and then increases by 10% every year until the fifteenth year. By the fifteenth year, the cover would have doubled,” says insurance consultant Vivek Laghate.
Ensure adequate protection
Even those who have taken out insurance may not have adequate cover. This is Dharmendra More (pictured), who, on the advice of a friend, took out two term insurance policies with a total cover of Rs 35 lakh. Like Gupta, More is the main earner in the family. His wife Sakshi’s income is enough to cover household expenses but not the outstanding mortgage of Rs 13.5 lakh and the study expenses of their two daughters abroad. More does not take out any more insurance because his age and occasional smoking have pushed up the premiums to unaffordable levels. Had he been a non-smoker, a cover of Rs 1 crore for 10 years would have cost him Rs 64,000 per year. So for smokers, the amount is about 50% higher, or Rs 1 lakh.
While this is quite expensive, More should remember that his family would be financially vulnerable if something were to happen to him. He should consider reducing other investments and taking out life insurance to secure 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
2.7 lakh rupees per month
Outstanding debts
3.75 million rupees
Financial goals
60 lakh rupees for the child’s education.
40 lakh rupees for a child’s wedding
Life insurance
Zero
He understands that he needs insurance but has not yet made up his mind to buy one. This delay is jeopardizing his family’s financial future. He should buy a term insurance policy of at least Rs 20 million before he turns 40 and health problems arise.
Although pure term insurance policies offer comprehensive protection at a low cost, insurance agents are reluctant to recommend these policies. This is because they earn more commission on term insurance policies and even Ulips. An agent receives 25% of the annual premium as commission in the first year of a 30-year term insurance 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 insurance policies mean a lower commission for the agent.
Not everyone needs insurance
Life insurance is important, but not everyone needs it. If you don’t have dependents or haven’t built up enough wealth, you don’t need life insurance. Priyanka Joglekar (pictured) is single and her parents are financially independent. Instead of buying a term insurance policy, she should consider buying a Ulip to build wealth. Ulips have higher fees than mutual funds, but they are also tax efficient. If the combined annual premium of all Ulips bought after February 1, 2021, is below Rs. 2.5 lakh, there will be no tax on gains. There are also no tax implications for switching from one fund to another in the Ulip. Such a switch will result in taxation in mutual funds.
Dharmendra and Sakshi More, 53 & 47, Mumbai
Household income
1.75 lakh rupees per month
Outstanding debts
13.5 lakh rupees
Financial goals
60 lakh rupees for the education of their daughters abroad.
Life insurance
3.5 million rupees each
A friend advised Dharmendra to take a term insurance policy of Rs 3.5 crore three years ago. Sakshi also took a term insurance policy of Rs 3.5 crore. He does not want to take any additional insurance as the premiums have shot up due to his age and smoking habit.
Ulips usually offer a cover of around 10 times the annual premium. However, in the last few months, some insurers have launched Ulips that offer 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. “Although these plans offer a combination of high life cover and savings linked to market returns, Tulips cannot replace pure term life insurance,” claims Vaibhav Kumar, senior vice-president at Max Life Insurance.
Priyanka Joglekar, 26 years, Pune
Your income
65,000 rupees per month
Outstanding debts
Rs. 1.2 Lakh Personal Loan
Financial goals
Buying a car worth Rs 1 million next year and going on a holiday abroad.
Life insurance
Zero
She is single and has no dependents, so she does not need a large term life insurance policy. Instead, she should opt for a Ulip which can help her build wealth without worrying about capital gains tax.
