Financial Planning : Insurance
We do not think (or do not want to think) of what will happen to our family, if we are gone - especially when we have not met all of life's responsibilities. Though the family goes through emotional trauma, financial burden adds to the pain. One has no remedy for the emotional pain, but smart financial planning can certainly ease the financial pain.
If one is under insured, it could lead to a slip in family's lifestyle in case of an unfortunate death of the breadwinner. The family may have to compromise on various fronts to make the ends meet. These could include cutting down household expenses like food, medical, entertainment expenses, marriage expenses of children or moving to lower grade school for your children and many more expenses.
While life insurance is critical to meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So having a cover is not enough - having adequate cover is critical. Also, investment planning is not enough because plan could work only if funding the plan is regular and enough wealth is built up to take care of all life stages responsibilities. What happens if the funding suddenly stops?
Life insurance has moved from protecting life to protecting lifestyle. Financial needs can be classified broadly into following two categories.
- Protection: if anything happens to the breadwinner, the family continues to be financially protected and maintain the same life style.
- Savings: one should be able to generate required corpus to meet milestones such as education / marriage expenses of children, buying a house etc. The first step in buying insurance cover (Life Protection cover) is to adequately assess your need and responsibilities. One should ask the following questions:
- What is my life stage? (Age, family etc.)
- What are my responsibilities? (Buying a house, children's education / marriage expenses, protecting my income etc.)
- How much corpus I require to meet the above financial responsibilities?
- What is my current corpus / net worth?
- What are my liabilities (like car loan / housing loan etc)
- How do I plan (including selection of insurance plan) so that even if I am not around, my family can still sail through milestones?
The above data can be compiled in the following Protection Cover Computation Table to assess whether you are adequately protected:
A. Expenses protection» Household expenses of family members
B. Goal protection» Education expenses of children» Marriage expenses of children
C. Liabilities protection» Outstanding Housing Loan» Outstanding Car Loan» Any other Loan (Personal Loan) Total funds needed to cover expenses: (A + B + C)
D. Less: Existing Cover (if any)
E. Less: Current Assets / Investments (excluding assets for self consumption like house, car etc)
Additional cover required to be purchased = (A + B + C) - (D + E)
Note:» If the result of the above computation is positive, one is under insured and needs additional protection. If the result is negative, one is sufficiently covered or over insured.
» Inflation needs to be considered while calculating expenses.
» Present value of future expenses to be discounted to compute protection required.
Santosh Rathod. R
Mobile : 91 99861 84653
E-mail : rsantoshrathod@gmail.com,
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