Life Insurance is expense or Necessity?
As a wealth coach and Financial Planner, I have been advising all my clients to first build a strong foundation for Protection i.e Financial Security in the form of Insurances, Contingency Fund, Retirement Investments, and Having a home before embarking upon your goal-based investment and wealth creation journey.
Though Things are fast-changing, but still many investor consider buying life insurance as unnecessary expenses.
One of my clients in his early forties is also not buying his term insurance for almost a year now, despite my emphasizing, thinking his premium will go waste if he doesn’t need to claim insurance while he is very keen for his investments/SIPs.
There is a concept called Human Life Value (HLV) in determining Individuals Insurance requirements. HLV arrived at by adding Inflation adjusted monthly living expenses for the rest of the spouses’ life expectancy, Children’s Education and Marriage Expenses, and any uninsured housing loan outstanding.
For any aspiring family of the size of 4 would typically have HLV of not less than 1 crore.
Now if your portfolio is of say 30 lakh or 50 lakh. You need to ask yourself whether the same amount would be sufficient in case something untoward happens to you and you are not there to provide monthly income to your family?
If the answer is ‘yes’ then you don’t need insurance.
As we all know, but some do not appreciate, the fact that Life insurance is meant to provide financial security if the breadwinner of the family dies and income is disrupted.
Just Answer Following questions, in case you are not there ;
- My Estimates for monthly expenses of my family will be ___ for the next __ years. In case I am not there to provide for, this is where they will get a regular income from:
- I want my child to have a great education. The required funds would come from these sources, in case I am not there
- I want to make sure that my wife lives comfortably and this is how she will receive the money to take care of all her additional needs:
- In case some emergencies arise (in the form of illnesses or accidents), here’s where the funds to meet these will come from:
- I know that I have an outstanding home loan of Rs X lakh(my original home loan was worth Rs. Y lakh). As I am paying a huge sum of money as EMI, my family will have to continue paying the EMI or clear the loan in one go. This is how they will achieve it. Write it down, step by step.
Answering the above question would help you to ascertain whether Life insurance Premium is a waste expense or Investments to provide financial security to your Loved Ones/Family.
You should not waste your hard-earned money to pay Life insurance premium if your Net-worth ( Your Assets – Your Liabilities) is greater than your HLV, which typically happens at an advanced age or age when you are nearing your retirement.
Another wealth destroying practice of investor community is to mix investment and insurance by buying Investment-Linked Insurances.
This practice is prevalent in mass as it provides a comfort zone to both stakeholders i.e Investor and Agent. Investors are happy buying Investment-Linked Insurances assuming they are getting their money back and agents are happy selling investment-linked insurances earning better commission than pure term insurance.
The point which agents conveniently hide from Investor is that even in Investment-linked policies mortality charges are charged to provide insurance and they are not returnable.
In Investment-linked insurance policies investors lose at both ends, they are inadequately insured as a small mortality charge is paid by them hence their risk cover is less then HLV and returns are less than 20-year average inflation so their hard-earned money invested in insurances is losing its purchasing power.
So Prudent Personal Finance Practice is to buy pure Term Life Insurance and Medical Insurance (other applicable insurances) before starting investments.
Wealth Protection should be prioritized before wealth creation to ensure that the wealth you intend to create is protected in case of any untoward circumstances.
By The Way, If you are interested in managing your money/Personal Finance well, You can book a free 1-hour free consultancy call by clicking on the following link.
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