There are three areas of uncertainty in life that you need to make provisions for to avoid financial shock in the event of an unfortunate happening. Were talking about life insurance, health insurance and contingency reserve. If you are caught by these events unprepared the financial costs of dealing with them can be tremendous but thankfully sufficient provisions can be made without hurting your finances, if you act in time.
Life insurance is a much abused word in India. Only the most worthless of products are sold by the market. Thus, even if you think you have taken a policy, you may be hopelessly under-insured! So make sure you go through this to understand what insurance really constitutes and how you need to act.
Making money and investing it is exciting for everyone but protecting the financial security of your loved ones in the event of your passing away may not be thrilling for many young people. However it could be one of the most responsible decisions you ever make. Your income earning potential is an asset worth protecting.
Who needs Life Insurance?
Those with mortgages and debts
If you have outstanding debts and mortgages you must make provision for your immediate family to pay it off in the event of your death. You need a life insurance with enough cover to help them pay off your debts.
1. Those with children
Even if you do not have children now but think you will have children in the future who will be dependent on your income then you ought to have a policy to cover their needs. Buying a policy early will give the advantage of lesser premium.
2. Those with other dependents
This includes spouse, parents, siblings or other family members who are dependent or will be dependent in the future on your income. The cover you choose must provide them with enough resources to carry on their life without huge financial burdens.
Figured out, what next?
Now that youre determined you need life insurance you need to estimate how much insurance you need. This will depend on how much amount will be needed by your dependents post your death which should include the requirements at death which could be i) medical and other such expenses, ii) a lump sum required to clear your debt obligations, if any, and a steady cash flow for future money requirements. A reasonable amount is your annual income adjusted for anticipated pay raises and inflation (you can use estimates). Figure out the number of years your dependents will be depended on your income after your death.
Shop around for the best premium rates from trustworthy insurance providers for a suitable term cover. Term covers only provide death benefit and are the cheapest ones. We suggest that you do not club insurance and investment goals by choosing traditional plans or ULIPS.
The next logical step is a medical insurance policy or the Mediclaim. You may be feeling great and probably rarely go to the doctor. As pessimistic as it sounds, regardless of your age or present state of health, you can become ill, or be in an accident that lands you in hospital at significant cost. Being insured gives you confidence knowing that you'll have access to medical services and potentially higher quality health care, if and when it's needed. Many organizations give this as a benefit to employees. But do check yours. In any case, taking one will hold you in good stead, should you switch a job. Now, there are tax benefits to taking a medical policy for your dependent parents too.
Health insurance provides money for hospitalization expenses. This type is also called Mediclaim. They do not cover pre-existing illnesses until four years of obtaining a policy. You might also want to top your Mediclaim with a Critical Illness Cover.
You can cover the entire family under a family floater plan. You can cover yourself, spouse, children (over 3 months and under 18 years of age) under a common sum assured and a single premium. Some insurers cover dependent parents and in-laws (less than 75 years of age) under the same policy.
There are several companies providing health insurance in India, of which 3 are pure health insurance companies.
Before you head towards your investment goals there is still an important allocation you need to make which should never be used for any purpose other than the one it is reserved for. Financial planning would be incomplete without a contingency plan which is a plan devised for situations where things could go wrong. A contingency fund or reserve is created for your financial rescue should you face an urgent unexpected need that you are unprepared to deal with.
Why create a contingency reserve?
You have a job and a regular source of income today to let you live life the way you are living. But have you thought about what you would do if you lost your job or couldnt work for a while due to illness or accident? A contingency fund is what you should be able to resort to in such circumstances.
How to create a contingency fund?
Having understood how a contingency reserve will help you, you will agree that such a reserve should ideally provide you with at least six months living expenses in the absence of regular income. You can create a contingency fund by keeping aside money equivalent to this in a safe and liquid form, that is, in a savings account. When your living expenses rise, increase your reserves to match the expenses.