Buying a term insurance has become popular now especially in metro cities, thanks to rising awareness amongst the masses and the proliferation of financial services companies and insurance agents. The reason for buying a term policy is to ensure family has enough funds to sustain their lifestyle in case of an early demise of the policy holder. But does just buying a term policy secure the financial future of the family? I think it is just 50% of the job done.
For most households, the wife does not know anything about investment and finances and if the children are also young even they would not have a clue about it. So what happens when your wife gets the cheque of your sum insured? If everything just keeps lying in her savings account or if it is converted into a fixed deposit would the fund be enough to last their lifetime? Let us try and understand this with an example.
Suppose Mr. X who is 40 years old is planning to buy a life insurance policy for his wife who is also 40 years old and his son who is 10 years old. Their annual expenses are INR 9 lakhs and Mr. X estimates that in case of his demise, family expenses would be INR 7.5 lakhs annually. He currently has INR 20 lakhs of investments primarily in debt instruments. He estimates going forward inflation in expenses would be 5% and returns on investment would be 7% after tax. On this basis he would require an insurance policy of INR 2.05 crore assuming a survival age of 85 for the wife.
Now say he bought this policy and on his demise the wife receives a cheque of INR 2 crores. Imagine a household whose networth in only INR 20 lakhs and the wife getting a cheque of INR 2 crores who has never handled money. She may think her husband left her with a bounty of wealth. But in reality, it is only sufficient to sustain their current lifestyle, that too if the entire corpus can be invested at 7% post tax (which savings and fixed deposits may not provide).
Along with buying a term policy it is imperative to also have a plan in place for the survivors on how the money needs to be invested and what expenses can they incur if the corpus is to last them for their life. Along with creating a will, let your beneficiary know the people they should be consulting for investing the assets left behind especially if they have no knowledge or expertise in handling finances. This could either be a financial advisor or your close friends and relatives with a good financial acumen that you trust. The whole purpose of a term policy is to provide financial and mental comfort to your survivors and without a plan for your funds that goal may not be achieved.
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