Publication: The Economic Times Mumbai; Date: May 29, 2008; Section: Personal Finance; Page: 21
Anju Grewal, a housewife in her mid-30s, agreed to buy life insurance after been chased by her cousin. Though she gave in to social obligations, she was not sure whether she should buy the investment oriented insurance policy pitched to her. Many people, including Anju, believe that insurance is a forced form of savings. Hence the key message thrust on them is that insurance will not only provide some cover to your family, but can also give you some amount on maturity.
“Do I need life insurance?” was Anju’s question. To find an answer, we must understand what life insurance exactly is. Life insurance is primarily a tool by which an individual can transfer the financial risk (to his/her family) of his/her early or untimely demise to the insurance company.
So what exactly is the financial risk in case of loss of life? The first question Anju should ask herself is : “Will my family have sufficient financial resources to maintain their lifestyle and achieve financial goals such as children’s education, marriage, if something were to happen to me today?”. The answer to this question needs introspection as well as thorough analysis. Besides the emotional loss, there is also a financial loss that occurs to a family , when the breadwinner or earning member of a family dies. Families are devastated; have to go through a lot of hardships and turmoil to make ends meet. Even if you have plenty of money, poor planning (too many claimants, legal issues, and litigation) can ensure that your family sees tough days ahead.
Generally people buy insurance to demonstrate caring and to feel comfortable that they have indeed done something to secure their family’s future. Whether they need insurance or not is considered irrelevant. For example, there is this celebrity who has been sold an insurance policy where he is paying premiums in crores. This celebrity does not even need life insurance as he is single, no dependents, and no liabilities, has lot of assets but yet has fallen prey to some life insurance product. Life insurance is generally a very personal decision and should be bought only if there is some significant economic impact of your untimely death on your family.
Therefore, a housewife needs to ask herself the following questions
1. Is my husband’s income sufficient to take care of my children, liabilities and family goals?
2. Are there any immediate expenses or recurring expenses that would come up should something happen to me today?
3. Does my husband have adequate cover? If so, how much and what kind of expenses, liabilities and goals would I have to address in case of his untimely death?
Ensuring that your husband has sufficient cover is far more important for a housewife than ensuring that she has sufficient cover. Considering that the husband has sufficient life cover, there is no pressing need for a woman to buy life insurance.
However if one must buy life insurance , then you can opt for a simple term plan that will give a very good cover for a low premium. Most insurance companies will either refuse a pure term plan in the name of financial justification , moral hazard or give a low cover of around Rs. 5 lakh. A term cover of Rs 5 lakh for a 35 year old woman will cost Rs. 1,700 per year.
Premiums might vary from company to company but in general there is no need to pay anything significantly more than this number. This means that you can comfortably stay away from investment-oriented policies Folks from insurance companies generally are of the opinion that since housewives are not earning, there is no question of replacing income in case of their death. On the other hand they readily agree to give you insurance if you opt for a investment oriented insurance policy.
The right approach to buying life cover is to consider whether the risk has the potential to jeopardise the family’s future. Anju did some introspection on whether her death besides an emotional loss could cause any financial damage. She listed down all the expenses that would come up in case of her absence under the following broad heads:
Tuition Teacher for kids
Care taker for kids
Help for cooking
She figured out that her husband’s income was sufficient to take care of all the above expenses and leave aside a tidy figure for investments per annum. She also figured out that should something happen to the couple (Anju and her husband), her husband had sufficient life insurance to provide for their dependents. This thought process and a few calculations made the decision easy and Anju decided to simply invest most of her savings and see if an insurance company can issue her a low cost term plan. There is no doubt that duties and responsibilities of housewives are selfless and incomparable. However, when it comes to life insurance, one must make a thorough assessment of individual situation and then take a prudent call.
The author is a certified financial planner and the director of My Financial Advisor
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