Uninsured and Breadwinner? Don’t live with a time bomb on your head

Uninsured and Breadwinner? Don’t live with a time bomb on your head.

In the previous article, we understood the power of compounding and the power of money and how to inculcate a habit of saving money. If you have not gone through that article, here is the link

I hope you got yourself acquainted with the necessity of saving and investing to achieve financial independence. However merely knowing about the destination is not enough for you to sail your boat directly into the ocean. For it, you need safety equipment, the knowledge of wind direction and much more. Similarly, before investing your hard-earned money into a return generating asset, you need to understand the hurdles you might face during the journey.

I assume all of you have a general idea of what insurance is and why is it necessary. I will take the liberty to skip the explanation and will directly come to a case study.

Mr. X is working in an MNC and lives with his spouse and two daughters, six and nine years old. Mr. X just started saving a few years back and is targeting a corpus of Rs.5 crores at his retirement to bear all the expenses of his daughters’ wedding and education, home and car loan EMIs along with an income for his post-retirement life with no insurance covering any contingency. 

Years pass by and Mr. X is now 48 and has made his portfolio of Rs. 1.5 crores, with his investment into Gold, Real Estate, Stocks and FDs. Unfortunately, on one sad day, Mr. X suffers a cardiac arrest and is hospitalized in an emergency condition. Without having his life insured, he has to now bear all the medical expenses which run in lakhs. His continued illness is now taking a toll on his portfolio nurtured over the years of hard work. 

God forbid if Mr. X dies, his home loan EMI will stop. The Bank in this eventuality will be the first one to sell the house to recover the remaining principal. All the sheer pain and hard work went into vain. The family is back to ground zero.

I am not trying to make you emotional. I am only making an effort to make you understand the practical aspects of the life where you need to keep your emotions aside and provide a risk-free life for your family even in your absence. 

Imagine a situation in which Mr. X had taken an Insurance plan with an appropriate risk cover. These days, Life Insurance plans cost you 7,000-8,000/annum (600-800 approximately per month) of premium to give you an insurance cover of Rs. 1 crore. And if you add to it Critical Illness/Disease Rider, it goes up to 1100-1200. 

If you have not got one and you are the breadwinner for your family, don’t wait with a time bomb on your head. Get insured now because it might eat away your entire investment portfolio. Remember, the premium is fixed throughout life. Also remember, the premium varies with your age at the time of choosing a policy. So, my premium at the time of joining is 8,500/- as I am 29 years old and it will stay the same throughout the lifetime. However, if I had opted to choose an insurance plan at the age of 35, the premium would have been 11-12,000/-. Start early and better start now.

In terms of insurance penetration [ratio of premium (life + non-life) in $ to total GDP in $] is 3.70% in India (2018) as per IRDAI Report 2018-2019. Premium is nothing but the cost you pay every year. To give you an idea of how abysmal the number is, the ratio is 20.88% for Taiwan, 18.16% for Hong Kong and 12.89% for South Africa. 

Government of India and various state governments are also taking necessary steps to promote insurance culture in India with noted schemes like PM Suraksha Bima Yojana, Jeevan Jyoti Bima Yojana among others. Most of the private companies and Government bodies deduct the premium from the employees’ salary to get them insured. For instance, the CGHS scheme of the Government of India deducts premiums in the range of 300-700/- to cover all medical expenses of an employee. It is very necessary for you to understand the contingencies included in your insurance policy.

It is my personal recommendation to get a pure term plan (which is life insurance) along with accident, disease and critical illness rider. If you have taken a home loan EMI and you are the breadwinner for your family, you must not wait for a single day to get your life insured. 

After having understood the necessity of insurance in your life, we will take the next step to understand where to put our saved money after paying the premium for an insurance plan :)

For this, we need to understand the various return generating assets available and the kind of risk-return involved in each one of them. Give me the liberty to skip many of them for the reason that I have started this blog for equity markets. However, I will still give you an introduction to each asset class in my next article. Till then, good-bye.

Disclaimer: This article is for an educational purpose. Feel free to connect at +91-9599202519 (WA)

Happy Investing….!!!