ver hear this argument? If you have ample wealth stashed away for your family after you are gone, don't worry about life insurance.
Seems right. But the logic is pretty flawed.
Here's why.
Let's say you have worked out that your spouse and two children will need a kitty of Rs 10 million to maintain their current lifestyle and pay for huge one-time expenses like marriage and education.
You total your assets and you are pleased: your home, bank deposits, stocks, gold are worth more than that.
What do you need insurance for?
Assume the worst. You fall really ill and have to undergo a complicated cardiac procedure that cannot be done in India. You fly to Houston or London (and medical treatment there costs the earth!).
Since you are neither a neta nor a corporate chieftain, neither the government nor the company will pick up the tab.
Guess where a substantial part of your millions will be spent?
Yes, you are in great health today. But catastrophes can and do happen.
Say you meet with a road accident, are badly injured and slip into coma. Your bills exceed your medical coverage. Your family dips into the Rs 10 million kitty for their maintenance as well as your upkeep. By the time you recover from the coma and are discharged from hospital, the kitty has substantially reduced in value.
Granted, these are extreme scenarios. Let's hope neither happens to you. But do you see the point?
As long as you are around, the possibility of spending a substantial portion of your wealth on health-related reasons also exists. You cannot wish it away.
In both the above cases, you will have to tap into your wealth.
Which means, when you are no longer around, your family not have the kind of financial security you planned for them.
Lesson to be learnt: You might be rich, but you still need to be protected against calamities and catastrophes.
Assume you do have enough wealth to take care of any eventuality, including an expensive medical treatment abroad. Even if a sizeable chunk of the money is taken away, there will still be enough for the family.
The crucial question is: what is your wealth made of? Most wealthy families have no dearth of assets for the survivors. But it takes a long time to unlock the wealth out of the assets.
For example, if real estate property, like a mansion or an apartment at a prime location, constitutes most of the wealth, it might take months (if not years) to sell it and collect the cash. If you live in an expensive apartment or house, it may not be possible for your family to sell it and relocate. Ever.
What if a huge portion is locked up in the share market and the market is totally bearish (which means the price of the shares have fallen) when your family needs the money? If they sell, they incur a huge loss. They are stuck.
What if you have included your jewellery under your assets? Would your family be eager to sell?
Don't confuse wealth with high income. The two are different. You could be a high earner but you could be spending just as much and, as a result, your savings could be quite low. This might also mean your family demands a lot of money which makes it all the more necessary that you have life insurance.
Lesson to be learnt: If your wealth is in the form of assets, your family may not be able translate it into cash when they need it.
Remember, the only people who can ignore life insurance are the super rich.
And if you need a monthly income, howsoever high, you cannot be classified as super rich.
Remember the saying, 'If you can count what you own, you are not wealthy'.
Only if you are in the same league as Bill Gates, Azim Premji or Tiger Woods, can you afford to ignore life insurance.
How do you get insured smartly?
1. You need life insurance in adequate measure. Make sure your policies are well-structured.
In order to select an appropriate policy, consult a financial planner or a good insurance advisor who will offer objective advice instead of a policy with a steep premium.
Term Insurance is the most basic form of life insurance. You are insured for a fixed number of years. If you pass away during this period, your beneficiary gets the money. If you don't, nobody gets anything.
2. Decide on the type of life insurance policy you want.
The Endowment Policy will give the money to the person you name as the beneficiary if you pass away. If you don't, you get the money at the end of the tenure.
The Whole Life Policy will give the money to the person you name as your beneficiary when you die.
To understand the various types of policies, please read How much is your life worth?
Do remember to ensure your life insurance policies are a wealth distributing tool.
3. Opt for different maturity periods.
Instead of taking a single policy for a large sum over a single term, consider taking a number of policies of varying maturities, say 10 years for one policy, and 20 years for another.
If they are investment policies, and if you live through them, you will collect huge sums at different points in time.
4. Name more than one beneficiary.
Nominate different members of your family as nominees.
For example, it may be a good idea to name your spouse as beneficiary for a policy of a relatively shorter maturity, say 10 years.
For a long term policy -- over the next 20 or 25 years -- you may want to nominate your children.
There is another reason why nominating different persons is important: it may be difficult to believe that they will ever fight among themselves for the spoils, but look around.
Family disputes about the distribution of the deceased's estate among the legal heirs are common.
To figure out how much insurance you need, read Your life is expensive. Here's why!
Next time you hear a film star taking a life insurance policy for a very large sum, don't smirk. That film star definitely has a good financial advisor!
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