Getting a life insurance is amongst the most important things which a person should financially do. This takes a paramount importance in case you are a bread earner in the family. My article on Term Insurance – First Step Towards Financial Planning explains the importance of life insurance for a person. However it is always important to know two things with regards to your insurance :
1. How much insurance you need ?
2. How long do you need to be insured ?
Every thing has a purpose and so does life insurance in your financial plan. Life insurance is meant to provide a lump sum amount to the dependents in case of an unfortunate death of the insured person. The amount which is to be paid in the event of the death is decided by the insured person at the time of insurance.
Having said that, let me narrate a story. Ghanshyam has a family comprising of his wife and two kids of age 2 and 5. He is currently of 30 years and earns a total of Rs. 1 lac per month and after monthly expenses he is able to save barely Rs. 25,000 per month. Ghanshyam is really worried that in case of his unfortunate death what would happen to his family members. He has a few investments totalling to Rs. 5 lac. These are grossly insufficient to meet his family needs if his income stops. Planning ahead, Ghanshyam takes a life insurance cover of Rs. 1 crore sum assured.
Luck is on his side and when Ghanshyam is of 40 years, his fortunes improve and he now owns a nice villa worth several crores and having other investments making his fortunes worth Rs. 10 crore. Moving on Ghanshyam is considering if he still needs to maintain his insurance worth Rs. 1 crore?
Let me throw this question to all of you. If you were in case of Ghanshyam what would be your decision ?
Clearly in overall scheme of things, Rs. 1 crore is no longer material for Ghanshyam now. When he started his career, Rs. 1 crore insurance versus Rs. Rs. 5 lac assets was really important. But now, Rs. 1 crore insurance in front of his Rs. 10 crore assets is no longer that important. Ghanshyam may take two decision :
1. Drop his insurance of Rs. 1 crore thinking that now he has assets which would be sufficient to meet the requirements of his family in case of his unfortunate death.
2. Review his insurance requirements and enhance them to a level which is sufficient for his future.
It is not a simple decision. With increased income, the standard of living improves. With increased standard of living comes an increased monthly cost of living. Ghanshyam’s monthly expenses may no longer be Rs. 75K per month. With increased fortunes his monthly expenses have increased from Rs. 75K to Rs. 2 lac per month. His family now maintains luxury cars, club memberships, luxury holidays, etc.
At this juncture, financial advisors may suggest Ghanshyam to increase his insurance cover to meet his revised needs. Another view is, Ghanshyam’s assets are currently sufficient to meet his family needs in case of his death. Ghanshyam’s current earnings are adding to his assets every year. He is of an opinion that he no longer needs an insurance cover. If anything happens to him, his family can monetise his investments for comfortable living.
Is this a wrong decision ? Perhaps not. You may have a different opinion. I would love to hear what you think on this case.