Stay home. Stay safe.
That’s the risk management measure everyone is saying right now. Its because the moment you step out of your homes, your life is at risk.
Is this a new phenomena? I don’t think so.
Even earlier, we knew that when we step out, we face huge risks
- We could be hit by a bus.
- Be involved in a plane crash
- Slip over a banana skin
- Be robbed by a thief
So we have our own risk management measures to counter it as much as possible. What’s changed now? Nothing much.
Its just that there are newer risks and we’re more aware.
How about financial risks? We have always been surrounded by them.
We need financial risk management measures in place just like we have in daily life.
Some of the major financial risks we have to deal with:
- Dying too early (especially if you are the breadwinner)
- Living too long (livelihood and medical costs)
- Falling critically ill (medical costs and loss of income)
It seems like a macabre list and we do not like to entertain thoughts about it.
Hey, but who enjoys thinking about the worst?
It is only when the worst happens that we regret of not thinking about it earlier.
Unfortunately, it is too late by then.
I am not talking of the emotional damage that happens in the above events.
No one can compensate for that. There is no risk mitigation for emotional loss.
However, risk management measures do exist for financial loss.
It is called insurance.
When financial loss is combined with emotional loss, the overall loss is compounded.
So it is better that we manage what we can manage and leave the rest to Almighty God.
Risk Management of Dying Too Early – Term Life Insurance
The first risk of dying too early is mitigated by having a term insurance plan.
It is the most affordable plan with sufficient risk coverage.
The rule of thumb is that you should have a coverage of 100 times your monthly income plus any long term liabilities.
However, this does not constitute financial advice and each one’s coverage requirement has to be determined individually.
Term plan premiums are expenses, not investment.
For instance, when your purchase risk cover for your assets like your vehicles or property, you don’t get anything back.
But you will receive compensation, if your asset is damaged.
In the same way, your risk of dying too early is covered by the term plan insurance.
And because you do not get anything back in return, it is the cheapest plan.
Now, insurance companies have started offering return of premium and other variants making it more expensive.
But in my opinion, that’s not needed. You should consider it as an expense and be assured that your risk is covered.
That decision leaves with you a higher investible amount which can then be invested into better avenues according to your financial goals.
If the breadwinner dies early, the family has a financial support to continue their desired financial goals with minimum financial loss.
That is how the risk of dying too early is mitigated.
Risk Management of Living Too Long – Annuity or Pension Plan
The second risk of living too long can be mitigated by an annuity or pension plan.
An annuity plan is where you invest a lumpsum or a steady amount over the years and after retirement, you get a pension.
Unfortunately, returns on annuity plans are very low in India.
However, NPS (National Pension Scheme), PPF (Public Provident Funds) are the good options available now.
NPS allows you to withdraw maximum 60% of your money as lumpsum at the time of retirement out of which 40% is tax-free and remaining 20% is taxable. The remaining 40% has to be mandatorily used to purchase an annuity which will give you a pension amount every month.
You can even plan for your own retirement using SWP (systematic withdrawal plan) of mutual funds.
In your earning years, you can accumulate money to generate the required corpus.
Then at retirement, you start withdrawing a fixed amount every month from your mutual fund corpus.
You can also use a combination of the above plans to mitigate the risk of living too long.
Health Insurance with Critical Illness rider
We may not die early or live long but we could fall ill in between.
Critical illness can result in loss of livelihood coupled with huge medical costs.
This risk is mitigated by having a health insurance cover. A critical illness rider compensates for the second part.
There are many health insurance companies providing this cover.
You can compare their features and premiums to decide the best one for you.
For families, the best ones are family floater plans which includes the entire family in a single plan.
There are also top up plans which are activated only when your primary cover amount is exhausted.
Top up plans are cheaper and may be useful if you need a higher cover for your family.
You can opt for a primary plan with a good coverage amount and purchase a top up plan for extra coverage.
Once you have covered all your probable risks, you are free to plan and invest for your financial goals.
You will not be overly stressed about any emergency that could dent your long term financial plan.
Emergency Fund
Speaking of emergency, the first step of financial planning is to have an emergency fund.
The emergency fund should have around 3-6 months worth of your monthly expenses including your insurance premia and EMIs.
You can keep a part of your emergency fund in a separate bank account for easy access.
You can keep the rest of it in fixed deposits or liquid funds.
Hope this helps to have your risk management measures in place.
Click here to start building your emergency fund.