Yesterday, we wrote on Investing for your child. However, investing for your child is totally different from protecting your child from uncertainties.
One of the biggest mistakes parents make is insuring their child. Don't buy policies that insure the life of your child. Should something happen to you, your child will need the money. Not vice versa.
What you need to do is invest for your child. You should also take out adequate insurance in your name, with your child and spouse as beneficiaries.
Why term insurance will score
This is the most basic form of life insurance.
Let's say you insure yourself for 25 years. You pay a premium. If you die during this time frame, your family gets the money.
If you don't (which is good), neither you nor your family gets anything.
If you take an endowment policy, you win both ways. If you survive, you get the insured amount at the end of 30 years. If you do not survive, your beneficiary gets it.
The only problem is that the premium in an endowment policy is much higher than a term policy. And, if the premium is high, you might be tempted to go for a smaller sum as cover.
Say you want to get insured for Rs 20 lakh (Rs 2 million). If your term insurance premium is Rs 7,200 per annum, your endowment policy would set you back by about Rs 26,000.
Now, because you cannot afford Rs 26,000, you might be tempted to go for an endowment policy of only Rs 10 lakh (Rs 1 million) that would cost Rs 13,000 a year.
Do you know what you have done? In one stroke, you have halved your life's financial worth!
If something were to happen to you, your family would get much less than they deserve.
Whatever policy you choose, don't meddle with the sum you think your family deserves when you are gone.
How much must you get insured for?
Take a good look at your insurance coverage now that you have a child. Remember, someone's entire life is now dependent on you, your earnings and how you provision for them.
Examine all the expenses your family will incur should you die, and account for them.
Track your family's expenditure over a month. That will give you a fair idea of how much your family needs every month to survive:
i. Monthly expenses: Rent (or monthly outgoings to the society), utility bills, food bills, household expenses, daily travel, etc.
ii. Multiply these by 12 to get the annual figure.
iii. Annual expenses: festivals, vacations, gifts, birthdays, etc.
iv. Sporadic expenses: clothing, medical expenses, shopping, etc.
To the annual figure you arrive at, add inflation at around 5% per annum and calculate it for the number of years till your children are no longer dependents.
Add your child's expenses
The calculations made above take your lifestyle into account. Now add your child's expenses.
Add to the above figure how much your child's education fees (school and college), pocket money and marriage cost would amount to. Add an extra amount for living expenses. You will land up with a rough estimate of how much you should get insured for.
Let's say your total expenses work out to Rs 2,40,000 a year. In the event of something happening to you, these expenses will continue. You need to have savings invested in such a way that they give you a return of Rs 2,40,000 every year. Assuming you get a tax-free return of 6%, you would need savings worth Rs 40 lakh (Rs 4 million).
Take a good look at your savings and supplement the balance with insurance.
Insure your home loan
This is a great protection for your family should something happen to you. No, we are talking about insuring your home; we are talking about insuring your home loan.
This is a good idea, especially if you are newly married, have a new born child or years of repayment ahead of you.
This insurance will take care of the amount you owe the home loan company or bank on your demise.
Let's say you took a home loan of Rs 10 lakh (Rs 1 million).
Let's assume that after you pay up Rs 2,00,000 of the principal amount, you meet with an accident and don't survive. This means a balance of Rs 8,00,000 has still to be paid to the home loan company.
This is the amount the insurance company will cough up.
This way, your family is not left without a roof over their head; neither do they have the hassle of paying up the Equated Monthly Installment (monthly payment to be made to the home loan company until you clear your loan).
Don't forget medical expenses
If you have done the above, you have provided for your family should you not be around. However, there is one aspect of insurance that is beneficial all through your life: medical insurance.
No matter how rich you are, hospital bills can reduce your bank balance to dangerously low levels. That is why medical insurance is a must.
You must take out a policy for yourself, your spouse and your child.
Also ensure you have disability and partial disability insurance. Should something happen to you and you become partially disabled, the insurance coverage will be a great asset.
Simply put, a Mediclaim policy is a non-life insurance policy that covers the expenses incurred by an individual in case of an injury/ hospitalisation. Depending on the amount you get insured for, you will have to pay a premium every year.
Let's say you take a medical insurance policy of Rs 2,00,000 each for you and your spouse and Rs 1,00,000 for your child. Now, let's say the premium is Rs 2,500 for each Rs 2,00,000 policy per annum and Rs 1,500 for the child's policy. Do note: these are not actual rates, we are using them to provide an example.
Now the annual premium would be Rs 6,500. But, because you have insured the entire family, the insurance company will give you a 10% discount on it -- Rs 650 off per annum.
Of course, since we now have the service tax of 10.2% to contend with, the actual amount would be Rs 6,500 - 650 + 10.2% = premium you would have to pay.
All you have to do is renew your child's policy every year. For every year of 'no claim,' some insurance companies increase the coverage amount. For your child to get the best insurance benefit, it is wise to start him on it as soon as possible.
When calamities hit, the natural tendency is to dip into the savings allocated for your child. However, if you plan for contingencies, as you have done above, the chances of you doing so reduce.
Moreover, you are not only investing for your child, but you are also ensuring he does not have additional burdens to deal with should something happen to you.