While risks are a part and parcel of one's life, most individuals live under the false impression thinking 'It won't happen to me.' And hence do not take adequate measures to prepare themselves against the uncertain future.
Know that simple planning can go a long way in protecting you and your family from several hardships that life can spring up. Of course, the emotional and mental trauma of an event can never be quantified or protected but you can definitely protect yourself against the financial hardships that usually accompany such situations.
1. Risk of ill-health
While advances in science and technology have been able to save lives from innumerable diseases and thereby increase the average life expectancy, change in lifestyle has resulted in several new medical problems coming up. Cases of heart attack, diabetes among others has gone up considerably and so have the expenses associated with them.
Therefore, a Mediclaim policy is a must for everyone. Know that even a minor hospitalisation could be equivalent to three to five years of premia you pay. Besides, there are group covers too wherein you can cover the entire family under one policy.
Another associated risk is that of disability, either temporary or permanent. This risk can be covered through an 'Accident Insurance policy' which is quite cheap and won't hurt your finances much. Additionally you can also avail of tax benefits for the premiums you pay.
2. Risk of untimely death
Terrorism, natural calamities, accidents and so on, resulting in the untimely death of the breadwinners is a traumatic experience for the family of the dependents.
You can secure your family by buying adequate life insurance. Two things are important here -- how much insurance you buy and which policy?
As far as the type of policy goes, get a term cover only. This is the cheapest life insurance cover available to cover pure risk. Don't look for returns from your life insurance policy. Hence don't buy investment-inefficient policies such as endowment, money back or ULIP (Unit linked Insurance Policy).
As regards the amount of cover, just estimate how much amount you would have earned till retirement and calculate the 'present value' of that amount. This would be the approximate amount you need to insure for. (Don't worry -- calculation of present value is a very simple formula).
3. Risk of loss of income
Another common risk today is that of losing one's job and hence the earnings. This, together, with the increase in life expectancy would mean increase in the non-working years. Hence, financial security becomes increasingly important.
There are no insurance policies against such a risk. You would need to build your own protection plan that suits your circumstances through proper financial planning by moving from 'saving' to 'prudent investing'.
Starting from emergency funds to short-term needs to long-term dreams, we need to design our financial road map ourselves. Therefore, goal setting, asset allocation, investment selection and investment monitoring become very important. (Again don't worry -- the terms may sound big, but it is all very simple planning).
4. Risk to physical assets
Fire, terrorism, theft, earthquakes among others expose your physical assets to risk. Such risks can easily be protected today by way of 'Home Insurance Policies'. However, take care to read the terms carefully, to see what is insured and what is not.
5. Risks related to your home loan
In the last few years, we have seen an explosion in the number of people buying homes, which are mostly financed by way of home loans. The amounts run into several lakhs and the repayment term is around 15-20 years.
These huge amounts as well as the long repayment periods pose a risk. Should anything go wrong and you are unable to repay your loan, you could risk losing your house. To take care of such risks, you can opt for a suitable 'Home Loan Insurance' and protect yourself.
It is true that the above mentioned protection will involve some cost. But then these costs would not add-up to more than what you annually spend on weekend dinners/movies or your vacations. Moreover, they are essential given the increased uncertainties in life.
The author, Sanjay Matai, is an investment advisor. He can be reached at sanjay.matai@moneycontrol.com
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