Insurance—a matter of life and debt by Priya Sunder

I started preparing for the impending death a month ago. I opened the spreadsheet, which listed all the assets and ensured there was a nominee against each mutual fund, stock, bond, and insurance. I pored through the Will to make sure no asset or beneficiary was forgotten. I confirmed the husband had the passwords or PIN numbers for the investment portfolios, phones, banks, credit and debit cards, retirement accounts, emails, laptop and even the Facebook and LinkedIn accounts.

It was just past 10pm. In a few hours, it may all be over with X, my client and dear friend, who I had known for 5 years. In the quiet stillness of the hospital ward, I closed my eyes and recalled the first time I had met X. She came to me a healthy, cheerful woman in her forties. She was married with two young daughters, and enjoyed a successful career in one of the leading technology companies in Bengaluru. X knew the importance of financial planning and that is how our paths crossed. While she was extremely diligent about investing towards her wealth-creation goals, she would resist any engagement on life or medical insurance. She held the misplaced notion that people should not benefit from someone’s misfortune. About health cover, she believed she had adequate insurance from her company.

What unfolded 4 years later was staggering. X was diagnosed with malignant brain tumour. She underwent extensive treatment for more than a year. Her company took care of the initial medical expenses for a few months, but when X was unable to get back to work, she was struck off the company rolls. Along with her job, she lost her corporate medical and life cover. This is when her financial and physical health started tumbling downhill.

X was ineligible for a private health insurance because of her critical illness. She was forced to sell her assiduously accumulated assets. With more than half her assets redeemed, her family’s education and retirement goals were severely compromised. Given that she had no life insurance, her husband would have no means of rebuilding those assets before his retirement. What’s worse, their remaining assets were inadequate to fund the rest of her treatment, forcing the husband to consider taking on expensive loans. X’s death on that cold November morning was a chilling reminder that life is fragile and uncertain. You must prepare for life’s uncertainties and downsides before you start planning for its upsides. You must account for every major ‘what if’ situation. These are typically low-probability, but high-impact situations such as death, disability, job loss, asset destruction, or divorce.

First, ensure you have adequate medical insurance. In some ways, a healthy medical cover is more important than life cover in the hierarchy of protection plans. If you are hospitalised and are unable to work for a few months, not only will you bear mounting medical expenses, but will also face loss of income. Also, unlike death, where you stop consuming assets, in medical situations your normal consumption levels stay the same or even increase.

A healthy level of family health cover would be at least Rs20 lakh. You may not need that level of protection today, but you will need it later because of rising medical costs. If you postpone purchasing medical cover for later, or closer towards retirement, you run the risk of a cover being denied because of new health conditions. Medical underwriting is much more stringent today than it was even a year ago. Hence, you must put a healthy cover for yourself when you are young and fit and the chances of rejection are low. Don’t depend on a corporate cover; no job is guaranteed. There may be gaps between jobs where you don’t have cover. Your next job may not offer you a cover at all. Hence, do not tie your health to your employability.

Apart from a basic medical cover that pays for hospitalisation, you must have a critical illness cover and a permanent disability cover. Both help you tide over immediate medical expenses as well as ensure that loss of income is compensated to some extent.

Next is life cover. You need life insurance if anyone in your family is dependent on your income and runs the risk of being financially dependent if you pass away. This includes spouse, children, parents, siblings or other relatives. Ask yourself: if you lose your life tomorrow, will your family see through their expenses for the rest of their lives based on existing assets? Will some of those assets be used towards clearing a liability such as a home loan? If the answer is yes, you need life insurance.

A basic term plan is an efficient way of getting a high cover for a relatively low premium. Ensure that the term of the policy does not exceed your retirement age. Assuming you are healthy and live till you retire, you will have already accumulated assets through your income.

The basic objective of all financial plans is to ensure that you and your family are financially independent. You can’t build a strong structure of asset creation unless you build a solid foundation of protection. It is difficult to confront the possibility of your own death. But doing so will put you in some control over life’s imponderables. Your loved ones must have a future that is debt-free and financially strong, with or without you. You owe it to them.

Priya Sunder is director and co-founder of PeakAlpha Investments.