Sunil is 23 years old and just started his professional career. He saves about Rs 15, 000 per month and is looking for invest for his future. He has been advised that he should start investing in equity mutual funds through a systematic investment plan (SIP) and purchase a cheap term insurance plan. The advice sounds perfect. Since he is young and can take greater risk, he can invest for the long term and let the power of compounding work in his favour and equity funds are the way to go.
However, should he be advised to go for a term plan or can he do without it at the moment? It depends. Before we jump to any conclusion, let’s first see why you buy life insurance. You buy insurance so that your family does not suffer financially and does not have to compromise on lifestyle when you are not around. So, if your family does not depend on you financially, then you can do without life insurance. Do remember you have to think about future scenarios too. For instance, Sunil’s parents may not rely on him before they retire. However, they may have to rely on Sunil after their retirement. Hence, if something were to happen to Sunil, his parents would struggle post their retirement.
Additionally, if you have financial liabilities, say a home loan, then it makes sense to purchase life insurance because you would not want your family to clear the loan on their own before they can completely own the house.
You can do without life insurance if:
- You don’t have any financial liabilities (home loans, car loans, credit card loans etc); and
- Your parents (and other family members) are not financially dependent on you and you do not foresee any scenario when they will need funds from you (even in their retirement or medical emergency); and
- Your spouse does not depend on you financially and you don’t have any children
An alternate scenario is that your spouse does not depend on you financially and can take care of herself/himself and your children without any financial support from you. Should you buy life insurance in such a case? Yes, you should. This is because life is fickle and something can happen to both of you together such as a road accident. Hence, it is imperative that you purchase life insurance when you plan to start a family.
If Sunil checks all the aforementioned points, he can stay away from paying life insurance premiums for a few years. He can use the money to increase his allocation to mutual funds. Irrespective of whether Sunil chooses to buy a life cover, he must do the following right away:
Buy a health insurance plan
Sunil would be better advised to go for a health insurance plan. Any medical emergency can severely dent his plans and eats into his savings. There will be outgo towards health insurance premium but he will be spared a hit to his savings in case of any such medical emergency. Moreover, as he grows older, he may contact illnesses which may increase his chances of hospitalization and his health cover premium.
Build up a small emergency fund gradually
Additionally, he would be advised to gradually build up a small emergency fund (in liquid assets such as cash, liquid funds etc) to provide for his 4-6 monthly expenses. This is a small safeguard against a break in employment or any other urgent and unexpected requirement of funds.
Term insurance is very important and you will need it at some point of time in your life. However, you don’t always need to buy it with your first salary. Take some time and try to find out whether you really need it. You need a life cover if you have any financial dependents or financial liabilities or are about to start a family. Once you have decided to purchase the policy, do a proper assessment of the life cover required and purchase a cheap term plan.
Deepesh is Founder, PersonalFinancePlan.in