Is Life Insurance required after achieving Financial Goals (Explained with example)
Do you still need Life Insurance after achieving financial goals?
In the young or middle age, we would have taken 1 Crore or 2 Crore term insurance plans. These terms plans would help you meet financial goals even in your absence. However, a time comes where you would have achieved your financial goals. In such case you might get doubt whether you would still need life insurance then. This article takes a live example and provides a few pointers whether one need to continue their life insurance plans after achieving their financial goals.
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Why Term Life Insurance Policies are important?
You can skip if you are already aware of it.
Term plan is a simple life insurance plan that provides life risk coverage on payment of nominal premium. There is no maturity benefit. In case of unfortunate death of the life insured, the nominee or family members would get the sum assured and their family can continue to lead normal financial life. The expenses can relate to:
1) Kid’s education
2) Daughter’s marriage
3) To meet day to day expenses for spouse
4) Financial security for a spouse
5) Paying off outstanding home loans or auto loans or personal loans or credit card bills
6) To meet any other expenses
Hence, one should consider some of the best term insurance policies that come with low coverage and the high sum assured.
Due to increase in financial literacy, many of us are able to plan well and are able to achieve financial goals faster.
Now, what happens when you have achieved your financial goals. Let us take an example of Mr. Vivek, who has sent an email on this.
Dear Mr. Suresh, I had taken Rs 2 Crore term insurance plans earlier. Now I am 55 years of age. My kids’ education is completed, they are earning and no more dependent on me. I did my daughter’s marriage recently. I own a home. I have cleared all my home loans, car loan etc., However I have a debt of Rs 30 Lakhs where I purchased a land. I have sufficient retirement money for self and my spouse up to Rs 1.2 Crores (50,000 per month expenses for next 20 years). I have health insurance for Rs 10 Lakhs. I want to discontinue my term insurance plans (2 Plans of Rs 1 Crore each). Is it right decision?
The above message is edited with crisp points.
Did Vivek achieve all his financial goals?
Many of us might have this common question whether the term insurance plan is still required if we have achieved all financial goals. This lies in the reason why you bought life insurance. Mr. Vivek has bought a term insurance plan to achieve the following:
1) Want to meet expenses for kids’ education – Goal achieved
2) Wanted to buy home with housing loan, but since the spouse is non-earning member, he wanted to secure through term plan. He owns a home and cleared home loan too – Goal achieved
3) He wants to ensure his daughter’s marriage is taken care even in his absence. Since he did his daughter’s marriage recently, even this goal is achieved
4) Take care of living expenses for spouse in his absence. Since he earned enough retirement corpus to meet day to day expenses for him and his spouse, this goal is also achieved.
Does Vivek still need life insurance coverage then?
While we know he has majorly achieved his financial goals. However, let us check some less known things.
1) Debts are not counted. He currently carries 30 Lakhs of loan which he bought to purchase land. Can his spouse repay this money in his absence? He must either count this in insurance coverage or dispose the land and pay off the loan.
2) Not counting taxes – Many of us would ignore this aspect. You might be putting your retirement money in a bank FD or pension scheme, but what about income tax on it? One cannot expect 50K per month as return as taxes would eat away some of it. If they still withdraw 50K per month as net (by investing in a bank FD), retirement money is not sufficient for next 20 years. In his absence, the spouse cannot survive with lower income. Hence Mr. Vivek need to rethink about continuing life insurance coverage for some amount.
3) Unexpected medical expenses – Mr. Vivek has health insurance coverage for Rs 10 Lakhs which covers his spouse too. But for next 20 years, medical expenses keep skyrocketing and such low coverage is not sufficient. What happens if there are sudden medical expenses of say 30 Lakhs or 50 lakhs. This would eat away the retirement kitty. He can take a top-up health plan to cover this and another reason to have life insurance for at least small coverage.
4) End of life funeral expenses – This is the most disliking topic anyone want to discuss. The funeral expenses are not fixed. This would depend on the type of religious rituals one wants to do post the end of the life. Such amount also would eat away the accumulated corpus.
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Should you continue life insurance even after achieving financial goals then?
One should consider key pointers indicated above like counting all debts (irrespective of underlying assets that might have), unexpected medical expenses, taxes on retirement income, end of life funeral expenses etc., and come up with an adequate life insurance coverage, which might need to continue. In the above example, if Mr. Vivek thinks he might need 1 Crore term plan to continue, he can surrender one of the two plans and continue the other one. There could be a case where you would have taken only one term plan for Rs 2 Crores (as an example). In such case, surrendering it and taking a lower term plan can cost you a similar amount. In such case there is no option except to continue an existing one.
Hence, I always recommend taking 2 term insurance plans where one can surrender when not needed and another one can be continued for the rest of the life till needed.
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Out of the 4 reasons,
1 & 4 looks reasonable.. but,
2. Taxes coverage – how term life will help for covering the short fall of taxes?
Same way, 3. For health issues -as mentioned by you Medical policy/Top-up is required, but how term policy will help?
Could not understand the logic of 2 & 3 to have term policy
Madhav, The assumption here is Mr.Vivek is still working. Incase of sudden death of Mr. vivek, spouse cannot survive with existing funds.
Point no.2, spouse can survive with lower income after tax ? Answer is No.
Point no.3 Same way if something happens to Mr. vivek or his spouse and spent money on hospitalization charges, the retirement kitty is reduced. In this case retirement goal is altered and not achieved. If goals are not achieved, continuing term plan is better.
I think the point made by Mr. Suresh is quite reasonable and ok.
Imagine a situation where the earning member dies quite early and/or dies after a prolonged hospitalization with hefty bills eating into most/all your savings. The surviving member can carry on his/her life with the insurance money so received without altering the life style and social rituals/obligations also.