ATM :: Risk cover for your home loan


BALAJI RAO | The Hindu
A term assurance provides financial stability in case of unforeseen events and ensures that EMIs are paid.

ATM
Rangan is 35 years old, married, has twins aged three years. His wife, Ragini, is a home-maker. She teaches music to a few young aspirants and earns a small amount of money every month that takes care of her personal expenses. But Rangan is the main earning member of the family. He works for an IT company, earns well, has a home loan which still has another 17 years of repayment (Rs.50 lakh more to be paid including principal and interest), has a car loan to be paid for another three years, and has to take care of his children’s education over the next 20 years.

Rangan is bit worried about unforeseen events such as accidents, illness, loss of job and premature death. He has a beautiful house on which he had spent quite a bit of his savings and also taken a hefty loan. He also wants to secure his family financially.

What could Rangan do that ensures his family is not into any financial mess if some unforeseen event occurs? The one solution for all these is insuring the risks adequately. There is a general confusion due to lack of financial education and awareness that insurance plans are purchased to meet life’s events, whereas the purpose of insurance is to protect against unforeseen events leading to financial risk. Financial goals and risks should not be mixed; it would be a bad marriage.

Segregate goals, risks

Rangan should segregate his financial goals and financial risks. His goals are to meet his children’s education expenses, their marriage, expenses upon retirement some 25 years from today, vacations, upgrading of house, upgrading of car, pre-closing his home loan, etc. His financial risks are losing his job, health scare leading to hospitalisation, and premature death that could risk his house (not being able to pay the EMIs).

While Rangan is investing in financial instruments such as debt and equity to meet his financial goals he has inadequate cover to meet his financial risks. He should split his risks in such a way that he manages them diligently with low investments. Let’s see how Rangan can do it.

Three elements

He should buy three separate pure risk covers by way of term assurances. For the home loan outstanding, he should buy a term assurance which could cost him Rs.5,000 per annum (approx.) for a period of 17 years. In case of premature death the insurance company would pay his legal successor the sum assured which could be utilised to repay the home loan and retain the house.

For the children’s education he should buy another term assurance plan for Rs.1 crore for a period of 20 years which could cost him Rs.6,500 per annum (approx.). In case of his untimely death, the sum assured would be paid by the insurance company to cover the children’s education-related expenses.

For his life risk until retirement, he can choose another Rs.50 lakh to Rs.1 crore as sum assured under term assurance for 25 years which could cost him Rs.5,500 to Rs.6,500 per annum (approx.) that would take care of all other financial risks.

In case no untoward incident (such as his untimely death) happens, at the end of 17 years during the repayment of his home loan the premium payment will stop. Similarly, 20 years from today the premium payment for education too stops; only the overall risk-related premium payment would continue till he is 60 years old.

This is by far the best method of addressing financial risks. People make the mistake of buying traditional plans such as endowment, money back and whole-life policies which are highly expensive and impractical to cover the entire financial risks across different stages and requirements of life.

Health insurance

Rangan should also buy health insurance. Though he argues that his company has medically covered him and he will not need another insurance cover, this has no rationale because if he quits his job, his company-covered insurance would become invalid. Even if he works till his retirement, post-retirement his insurance cover would cease to exist. Hence, he should buy a health cover worth at least Rs.15 lakh which could cost him approx. Rs.15,000 per annum.

Source : http://goo.gl/xXVEqh

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