How to address financial vulnerability
Financial vulnerabilities, the decline in an individual‘s sustainable living standard that would result from the breadwinner‘s death or the end of an income stream, run heavy in India.
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People’s financial needs are subjective and change continually throughout their lives.
While most of the people have their typical financial life cycle pattern, any individual and family might face some difficult and unexpected events which are completely unplanned in the financial life cycle. Financial vulnerabilities, the decline in an individual’s sustainable living standard that would result from the breadwinner’s death or the end of an income stream, run heavy in India. It does not come to me as a surprise when this phenomenon is reflected by households in both rural and urban India. Yet, very few work towards addressing this risk and matching it at all times.
Consider the following scenarios; Dev and Devina are in their 20s, married and are part of the typical DINK (double income no kids) brigade that believes in living each day as it comes with little savings, considerable debts and no financial plan to fall back in the future. Imagine the financial risks they are exposed to if either of the spouses dies? Radha and Ramesh are in their 30s with a child and Radha is a stay at home mother who looks after her son and keeps the home running smoothly so that Ramesh, her husband can concentrate on his business. So, far they have focused on the business with little plan for themselves or their son, whom they will need to support for the next 18-20 years. What if Ramesh were to get disabled or the business were to shut?
At the peak of his career Praful is 46, with a wife and two children who depend on him emotionally and financially. He is still servicing a home loan, meeting the ever increasing needs of two teenage children waiting to enter college with enough left for other financial needs of the family. All the frenzy has resulted in their financial future taking a backseat. Praful is worried of life in retirement which is another 15 years to go, but something that he will need to manage on his own unlike his government-retired father who still receives a decent pension. These are all real life situations that I find people in, some much worse than these, with exposure to financial risk that can be disastrous.
It is important to understand what financial vulnerability is. Financial vulnerability is not just the household's living standard volatility resulting from the death of a wage-earning household member but also the possibility of outliving one’s savings in retirement. Both these situations are a reality and can be addressed with some planning, proactive decisions and disciplines.
In India family support was seen as the best protection against financial vulnerability. With joint family system, the concept had validity as it was pooling of resources to overcome crisis situation for one member. Concept akin to life insurance, pooling of risk. However with growing acceptance of nuclear family, there is an increasing need for financial protection plans. It is true for health insurance cover also. Similar is the case for old age planning specially given the fact that fixed benefit pension plans are no more prevalent even in the government sector.
From long-term savings perspective also there is huge scope for improvement. Indian households are not fully aware of the new savings / investment instruments and are still comfortable with bank deposits or investment in assets, the instruments mainly used by earlier generations. Generations of exploitation by moneylenders both in urban and rural India made Indians distrust private financial institutions. That may be the other reason for not investing in right instruments.
Life insurance comes to the rescue to address financial risk associated with death and longevity. The way life insurance policies are structured; they can take care of the financial dependents in the eventuality of the breadwinner as well as by saving for life in retirement when active earning sources dry up.
For instance, if the breadwinner dies and leaves a wife and children, a life insurance policy payout can provide money to substitute for his income and to cover educational expenses. Likewise the pension plans facilitate one to save for their long-term needs through disciplined and forced thrift that a pension plan instils. The long-term nature of this product has many factors going for it. There is regular savings, long-term investing and the benefit of compounding that collectively makes life insurance the most suited financial instrument to match financial vulnerability.
Though many individuals repeatedly state life insurance to be their first choice financial product, yet it is found that life insurance is uncorrelated with financial vulnerability at every stage of the life cycle. What it means is that even amongst those who are aware of vulnerabilities and take insurance, the cover is inappropriate. Many, who do take appropriate insurance coverage, fail to adjust this coverage through time as their circumstances change leaving themselves more vulnerable. The best way to check financial risk is to evaluate the risk periodically and balance it accordingly to have adequate insurance. With life insurance, you will not only have financial cushion but also peace of mind. It is a long and arduous journey ahead but the end result of seeing a financially better protected country is sweet enough a fruit to undertake this journey.