Anil Rego
No one's income is ever quite sufficient for his wants. Yet, our regular income, be it in form of salary, rent or consultancy fees, is the single-most important driver of economic independence. Income-less for just one month can be a disturbing experience, emotionally as well as financially. With the opportunity to earn being mostly time-defined, it is important for us to protect that income. Let us understand how we can achieve this.
Greatest asset left exposed
What is our greatest asset? Not our house, new car or investments - our ability to earn an income is the greatest asset. It’s not just medical practitioners, business owners and high-flying executives, the ability to earn money is important for everybody who is not born with a silver spoon in their mouth. We are able to do this month after month, year after year. A person earning Rs 7 lakh annually is a money-printing machine worth Rs 1.17 crore. This is because only a bank FD worth Rs 1.17 crore, giving 6% compound interest, can generate Rs 7 lakh a year before taxes. Sadly, most do not insure their greatest asset. Losing this ability due to job loss, injury, sickness or death can be financially devastating for you or your dependents.
Winning against death
The average Indian is expected to live for 68 years. Under ideal conditions, this means you need to plan for retirement for 8-10 years depending on your superannuation age. It's expected that over the full working life of 30-35 years, you will save enough so that your economic freedom is maintained after retirement. Even after your death, your dependents will be able to lead a comfortable life. What if you die at 40, or even earlier? Once dead you do not need to save for retirement, but your family will be devastated. Most of your liabilities will fall upon their hands. Your children's education and marriage plans will become uncertain. Without you and your income, your wife and parents will face a financial crisis every month. By simply buying a term insurance cover you can cheat death's blow on your finances. The annual premium for Rs 1 crore term insurance costs an affordable Rs 15-20 per day, and can fully replace your income if death arrives at your doors earlier-than-expected.
Income insurance
We live in an age of fast growth, and quick decisions. Our jobs are not immune to the changing times. A job is the main driver of your income. Without it, your income would drop to zero. Income insurance can provide you with a cover that protects your income if you are laid off. Often sold as an add-on, income insurance plans are bundled with other covers. It basically covers risk for payment of liabilities in case of job loss, but only applies when you are fired from the job. Insurers mostly pay your 3 home loan EMIs when the cover kicks in. You will accept that finding a job in a terrible market is difficult. An insurance cover that takes care of your biggest loan EMIs for three months will leave you peaceful, and with the focus to find the next job. Alternatives are seeking help from relatives who may take advantage of your situation or taking loans at exorbitant rates that can make your situation even more precarious.
Disability cover
Studies have shown that a 30-year old is twice as likely to become disabled rather than die at that age. To avoid disability from destroying your life, one can purchase disability insurance to replace a portion of your lost income in case you are unable to work due to sickness or injury. In the case an accident leads to disability, you will receive payments to cover actual expenses and loss of income. It works both in case of temporary and permanent total disability due to an accident. If the disability is partial, the policy pays a percentage of the sum insured, depending on the degree of disability. For instance, permanent total loss of use of four fingers of either hand is given 20% compensation. This is why make sure when your buy life insurance cover, you are protected against accidents that can leave you partially or fully disabled.
Conclusion - Monetary income is often an individual's true worth in financial terms. Unless you have assets that can fully replace your income, it will be smart of you to insure your income. The best time to do insure your income is while you still can!
(The writer is founder of Right Horizons.)
Also read: Want to death-proof your financial plan? Here is a TIP
Why term insurance is a must-have cover for all parents
Term Insurance Vs Car Insurance: A financial decision you may regret
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