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Many of us probably have life insurance of Rs 1 crore, thanks to cheap term plans available today. But merely having a huge life cover is not enough to protect your family members from all liabilities and financial responsibilities. In case of your death, they will have to prioritise how to spend the insurance money. For instance, paying off the home loan of Rs 75 lakh is important. So is setting aside Rs 30 lakh for your child's higher studies and making provision for future expenses.
In case of the untimely death of the breadwinner of the family finances are not the top priority for the family members. However, if not tracked, it is very likely that the family uses up a major chunk the money received from the insurance company without even realising it and is still staring at a long list of payables. Estimating life insurance cover for an individual is a daunting task. A financial advisor can provide an estimate of the insurance coverage the family would require after going through the expenses - current and future. But, in case of the principal breadwinner's death, it is unlikely that the advisor will track whether the coverage has been sufficient to cover all the responsibilities and liabilities of the family.
In the event of the death of the earning member, there are some steps a family can take to keep track of and manage the insurance money for a sound future. Strictly speaking, the ideal pattern for the money utilisation depends on which life-stage the family belongs to at the time of their breadwinner's death. These are general steps and will vary in each actual situation.
Make a list of known liabilities
It is important to first clear off the liabilities outstanding for the individual to avoid any legal hassles for the family. A general list of liabilities will include home loans, personal loans, credit cards, etc.
However, if the deceased happens to be a businessman, the family also has to manage the commercial liabilities. The gravity of the problem is highest in case where the deceased ran his/her business as a proprietorship firm or was a partner in a partnership firm, as in such cases the business owner has unlimited liabilities and the legal heirs are also liable for their outstanding.
If the family has been in the know of things or any member is involved in the business, knowing the liabilities is simpler, in other cases, last drawn balance sheets will be a good source to understand and quantify the dues. It is for this reason, that for non-business people if their yearly balance-sheets are drawn-up (either at the time of filing their tax returns or independently) it shall prove useful for the family.
In most cases, the liability list could be long enough to intimidate the family, but it is essential to make an inventory of the same and draw up a 'payment plan' for them. Liabilities that have a matching insurance cover for them should be sorted first. For example: several banks and housing finance companies insist on the borrower taking a mortgage-redemption term insurance policy along with the home loan. Such policies will help to square off the outstanding on death of the borrower. The other liabilities can be prioritised based on the interest cost attached to them.
Make a provision for unknown liabilities
Despite one's best efforts, it may not be possible to trace and quantify all the liabilities of the deceased. It could be a friend or a relative who had lent money for an emergency. Or the deceased may have promised a donation to a charitable organisation. Since these liabilities are unknown, any efforts to quantify them would be in vain. The solution is to set aside a provision for the same and keep it for a period of at least three years.
Unfulfilled family responsibilities
Next on the list should be an inventory for the unfulfilled family responsibilities. The family should make a realistic estimate of the money required to fund these responsibilities and the time horizon for the same. For families without a financial plan, this event should trigger the need to get their goal-sheets done which helps them quantify their responsibilities and make an adequate provision for the same. In case of an inadequate insurance cover, families would do well to downsize some of their goals based on the corpus available. For instance, the foreign education could be substituted with a degree at a premier Indian institute.
Meeting the standard of living
A good portion of the corpus should make way for meeting the family's day-to-day expenses. The capital retention approach here works best with the family aspiring to live off only the income generated rather than dipping into the corpus money. Indeed the family may need to compromise on this aspect in case of under-insurance by the deceased. Inflation could play spoil-sport for the family and will be a major challenge to be constantly reviewed and addressed.
Investment style
The investment pattern in such kind of a life-situation will be much similar to the post-retirement scenario. The family has to focus on the 'Safety-Liquidity-Yield' factors while looking to invest the corpus. No element of risk is warranted even if the goal is long-term and has around 10-15 years to maturity.
Trusted advisor to work with
All of the above decisions are not easy as they deal with finance and a family can look to work closely with an advisor who can help make objective decisions. Informed decisions hold the key for the family and an independent opinion will add tremendous objectivity to their decisions.
The author is a Chartered Accountant
