Risk management plan is an integral part of any financial plan. Creating a financial plan without risk management plan is like starting a journey without doing any preparation for the vehicle such as checking the stepney, break oil level and other conditions of the vehicle. Not doing all these can make your journey towards a destination halt in between.
Life Insurance:
The amount of life cover you need to take will be decided, depending on your income earning capacity and the financial goals you have. When we say life cover, we don’t mean traditional policies like endowment or money back where you will get only 5% to 6% return p.a. and also we don’t mean ULIP policies where there is a heavy front loaded charge up to 40%.
We are looking for life cover and not investment. Insurance is different from investment.
When we say life cover, we mean life cover through pure term insurance policies. Of late, online term insurance policies are better because they are cheaper by 50% to 70 % than the offline term insurance policies. The offline term insurance policies are taken through insurance agents, so their commission is loaded in the premium. That’s why the offline policies are costlier than the online policies.
The idea is to compensate the financial loss to your family in case of any mishappening to you. You family needs to achieve all the goals which you have set for them irrespective of the fact that you are around or not.
Health Insurance:
Does your employer provide a health insurance for you? Does the employer provided health insurance cover all your dependents? This coverage amount is sufficient or not…? Will your employer cover under health insurance when you are in notice period?
After your retirement employer provided policy will not cover you. If you go for a separate health insurance policy at that point in time, because of age the premium will be higher and also the pre-existing diseases will not be covered. So what is the way out?
You need to find an answer for all these questions.
Also you need to cover you against accident and disability. Critical Illness insurance is also an important cover you should have for you as well as your dependents.
To have the optimum health cover you should have 3 policies namely health insurance, accident & disability insurance and critical illness insurance.
Property insurance:
If you have an independent house or flat that needs to be protected against any natural perils like fire, earth quake, flood… and also things like terrorism, riot. Though this kind of risks happening to our property seems to be very remote, if it happens, that will put our entire financial plan upside down.
Protecting your existing wealth is equivalently important like building more wealth. Moreover, the premium you pay for such property insurance is also very minimal. Say for a property worth 50 lakhs, the premium will be around Rs.2000.
Emergency Reserve:
You need to set up an emergency reserve in order to meet unexpected contingencies of life. Generally this reserve will be to the extent of 3 to 6 months of your expenses and other loan commitments. You need to keep this emergency reserve in a place which is very safe, liquid and at the same time needs to generate a decent return.
Emergency reserve brings not only brings comfort, it also brings peace of mind. When you have enough emergency reserve, then when the contingency arises you will not use your credit card, you will not be forced to withdraw from stock market, you will not be forced to opt for personal loan.
Also this emergency reserve needs to be increased every year by certain percentage to cope up with your increased spending.
If you start your journey towards your financial destination, after doing all these preparatory works in the form of risk management plan, you journey will be protected, peaceful and pleasurable.
Have a safe and smooth financial journey with a well thought out risk management plan.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at ramalingam@holisticinvestment.in
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