A Financial Planning for Human Life Cycle

The potential of Indian life insurance sector is remarkable, though it is at very low level when compared with the global standard. It is call of the time that people should buy life insurance gladly of their own without any pressure from other persons such as Development Officers, Agents etc. The life insurance was not at the top priority of policy maker in our country for a long time. It resulted in lack of understanding of basics of insurance even in highly educated people. It is important to note in this context that majority of policyholders do not know which policy they have bought and what are different features of that policy. This is a common phenomenon for agents to sell those policies which attract maximum commission without considering the needs of a client. Perhaps this is the reason why term insurance policy is neglected. But, after the Insurance Regulatory and Development Authority Act, 1999 the insurance sector has changed in all aspects viz. Product, Person and Practice. Those were the days when a stranger declaring himself as an expert approached someone to give lecture on the concept like economic and social security and at the end of it requesting people to get insures by buying the insurance policy. In those days there were only the LIC agents, who would try to convince you to buy a policy and your task was to ignore him by giving an excuse get rid of him. Now, even in a changed and technologically advanced age normally we receive three or four phone calls per week relating to insurance. They speak so sweetly and convincingly that you can not get the way to fly from him. These trained market executives (agents) will show affection, make you worry about your children’s future, remind you of some event of your life. At last you will start crying to get rid of these insurance consultants. You will simply sought Oh God! Save me from these consultants!!
Therefore in the given situation one can get rid of all these insurance consultants by enhancing his/ her basic knowledge of insurance. One must know:
  • What is insurance?
  • What are different types of insurance?
  • How much is the need for insurance?
  • How to apply for insurance?
  • What care should be taken while applying for it?
  • What are the procedures of settling the claim?
There is no denying the fact that our life is full of competition and completely unpredictable. Thus the indispensability of taking life insurance policy cannot be denied. If some untoward happens to any person then his family will left completely without any support after him. Every family must have economic protection and the life insurance gives the social security to the family. It provides pension in old age, when we have either a limited source of earning or not at all. Life becomes very difficult at this age due to higher possibilities of sickness besides the death risk. Insurance does not mean to pay a certain amount for a certain period of time and get back a certain amount after maturity; rather it protects from the life risks. It does not make policyholder rich through making investment in it but it prevents them from becoming poor! Insurance provides instant help in the hour of great need, which cannot be expected from other form of investment. In present age of industrialization, social unrest, growing diseases, high level of pollution etc. are going to affect the human life. None can be sure of their life that how long he is going to survive though it is true everybody is going to die someday. But, what is next after one’s death? Friends and relatives would grief maximum for a month but the victim family will cry for years. The said family will come down below the poverty line. Life insurance provides an alternative for such family. In a socialistic economic system, the state has to provide social security. But under the capitalistic economic system this is a personal responsibility. The constitution of our country, as per Article 41, states that the state has to provide means within its economic capabilities in such a way that citizen can find employment, education, assistance for a happy life with regard to old age illness, disability etc. As per the instruction of the union government the LIC has raised a fund for offering social security to economically weaker sections and unorganized people of the society. Insurance is the only way to obtain economic security in case of various risks responsible for destruction of wealth and assets. Only insurance has power and ability to lessen the intensity of the losses that occur due to any kind of accidents. It is more important to cite the example of a sole earning family, where a lot of financial planning is essential to ensure protection and continuation of present life style of that family in absence of earning member. Without the peace and security in life no one can concentrate on their business and profession. This concentration will improve productivity which in turn brings a respectable financial and social status in people’s life. A perfect financial planning is a pre-requisite to become an achiever in life. Those who ensure a proper financial planning make life peaceful and secured. Life insurance only provides peace and security to an individual by covering their life risks. A life insurance product offers three types of benefits:
  1. Death Benefit
  2. Survival Benefit
  3. Market Upside i.e. Distribution of Bonus and/or profit.
These days, insurance companies have introduced a new concept called ULIP (Unit Linked Insurance Policy), which attracts more return to insured by participating in the equity market while death benefit is a basic assurance from the insurance companies. Every human life has a financial value and it must be insured. It is observed that we never under-insure our real-estate property, car, plant and machinery etc. as because in case of any loss or damage the realized value from the insurer will be much lesser than their actual value. Therefore, we must value the personal life correctly and accurately. A standard model of calculating Human Life Value (HLV) is given as under with the help of the imaginary figures:
Sl. No. PARTICULARS                                            AMOUNT (Rs.)
i Your Age (in Years) 35
ii Annual Gross Income 10,00,000
iii Less: Personal Expenses and Taxes 2,00,000
iv Amount available for Family Spending 8,00,000
v Gross Human Value (sl. No. iv x HLV factor *) i.e. Rs. 8,00,000 x 15 1,20,00,000
vi Less: Liquid Assets  (to be encased within a week) Existing Life Insurance (Sum Assured) 20,00,000 50,00,000
vii Add: Current Liabilities (Loans, Borrowings etc.) Money Value of Life Events (Vacation, Child Marriage, Car, House etc.) 10,00,000   40,00,000
Viii Human Life Value 1,00,00,000
[*Human Life Factor may be calculated considering too many factors and it depends upon company to company, but roughly we may assume up to 25 Years: 20, 26-35 Years: 15, 36-45 Years: 12 and Above 46: 10 ] Now after arriving at the correct figure of Human Life Value one should take an account of their all current policies and calculate the gap to be bridged by further insurance for human life at the age of this calculation. It is very pertinent to note that premium increases as the age increases, i.e. lower premium is charged at the lower age. Technically it is termed as mortality charges. Generally it is observed that even highly educated people do not come forward to take insurance term-plan policy. They feel the premium paid for term-plan policy is wastage of resources. But fact is that if one can opt for term-plan policy in their early life i.e. just at the time of entering into earning phase of life cycle, it will be too small financial obligation to cover a huge amount equivalent to their life value. Therefore, as a wiser financial planner one should go for maximum coverage at reduced premium at young age. The existing taxation laws extend tax benefit under section 80 C and the final payment on settlement of claim or on maturity fro insurer is also exempted income under section 10 (10D). It is but obvious that as we attain the different age in our life cycle we also meet with our different desire and dreams. There are three phases in our life cycle as under:
I Birth and Education Up to 22 years
II Earnings Years 23 to 60 years
III Retirement  Above 60 years
Phase – I: In this phase of life cycle one gets birth and education. The income in this phase is either nil or negligible. They mainly depend on their parent. Financial planning in this phase is not required at all up to the age of 22 years in their life cycle. Phase- II: this phase included all the major events of our life. It covers the age of our life reaching to the superannuation i.e. the age of 60 years or 65 years or 70 years as the case may be. This phase is of accumulation phase where major goals of our life are being fulfilled viz. Marriage, Childbirth, Housing, Child’s Education, Child’s Marriage etc. this phase covers almost more than half of the life cycle period of human life i.e. almost 40-45 years. Therefore, it is crucial to make all financial planning in this phase of life cycle in order to achieve all major goals of this phase as well as to accumulate funds for meeting the needs of retirement phase. Phase- III: the entire superannuated age of a person is being covered under this phase of one’s life cycle. Every financial planning must have its primary goal i.e. to lead a peaceful and secured retired life. There must be sufficient financial provisions or other arrangements (health insurance etc.) for health maintenance and meeting the cost of living required as per their social status quo. One should take the policy such that it ensures proper pension income on regular basis without any interruption. The financial planning for this phase is also planned in Phase-II of our life cycle. We may have different set of desire and dreams in different cycle or phase of our life. We need a proper financial planning to achieve all those desire and dreams in real terms. Again it is hard but true that no one can fulfill their desire without mobilizing sufficient financial resources to make their dreams come true. There are many opportunities in our life to make entry into the service or profession at our younger age with an attractive salary packages or earnings. It is essential to concentrate on our performance, which depends on our peaceful mind and social security, to create more wealth. Therefore, inclusion of life insurance policy in the financial planning is very responsible step to provide security to the life of our family members. We can say that we have made a correct financial planning only if we have taken life insurance policy covering the sum equivalent to our human life value. Taking life insurance policy is indispensible to give financial and social security to family members in our absence. That is the only appropriate way of making financial planning for human life cycle. The financial planning which has been made for the human life cycle including the life insurance policy extends its wings of benefits not only within the life span of human but also after the end of their lives by supporting their families in the hour of need. It is important to note in this context that investment in life insurance is a triple-benefit deal i.e. Income tax concession, Tax-free income and the Economic protection provided by the insurer to the family of insured. Thus we should always remember during deciding our financial plan that there is no alternative of a life insurance policy for a happy, peaceful and secured life.


Dr Ram Prahlad Choudhary

Assistant Professor, Department of Commerce, University of Calcutta

Published : Life Insurance Today – March 2013

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