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Life insurance is tool to address financial vulnerability

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PEOPLE'S financial needs are subjective and change continually throughout their lives.

While most have their typical financial life cycle pattern, any individual and family might face some difficult and unexpected events that are completely unplanned in the financial lifecycle. 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 households in both rural and urban India reflect this phenomenon. Yet, very few work towards addressing this risk and matching it at all times.

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, especially 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, pension plans facilitate one to save for their long-term needs through disciplined and forced thrift that a pension plan instills. 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.

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