AK, who did not want to divulge her full name, was left to fend for herself and her two children after the death of her husband SS in 2016. AK was a home-maker at the time and her 20-year-old son and 16-year-old daughter were still studying then. SS had a retail garment store in Delhi’s Karol Bagh market and was 46 years old when he died of a heart attack. “He was perfectly healthy at the time and it came as a shock to the family," said AK.
AK overcame her grief and decided to step into her husband’s shoes to take charge of the family and business. “It was a tough decision, but I decided to take it up," said AK.
One of the first things she did was to take stock of the insurance and investments of her husband. SS had 16 life policies, including a couple of term insurance plans that he had bought with the help of an independent financial advisor who was a family friend. The total sum assured was about ₹ 96 lakh, including ₹ 25 lakh each from the two term plans. It took her about two months to get the insurance claim, which she used to clear a car loan and a business loan totaling ₹ 7 lakh as suggested by the advisor. She invested the remaining amount.
Cases like AK’s are not so uncommon. Dealing with the grief of losing a loved one and getting on top of the household’s financial responsibilities at the same time can be challenging, to say the least. While more people are now aware about the importance of buying a life insurance policy with a substantial sum assured, few have a plan for their dependants that the latter can follow in their absence. Also, a lot of times the beneficiaries do not have the emotional bandwidth or financial knowledge to put the money they receive as insurance claim to good use.
We tell you how policyholders can put a plan in place for their beneficiaries and how the latter can use the big insurance claim they get.
Involve the family: Involve your spouse and other family members in financial decisions. At least make them aware of all your investments and policies. As of now, there are few who involve their spouse in the financial planning process, according to experts. “Some of our clients involve their wives at least on a half-yearly basis in update meetings with us so that they know the basic plan for the family," said Varun Girilal, co-founder and executive director, Mitraz Investment Advisors.
Organise documents: Ideally, you should make a file of all your investments and insurance policies and share it with your spouse. “A good practice is to share inventory or a dossier in one place with all relevant details such as contact number, amounts etc. with the spouse who is not actively involved in the finances," said Girilal.
Put in place a plan: There’s nothing better if you can chart out a plan, that your dependants can rely on after your death. But to do that, you need to have the right amount of sum assured. “A plan or asset allocation that can be followed, and a professional or family adviser to consult with should be suggested," added Girilal.
The beneficiaries need to cover that last mile on their own without the help of the insured person.
Collect all documents: While having a file of all the policies and documents will certainly help, you need to collect other important documents and proofs like death certificate and your identity proof.
“The agent through whom the policy was bought should be informed as he/she can help in handling and understanding the process involved in making an insurance claim," said Hemant Rustagi, chief executive officer, Wiseinvest Advisors. In case the agent is not reachable, inform the insurance company at the earliest about the death of the policy holder. “If the claim form is filled properly and documents are submitted as per requirement, making a claim can be quite smooth unless there are technical issues," said Rustagi.
Evaluate expenses and goals: You should first calculate the monthly expenses they will need. Things will be different for a family where the insured person was the only earning member and where there are other earning family members to take care of dependants.
Assess the family’s requirements of cash flow, future goals and so on, and continue or alter the plan placed by the insured person accordingly. Get a new one if none exists. “It is common to see beneficiary getting financial advice from relatives, friends and colleagues and that often results in financial mistakes that can be detrimental for the family’s financial future. It is important to take the help of an advisor to bring the family’s finances back on track and ensure that sufficient amount is provided for different goals like regular income, children’s education and marriage," said Rustagi.
Investment avenues should be selected based on merit and suitability. “The usual practice followed is one where beneficiary just takes the entire amount and invests in an FD," said Girilal. But investing in an FD may not always make sense. Among debt instruments, a debt mutual fund can be a better instrument compared to an FD because it offers more liquidity, is more tax efficient and may give better returns. Besides, one can opt for systematic withdrawal plans (SWPs) from debt mutual funds to cater to their regular requirement of funds.
“A moderately conservative asset allocation strategy with at least 65% into debt and safer investments and the balance into equity mutual funds can be considered. As one completes 3-5 years and becomes more comfortable with financial instruments, one can take higher risk," said Girilal.
Look at the liabilities: Home and car loans are common liabilities that most households have these days. The EMI has to be paid on a fixed date every month, even in the case of the borrower’s death. In such a scenario, beneficiaries typically have to deal with the dilemma of whether to pay the loans first or keep servicing EMIs. “This will depend upon factors such as type of loan, the amount of loan outstanding as well as the remaining repayment period, rate of interest, requirement of regular income and status of earning members in the family. However, it is advisable to repay the big loans as paying EMIs can be tricky in the absence of regular income," said Rustagi.