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Concepts & Tutorials

On Yahoo: Planning for the Grim Reaper

I write at Yahoo about what you might want to consider as you think about going to that big hole in the sky. Planning for the Grim Reaper:

It’s a dark thought, but what happens if you die today? Financially speaking, that is. The emotional trauma of losing you, however unimportant you think you are, is damaging enough. What you don’t want is financial troubles alongside. The answer differs based on your circumstances. When you have dependents – children, parents, spouses – that’s when your death has a huge financial impact from, mainly, two areas:

  1. Loss of your income. Your spouse or parents may have to go back to work to replace your income, if you don’t leave them enough.
  2. Loss of the money you leave behind. That’s a problem when you spray your investments wide and leave no trail, or put money in the hands of those likely to cheat your next-of-kin.

Let’s consider each one. If you die, the loss of your income, along with bereavement, can leave your family in serious stress. So it’s obvious you need to work to reduce the financial suffering, but leaving them enough to generate what you used to. But what you need to consider is not your “income” but the expenses. That means for a Subir Sengupta earning 1 lakh a month who only spends about Rs. 40,000 per month, what he needs to use for the calculations is: What does it take to generate Rs. 40,000 per month?

If Subir can get 8% on a long term investment, then the amount needed is about 75 lakhs – that will give his wife 6 lakhs pre-tax, and post-tax, about 4.8 lakhs, which is Rs. 40,000 per month.

Oh, but wait – if Subir has two children, for whose education he must save Rs. 10,000 per month (each), that saving will need to continue. So he actually needs Rs. 60,000 per month for a while. That ups the requirement to 1.12 crores. (Which yields 9 lakhs a year, that after taxes becomes 7.2 lakhs or 60K per month.)

Now think about inflation. Costs go up by about 6% every year, so Subir figures his wife, Aparna, will live for another 40 years, and inflation’s likely to be 6%. And consider that the children’s education fund needs money for only another 12 years. That, worked out on a spreadsheet, shows Subir needs 1.78 crores today.

Chances are that Subir doesn’t have 1.78 crores. That’s fine. He can take an insurance cover – pure term insurance – for 1.8 crores, but at age 40 that’s going to cost him a whopping Rs. 90,000 or so; at Rs. 7,500 a month, that’s about 20% of his expenses! (Aparna is not very happy at this point)

This is fairly tough, and as much as it seems like the right amount, each person will have different factors; a lower expense as children leave home to their careers, lower actual inflation (to a person spending 40K per month, inflation is probably lower than vegetable price rises) or a spouse that is likely to work after a few years. And if Subir lives another five years and save, say, 20 lakhs, the insurance requirement drops to Rs. 1.35 crores. In order to not kill himself to save for his own death, Subir might decide to insure himself for Rs. 50 lakhs today, and scale it up as his salary increases. Obviously, the earlier one realizes this, the better.

Additionally of course, you need to have at least enough insurance cover to wipe out any debt. Subir might owe 50 lakhs on his house, for which you might need a separate term loan. Usually banks require such a loan when you buy the loan anyhow. (Hot tip: don’t buy such insurance through the bank. Buy it yourself and “assign” such a policy to the bank. You’ll find the result is substantially cheaper.)

In short: Calculate what you need, and negotiate it down to a point which doesn’t make you the living dead.

As Subir starts to save, he’s going to need to stash it somewhere. Which is where we come to our second problem.

How do you ensure your next-of-kin gets access to your money?

Many people invest in twenty different mutual funds, bank deposits, multiple equity funds, have policies from a number of insurance companies and so on. While this may be a result of advisors pushing you to their favourite commission spot every year, it does no good for the purpose of protection against death.

Your family isn’t going to find it easy to unravel all those investments and insurance, and remember, they’re not in great shape mentally either. The best thing you can do is to keep an updated record of every investment you’ve made; but don’t put things into so many investments it will take your family years to get them transferred. Make things easier – Subir should have his house registered in both his and his wife’s name, have joint bank accounts, and where it’s possible have investments in joint names.

Now you could also trust your advisors to do the right thing – unfortunately, many of them are unscrupulous scum who will even steal from a grieving widow. Which I think is true of many financial institutions in India, so let’s not blame just the individuals.

You could keep family informed about every single thing that you do, which, although difficult, is probably the safest. Another alternative is to use an “estate management service” – I honestly don’t know of any trustworthy service that will charge a small fee, and who you meet every year and provide full details of all your accounts, usernames, passwords, etc. (This can go into a locker, openable only on your death. This kind of service needs to have the highest levels of integrity.)

Subir has a set of friends who have a “day of reckoning” meeting every 6 months, write down all their individual financial information on separate files, and put them in a safe place in their own houses. If anything should happen to Subir, that file is all his friends will need to help his family out.

When you buy financial products, consider the ease of exit. I buy my financial investments online – both stocks and mutual funds. Why? Simple – if someone needed to withdraw the money, it can be put back into my bank account in three days, without anyone needing to be informed. When you buy a lot of fixed deposits or a number of such instruments, you definitely want the ease of exiting that investment.

And buy insurance from a company you trust. To save a few thousand rupees in premium, you could go for a company with no track-record; and if that company doesn’t pay, delays payment or gets ridiculously mired in red-tape, you’re not really getting insurance, you’re buying pain. For example, certain life insurance companies require extensive documentation for claims like this one:

“Certificate issued by (attending doctor,usual family physician and employer) (Format will be issued by Claims Team)”

This, for a “non-accidental” death, is ridiculous, and it is a requirement apart from the cause-of-death certificate from a hospital, a post-mortem report copy, a cremation/burial certificate and municipal death certificate. Sure, tell a widow that she needs to ask her ex-husband’s boss to certify that her husband is well and truly dead. This is why cats don’t buy insurance – nine lives aren’t enough for the documentation. I’m biased towards the largest public sector insurer in this case because they have a brilliant claims payment history.

Lastly, you want to be sure your next-of-kin is secure. Since Aparna is not financially savvy, Subir has left instructions to have all the insurance proceeds invested in long term government bonds, through his online broker. Interest will be received every few months, directly into his wife’s bank account. Fresh investments will be made into long term equity funds (for his children’s education). That’s not the most optimum strategy for returns or taxes, but remember, at this point you want security, not efficiency.

Now, after that long, boring exercise – wh
at if you’re just 22 and have no dependants? Well, go out and enjoy your life, buddy. You don’t have to worry about the financial impact of your death today. (Yes, I know you wish I’d said that earlier)

And then, what if you’re 60, and have no income anyhow? Insurance is ridiculously expensive – don’t even bother. If you have any income/expense gaps – that is, if your income is less than your expenses – you need to think about making up that income by working for it. Do not under any circumstances attempt to make “short term money” in the stock market – some people may have done it, but remember that you never see the ashes of those who didn’t.

The financial consideration for a retiree is – will I endanger my spouse if I die? That simply means – keep money in joint accounts, have interest flow from a small number of safe investments, and keep things simple.

I don’t advise leaving substantial amounts of money to adult children. You will probably end up leaving your house to them anyhow. But money, in this day and age, when you’ve given them enough education to run their own lives? I don’t think so. You could consider donating it. Or better still, spending it. If there’s something left over after an article-full of planning, travel the world, climb a mountain or whatever tickles your fancy. You have to get your kick before the bucket does.

Errata: In the middle I say

Subir might owe 50 lakhs on his house, for which you might need a separate term loan.

This should be term plan. (Thanks, @aadisht)

Do send me your comments!

  • Manoj says:

    >Good article.
    But personally I don't like these kind of inflation related calculations. I think we are exaggerating on the corpus required in X years from now. I agree about things like food price going up. But there are many other things that remain more or less the same or even a lot cheaper. Example TV,computers,cars etc.

  • Debashish says:

    >I have some concerns regardin the advice for 22 yr old , even if you do not have any dependent as such , i assume you have parents who have spent a lot of their money and effort to get you there and you have obligation towards them . So you should have some insurance to compensate for their financial losses .