10/11/08, ET Bureu, Vidyalaxmi
It helps to be prepared for the worst. In case of single parents this preparation is more of a necessity.
First, you have less money to spare. Second, there is a pressing need to have a long-term plan given that there is no alternate source of income. That calls for a systematic financial plan!
The most important leg in a single parent’s financial planning process is life insurance.
Ensure that you have sufficient life insurance that pays off all your liabilities and can ensure a steady stream of income for your child till he is independent & at the same time provide for his education and one-time needs,” says Amar Pandit a Mumbai-based certified financial planner and director My Financial Advisor.
Get adequately insured
There could be a risk to your child’s life, health, property or even income. If you don’t make provisions for risk mitigation then your child will be affected.
Swapnil Pawar, wealth advisor and director-Park Financial Advisors explains, “The child could get into a messy situation if he loses his only parent. At any point of time there should be sufficient insurance to take care of his needs till he starts earning. Till then the child could be in some relative’s custody.”
For example, any couple may go for life insurance which is five times his salary. But for a single parent it’s better you opt for at least 7 times of his/her salary to ensure the child is adequately compensated.
Of course shop around and look for a low premium policy. Term cover can come in handy. Similarly you can opt for a smaller mediclaim if you have a health cover offered by your company.
Assign a trustee
It helps to have a trustee. In case of premature death of the parent, the trustee can be of help. The idea is to assign a responsible and trustworthy adult who should be updated on your overall financial situation.
“A child may squander all the money in his youth. Its better you have a responsible relative/an official trustee handling the finances till child gets his head over shoulders,” Mr Pawar adds.
A roof over your head
Getting a shelter is the biggest expense. If you apply for a home loan, it’s a big liability.
You should ensure that you have a roof over your head and that the liability is covered through insurance. These insurance plans, which can also be called as mortgage redemption plans cover your home loan liability. The sum assured reduces as your outstanding home loan comes down every year.
The idea is to protect your loan (not the home) if something happens to you. For instance, if your home loan reduces from Rs 30 lakh to 25 lakh subsequently the sum assured also lowers such that it can be adjusted against your home loan liability.
However, longer the tenure of the loan, higher is the premium on home loan insurance.
For example, if you take a loan of Rs 30 lakh for 20 years the premium amounts to Rs 63,390. The same sum assured for 15 years will fetch a premium of around Rs 45,000.
Keep some contingency reserves
If you are the sole source of income, it is extremely important that you have contingency funds in place. “If you have assets you can fall back on, they can come to your rescue in case of any short-term contingencies such as losing a job, illness and so on.
Transfer all possible risks such as life, health, critical illness and disability in the best possible manner to an insurance company,” Mr Pandit adds.
Save, save and save: Savings are a must for a single parent and you should attempt to save at least 25% of your gross income. Delay gratification today for a better future. At the same time, limit your liabilities to a bare minimum (home loan and education loan only). Any consumption loan like a credit card or personal loan is better kept at bay.
It’s all about being financially independent and prepared for your secured future. Then you can celebrate your singlehood and financial independence in true spirit!