Let’s call out the elephant in the room straight away- many of us are simply not good at budgeting. And the idea of putting aside money for life insurance plans when we are oh-so-young-that-we-surely-can’t-die seems kind of unnecessary.

But, starting a life insurance policy offers tonnes of benefits which you might look back on regretfully if you were to purchase the policy at a later date.

So whether you have already purchased a number of life insurance plans or are teetering on the edge of purchasing one, this post is going to help you budget like a boss for the same.

First things first: Why you need a life insurance plan

It’s time to be the psychic in your life.

Think forward to 10,20,30 years from now. Depending on your current age, within a span of 10-30 years, you would have a family, a house, a comfortable job, and an income that holds up the household. Your kids would be in school or making their way to college. Their wedding would still be in the cards as would be your and your partner’s post-retirement years.

Cut into the happy family picture. Disaster strikes and despite the immortality you felt when you were younger, chances are you’ll end up being a mere mortal. In case of any uneventful situation where your mortality is proven, your partner and your kids will be left alone with nothing but themselves for support.

Except you can change the narrative. You can change the last line by purchasing a life insurance plan. The money that your family gets at the end of the policy term can help your kids to complete their education, marry, and your partner to settle into a comfortable post-retirement life.

Don’t you want to create this security for them? Don’t you want to look at them one day and feel that you’ve done all you can for them?

Let’s get to budgeting then.

How to budget for life insurance: Part I

The first steps when budgeting for life insurance plans are to be carried out at home. The thought of more budgeting can make you feel sad and defeatist when you are already squeezing expenses for utilities, rent, food, clothing, commute, education, and other small luxuries out of your monthly salary. But, there are practical ways to start paying your premiums without ensnaring yourself in the miserly trap. Here’s what to do:

Review your income

Do not fall into the trap of overestimating the coverage you can buy. Know the money you have incoming on a regular basis. Calculate your gross income and not your net income. If you are self-employed or have an irregular income, then calculate the average of your past weekly incomes from previous years.

Always be realistic and strive to arrive at a true figure. This way, you’ll be able to buy a life insurance plan that you can actually afford.

Review your expenses

Divide them into fixed expenses and monthly expenses. Fixed expenses are the ones whose amount is decided and which you pay without fail. These include any EMIs or car payments. Variable expenses fluctuate from month-to-month and include things like electricity, groceries, monthly entertainment. Look at your card statements for a clearer idea and for picking out any spending habits or patterns that you might have missed initially.

Set goals

Depending on your income and expenses, see how much you have leftover to contribute to savings. A general rule is to budget according to 50/30/20.This means that 50% of your income will be for fixed expenses, 30% for variable ones, and 20% for savings. Come up with a definite or (very) approximate number that you’ll be able to contribute to your savings. This will determine the life insurance plan that you ultimately purchase.

How to budget for life insurance: Part II

Now you step into an insurance office to buy that ideal life insurance plan. Here’s what to do:

• When you first go to visit an agent and discuss which policy to buy and at what premium, make sure to be absolutely clear about the financial future you’ll be looking to create for your family post-death. If you didn’t think about this when doing the budgeting exercise above, do it asap.
• Discuss with your agent which financial pillars will be affected by your death and hence, will have to be prepared for.
• Add up all these expenses and the expenses associated with your death to arrive at a ‘life insurance coverage’ figure.
• Make sure to buy the coverage that you need. But at the same time, factor in the possibility of inflation and any lifestyle changes. As a general rule of thumb, you’ll need to maintain at least 10x your annual salary in benefits to cover your family’s needs. Hence, you’ll need to pay 2-5% of your annual salary on coverage.

Another important thing to keep in mind: you can compartmentalize your coverage so that certain parts of it expire when you’ve outlived them or no longer need them. For example, your children might be able to graduate without needing coverage benefits due to scholarships or other savings. You’ll no longer need this aspect of your children’s future to be covered. Hence, you can plan for it to be excluded from the coverage.

Or you might want to begin with a term life insurance policy. Red flag, though: make sure to inquire whether the term policy can be converted into a permanent one. If your income were to increase or you were in a position where you could pay more premium, you can switch to a life insurance policy that covers you for howsoever long you live.

How to budget for life insurance: Part III

Finally, at home:

Keep adjusting your habits

See where else you can cut back on unnecessary variable expenses. A good idea is to make a ‘need/ nice to have list.’ Divide all your expenses into these 2 categories, and seek to minimize the nice to have with cheaper options or by cutting them out entirely.

Review your budget

Carry out a weekly, monthly, and yearly review. Your financial situation will undergo a lot of changes no matter what stage of life you are at. Be flexible and be willing to adjust wherever necessary.

At the end of the day, the cost of not having a life insurance plan is more expensive than having one. When you feel like budgeting for it is an impossible task, think about your why. Why are you doing this? Who are you doing this for? That should be validation enough that you made the right choice by investing in a life insurance plan.

Jul 61/19

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