The Importance Of Goal Protection

Mahesh (name changed), a 34-year-old Bengaluru-based software engineer earning 2.25 lakh per month, decided to start planning for his 2-year-old daughter's higher studies back in 2013. Having done the requisite maths, he and his Financial Planner together arrived at a 16-year target amount of Rs. 55 lakh, after taking his aspirations and inflation into account. A monthly investment of Rs. 9,500 in Mutual Fund SIP's was earmarked for this goal, and Mahesh got started. Between April and September 2013, he deployed six SIP tranches and his corpus value was Rs. 59,000 - roughly 1% of the target amount.

In October 2013, Mahesh stepped out of a morning meeting at his office and collapsed. He died of a sudden, fatal heart attack within minutes, leaving his family shattered with grief.

Mahesh's unfortunate case isn't isolated. With increasing stress, we've also witnessed an alarming rise in lifestyle diseases in the past decade. In fact, a study commissioned by the American Heart Associated recently led to a disturbing conclusion - that "the number of people diagnosed with heart failure, which means the heart is too weak to pump blood throughout the body, is projected to rise by 46 percent by 2030"

Without dwelling too much on depressing statistics, let's move forward to the valuable Financial Planning lesson that one can learn from Mahesh's example. While he made the responsible and forward-thinking decision to start saving for his daughter's education 16 years in advance - his plan had a fatal loophole - what if he wasn't around to save money for the next 16 years? This is where Goal Protection through Life Insurance becomes critically important.

The years have masked the true purpose of Life Insurance for some people, who erroneously consider it to either be tax saving avenue or a long-term investment meant for accumulating capital for one's future goals, such as a child's education or one's own retirement.

Both are wrong reasons to buy Life Insurance - whose true purpose is the "transfer of risk". In this case, when Mahesh set an aspirational target of 55 lakhs for his daughter's higher studies, the financial risk associated with the loss of his life went up in tandem - a fact that he overlooked. He should ideally have transferred this risk to a Life Insurer immediately, in order to close-loop his goal plan and make it iron tight.

Life Insurance, really, is a selfless act towards ones dependants. From a goal planning standpoint, purchasing a dedicated term plan to protect that goal is akin to "ensuring that your goal is met, even if you're not around".

The question is - how much should Mahesh have upped his term insurance coverage to protect his goal? If you're thinking Rs. 55 lakh, you're wrong. In fact, Mahesh needed to up his cover by only around Rs. 12 lakh, which is the present value of Rs. 55 lakh, discounted at a reasonable expected growth rate of 10 per cent per annum, compounded.

The underlying assumption here, of course, is that the death benefit of the policy earmarked for this goal (along with the funds accumulated through the SIP's thus far) will get reinvested efficiently for the remainder of the time left till the goal date. For instance: in this specific case, Rs. 12 lakh (the death benefit pay out) and Rs. 59,000 (the accumulated SIP amount) would be reinvested for a period of 15 ½ years. The resultant fund value, assuming a 10 per cent CAGR, would be Rs. 55 lakh - sufficient to meet Mahesh's planned goal of providing his daughter with a fantastic education.

So, there you have it. The next time you plan for a financial goal, ensure that you take the responsible step of protecting it by upping your term coverage as well. Always do so with a no-frills attached term plan, and follow the simple thumb rule of discounting back the future value of the goal amount to its present value, using a reasonable 10% discount rate, to arrive at the target death benefit amount.