How financial planning helps you deal with bereavement

However, Tiwari, who came into a large sum of money soon after, was unsure of how to invest the money for her daughter’s future needs. “I kept the money in my bank account for several months. I paid ₹50,000 tax just on interest income,” says Tiwari, who did not want to be identified by her first name.

Tiwari then got in touch with a certified financial planner who advised her to invest in mutual funds. “Some other people wanted me to buy savings-linked insurance products but I finally invested in mutual funds, fixed deposits and Kisan Vikas Patra for my daughter’s future,” she says. Tiwari, however, declined to say how much she received from the insurer because her financial planner forbid her from revealing this.

Tiwari’s hardships immediately after her spouse’s death puts the focus on the importance of life insurance policies. Typically, people buy these policies to ensure that their loved ones do not face any financial problems in the unfortunate event of their demise. And Tiwari is thankful for that.

Life insurers paid out ₹45,817 crore individual death claims involving 1.58 million policies during FY22 as against ₹26,421 crore (1.08 million policies) in FY21, data available from the Insurance Regulatory and Development Authority of India shows. The death claim settlement ratio increased to 98.64% in FY22 from 98.39% in the previous year and the repudiation/rejection ratio decreased to 1.02% from 1.14%.

Yet, even as insurance policies do help alleviate financial hardships, beneficiaries of insurance policies face several other problems, including with filing claims. More importantly, a lot of people are unsure of what to do with the proceeds once it is credited into their bank accounts, like in the case of Tiwari. For one, bank relationship managers want them to deploy that money in investment products that the lender is promoting. Then, there are relatives and friends who come out with their own suggestions. If beneficiaries of insurance claims are not financially savvy, they fail to invest it properly or put it to proper use, say financial experts.

That is exactly what happened to a client of Renu Maheshwari, a fee-only certified financial planner and Sebi-registered investment adviser (RIA). Renu says her client, a 64-year-old widow based in Chennai, lost her husband around eight years ago. She had been a homemaker throughout her life and did not know what to do with the insurance amount. Her parents who died five years ago also left her a sizeable corpus in the form of fixed deposits. The woman lived alone—her married daughter lived elsewhere. And then, she was diagnosed with cancer. Renu said her daughter and son-in-law were not ready to admit her to a good hospital. The woman had deposited all the money in her bank account and the corpus kept dwindling.

“If managed with proper allocation, the original corpus would have been sufficient to sustain her throughout life even after factoring in the cancer treatment cost but she didn’t seek any professional help in the initial stage. She came to me two years ago,” says Maheshwari, who took down all details about her income, expenses, assets, and liabilities and then put in place a financial plan (see graphic).

“She started living with her sister and put her own apartment on rent. This ensured a monthly rental income. We created a customized portfolio for her with different asset classes to be able to provide a contingency fund in case of medical emergency. This money was primarily invested in bank fixed deposits and debt mutual funds. The remaining was invested in a combination of equity and debt mutual funds,” says Maheshwari.

Equity allocation of insurance money is extremely important because it will otherwise not give returns that can beat inflation and still generate wealth.

Devil in the details

Buying life insurance alone is not enough, say financial experts. Policyholders need to keep their families informed about the details of all such policies to ensure the family is able to manage the corpus well later. “In India, the typical mindset is that men don’t disclose their finances to the family. They will have no idea about insurance policies or loan and other liabilities,” says Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners.

He recalled the case of one his clients whose husband died a couple of months ago. “She had no idea about her husband’s loans or insurance benefit. A bank official suggested that the husband could have taken insurance because he had a loan in his name,” says Joseph, who did not reveal the name of his client since it breaches client confidentiality rules.

The woman had a hard time collecting details about the insurance policy . “These days, insurance companies open an e-account instead of providing physical documents. Her husband, too, had such an e-account. Eventually, she managed to get the details. In such cases, it is better to give your wife a printout of the e-account for future reference,” says Joseph.

Policyholders also need to protect the insurance amount from being claimed by creditors. Married Women Property (MWP) Act is of great help here. If a man buys a policy under the MWP Act, he can ensure that the death benefit solely goes towards protecting his wife and children. Neither creditors nor relatives can make a claim over it. “Self-employed people who may have taken business loans must opt for MWP Act so that the death benefit goes to the family and not in settling loans,” advises Joseph.

Insurance companies also offer customised payout options. For example, they can offer a monthly payout or lump sum settlement. “A monthly pay-out seems convenient but we don’t recommend it. Do it only if your family is completely unable to manage lumpsum on its own,” says Joseph.

Financial planning

With the loss of a breadwinner, surviving family members rely on relatives and friends for financial advice. That, however, may not be in their best interests. “Most families reach out to their trusted family member for guidance who might be as ignorant as them. This will be like one blind man leading another,” cautions Maheshwari.

A financial planner can offer unbiased professional advice. But there are many in the field who could have vested interests. “Stay away from people who recommend products while refusing to discuss your needs. Don’t tie yourself down to products that demand long term payment obligations and penalise you for opting out along the way,” says Mohini Mahadevia, founder of SOLUFIN, an investment and estate planning firm.

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Updated: 20 Oct 2023, 12:19 AM IST