Sundaymail Editor
Why can’t I buy insurance now, argued my 65-year-old friend. It is an unfair world for senior citizens, he lamented. They won’t give you home loans, either. Health insurance is expensive when I need it most. Thankfully my money is safe in government deposits. If push comes to shove, I will do a reverse mortgage, he declared. Wait, I almost screamed. Those are just too many misconceptions.
Insurance is protection, not for your life and your limbs, but for your wealth. When you begin to build wealth early in life, you only have the human asset to depend on. You hope to be employed, earn an income and build some assets for yourself. If you have a family that depends on your income, their lives also depend on the human asset.
Insurance is your tool to ensure that the wealth you plan to build is there, for you and your family, should anything happen to the human asset that may impair its ability to earn an income. Your insurance proceeds will kick in and make up for you, if there is a loss of life or limb. That is why the calculation of how much insurance you need considers the income, the spend and the savings. You choose the target you want to set for your wealth.
That is why insurance is needed earlier in life. To act like a shield that protects your wealth. It is not an investment, even if it is sold as such.
It progressively gets expensive to buy insurance if you want it to also work as an investment. Term insurance is the cheapest since it serves the core purpose of offering a lump sum funding to your dependants if you were to pass away. If you believe you must provide for your child’s higher education, you have the option of comparing a term insurance and an investment product separately before bundling the two together. We digress.
My friend won’t need insurance when he is 65 because he has almost reached the end of his earning phase. Ideally, he would have enough assets saved for his retirement and old age. It would be both expensive and superfluous to try and buy another cover of the same value. My friend should know that he needs no insurance if there is enough accumulated wealth. That he is aging and is a higher risk to the insurance company is the insurer’s side of the story.
That he finds it expensive to buy health insurance is an extension of that story. Health care is overtaken by corporate interests and insurance companies. Treatment options are needlessly elaborate and expensive to feed the revenue targets of service providers. It is tough to find an inexpensive health insurance option for an elder who also suffers pre-existing medical conditions.
Now to the home loan. A loan is only a facility to use tomorrow’s income today. It is always an expensive choice to exercise. The interest on the loan is the price to pay for this facility.
A loan is useful when there is enough income to pay an instalment, but not enough wealth to buy the asset today. Most would not have been able to own a home if not for this facility, even if it comes with a cost. The lender will care primarily about the value of the asset being funded and the ability of the borrower to repay.
My friend at 65 does not need this expensive option. He has enough money in his retirement corpus to be able to buy whatever he needs. If he were to use his assets as collateral, he could still get a loan.
But he would have to repay it from his investment income, now that he is retired. The math won’t work out.
His assets may earn a return that is lower than the interest rate on the loan. It won’t make sense to take a loan; his focus should be on optimizing the return on his investments and assets and taking on an income and spending orientation, rather than trying to build new assets.
Now to the last bombshell about reverse mortgage. The product is simple. Instead of taking a loan and building an asset, you sell the asset in advance to enjoy an income stream. The lender buys your house for a price today, but agrees to pay you a monthly instalment for many years, at the end of which they take over the house. You continue to live in the house, while earning an income. Reverse mortgage is a distress option; not a normal one. You give up the appreciation in the value of your house, in return for an income you desperately need. If you have only a house as an asset and no other wealth or income, reverse mortgage is your last choice. Don’t treat it like a regular option for income. All these are very simple and much repeated fundamental principles.
But it is scary to see that many hold these notions with great conviction. — Economic Times (India).
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