Single parents need to be doubly careful
BEING RESPONSIBLE When you have only yourself to depend on, a strong financial plan could well be your best friend and ally
Life doesn’t come with a guarantee, but there are always exceptions to the rule. It’s difficult enough for a couple to take care of their child; for a single parent, the responsibilities and the anxiety only double. Being financially secure, or at least having a plan B in place, provides a kind of a safety net.
As a single parent, you are also most likely to be the sole source of income. Therefore, it is doubly important that the money is judiciously saved, invested and spent.
Here is a basic roadmap on the goals that a single parent especially needs to aim for:
GET INSURED
Insurance has to be at the top of the to-do list of creating a safety net. In terms of life insurance, the best option is to choose a term plan as it gives more cover at a lesser cost. Moreover, various versions of term plans are now available that give the policyholder flexible options such as buying the policy online and a staggered or lump sum payment to the beneficiary.
The general rule is to have a sum assured that is 10 times your annual income — this applies to single parents as well. If you have liabilities such as a home loan, include the loan amount in the term plan. Doing this has distinct benefits — if you die, the insurer pays the remaining loan amount; your dependants are spared the burden; and they get to retain the house.
The next item on the list is health insurance — again a must-have. “If you are living in a metro like Mumbai, you should have at least ` 10 lakh health insurance cover considering that the medical expenses are higher at such locations. If you live in a non-metro city, ` 5 lakh cover will work,” said Kapil Mehta, MD, SecureNow Insurance Broker Pvt Ltd.
Medical costs are only climbing, so it makes sense to take a health cover for your child too. “Most insurers offer cover for a child till she turns 25 or starts earning, whichever is earlier. Go for a floater plan, as it will cover both you and your child,” said Rahul Aggarwal, CEO, Optima Insurance Brokers Pvt Ltd.
Along with a health insurance policy, one must also take a critical illness cover of the same amount. The other layer of insurance that you need is that of a disability cover. “You can take an accident disability rider. This generally costs 10% of the term plan,” said Mehta.
HAVE A CONTINGENCY FUND Consider these situations: you are in between jobs and it will be at least a month before you start the next assignment; you want to take a sabbatical to finish your MBA; or, a family mem- ber is ill and needs your attention. Such situations mean that you need an emergency fund in place so that even if you are not earning, regular expenses are taken care of. The general rule is to keep aside three months’ expenses. So figure out what your average monthly expense is. This should include not only your household expenses but also EMIs, a child’s education fees, among other things. “The thumb rule of keeping aside three to four months’ expense as reserve applies to single parents as well to address unfore-
seen circumstances. Consider liquid mutual funds to build the contingency fund,” said Deepali Sen, founder, Srujan Financial Advisers LLP.
SAVE FOR RETIREMENT This may seem like a goal that’s too far in the future, or not important in the current scheme of things. But that’s really not true.
The first step towards retirement planning is to know your risk appetite and to find out how much you need post-retirement. You can seek advice from an adviser to know the exact expense requirement after factoring in inflation. “If you are in the accumulation phase (age 30-35 years), it makes sense to go ahead with a good amount of exposure in equity. For retirement planning, you need to have the right asset allocation, to keep track of performance, and to rebalance the portfolio whenever required,” said Sudipto Roy, business head, Principal Retirement Advisors. What are the products that one should look at? “You can look at investing in MFs such as income funds and exchange-traded funds. Mandatory investments such as provident fund or PPF are also a good way to build a retirement corpus considering you get a tax benefit too,” said Roy. PROVIDE FOR EDUCATION
A child’s education can be a major expense in the long run. Consider long-term investment products when building a corpus for this. Before you start, get to know the current cost of your child’s education. If you think your child will go abroad, it’s better to factor in other costs such as lodging and boarding.
MAKE A SUCCESSION PLAN One of the biggest worries of a single parent is: what will happen to my child if I die?
Writing a will is an important part of that plan B. “A will is more authentic if it is registered. Make sure that you name someone as a guardian to execute the will if the child is a minor,” said Tanwir Alam, CEO, Fincart, a financial planning firm.