Prepare for the worst-case scenario

Relying on company-provided medical insurance and provident fund as your only emergency backup can hurt

Francis Pinto had a dream career. He landed his first sales job in 2001 at the age of 23 after having completed his MBA in marketing. Slowly he rose up the ranks in his organisation based on his exceptional performance and by the end of 2008 he was a senior manager earning a six-figure salary per month. During these seven years, Francis was able to buy his own house, the latest sedan and got married to his office colleague, Sunita in 2007.

In 2008, just towards the beginning of the sub-prime crisis, which created a recessionary situation, he quit his job to take up a better assignment with a multinational. After spending only two months in the new company, he got a major jolt when his company became a victim of the credit crisis and most employees including Francis were fired.

The next two months he frantically searched for another job as he had his home loan repayment and family expenses to take care of. Sunita’s income was barely enough to meet the family’s basic expenses, leave alone the mortgage payments.

In his third month of unemployment, the family got another jolt when Francis was diagnosed with a severe lower spinal disease for which he had to undergo surgery immediately. As feared by the doctors the surgery was successful, but it resulted in paralysis of Francis below his waist.

The family had not taken medical insurance and was dependent on the insurance provided by Francis's employer. So, they were forced to spend a large part of their savings in the treatment. Whatever little remained went towards payment of the huge home loan monthly repayments.

Eventually after consulting their financial advisor, Francis sold his house and took up a small rented flat to keep costs lower. After paying off the home loan, the remaining amount of around Rs 20 lakh was invested in fixed deposits. This provided the family with some regular income for taking care of medical and basic expenses.

It is 2012 now and after nearly four years, Francis is showing some signs of recovery. Very soon, in the next two to three months, he should be able to walk and life a normal life once again. The family has already lost four years of his income and their own house. Whether Francis will be able to work the same way as earlier or can get a good job again is anyone’s guess. But this episode provides a lot of learning for us which can be summarised below.

• Insurance is the foundation of your financial planning life. Adequate cover has to be taken for life, health, disability, etc before you start your investments. Consult your planner and take this up on priority. 
   
• Don’t rely on your employer’s medical insurance as the cover provided may sometimes not be sufficient if there is a severe illness. If you quit your job, you lose the health cover and the next prospective employer may or may not provide you the same benefits. Also, during the employment period, if you suffer from some ailments or disease, then you might become uninsurable when you apply later for a separate health insurance policy. 
  
  The way out is to buy a good amount of health insurance at an early age and increase it subsequently after a few years. As seen in the case of Francis, health issues can have a crippling effect on your finances, even pushing the family into debt.
   
• Don’t think that your high income earning years can continue forever and spend unnecessarily on things that you don’t need. Given the sedentary lifestyles and stressful jobs most of have, today, we may not be able to work till our usual retirement age. So, it is wise to save as much as possible in your high income earning years. This amount, if properly invested as per your goals, can provide you a good corpus to depend on in case of any eventuality affecting the family or career. 
   
• The non-earning spouse should develop and nurture education and skill sets which can be used to generate regular income, if the main earning member is not able to do so due to any eventuality. Most women sacrifice their career for their kids and once there is a huge gap, getting back to work and earning an earlier level of income becomes difficult. They should devote some time for themselves on education and honing their skills which can keep them prepared.

Remember it’s better to be prepared than look back and regret.

The author is Chief Planner, Proficient Financial Planners