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How to leave behind an inheritance
December, 26th 2006

These days, certain high-income groups are high on credit. To know that one has access to an astonishing loan amount at the snap of ones fingers can be quite intoxicating. But, at the risk of sounding like the party-pooper, not all financial fairy tales last forever.

There is a reality that most of us dont even bother to deny a certitude that goes by the name of death. Recently , a 37-year-old Mumbai banker, who had a problem with alcoholism, succumbed to a sudden stroke. He left behind a young wife, a toddler and a load of financial liabilities. While she does not have a home loan to repay, her husbands loan remains unresolved.

Besides, life insurance was denied to him as he had only recently woken up to its merits. He wont get it, says his insurance agent, shrugging.

Loan rangers

However successful we may be, if we looked at the possibility of our demise in the eye, we should at least ensure that our families are financially comfortable. This calls for sort of after-life strategy. Most of it revolves around unpaid loans.

Gaurav Mashruwala, a financial advisor, splits the strategy into two parts secured and unsecured loans. Secured loans would comprise home, car and education borrowings, which are backed by assets, guarantors or co-applicants.

Unsecured loans, like credit cards and personal loans, on the other hand, would have no guarantee and thus attract a higher interest rate. If one fails to pay secured loan, the concerned financial institution merely attaches the asset or makes the guarantor pay up.

Many credit cards, which are unsecured , come with a built-in cover for accidents . But if its an unsecured personal loan, financier loses money. If a person has gone on vacation and he dies during the time, the family can refuse to pay, as it is not the family that had borrowed, says Mashruwala.

In case the family wants to retain an asset, it can ask institution for time or a revision in equated monthly installments . But there is a relatively painless way to do these things. Only, it has to be implemented way before tragedy strikes.
 
Home alone

Of late, many housing finance companies offer a mortgage cover along with the loan. They have a tie-up with the partner insurance company, like HDFC has with HDFC Life Insurance, or with other insurers, says Kartik Jhaveri, financial planner and director at Transcend Consulting India.

Even if a financier does not insist on a cover, the sensible thing to do is to go in for cheapest contingency option in the market today a term assurance plan. This would insure outstanding credit amount. Of course, if one survives the term, one loses money. But it is a good deal because the premiums you would have paid up are very small.

If, for example, a 25-year-old executive goes for a Rs 40-lakh home loan over a 20-year period, he would pay a premium (for term assurance) of Rs 10,000 a year. In case of death, the entire amount is covered, says D Sundararajan , a certified financial planner. Over the 20-year term, he insists, he ends up paying only Rs 2 lakh. If he has the wherewithal, a borrower could go in for a one-time premium as it works out cheaper than as an EMI add-on.

Today, while the level of financial liability is proportionate to the income level, it has little connection with ones age. Term assurance is good for younger people, although one can opt for a policy even at 40. As one gets older, premium increases . Senior citizens dont usually get a cover; they have to rely on assets to back up their loans. But what if one has made zero provision for the family? For instance, what happens, in case of sudden death, to a non-working wife and growing children?

She is advised to approach a financial planner to help her minimise losses . Says Zankhana Shah, chartered accountant and chief financial planner at Moneycare Financial Planning: In case of no-risk management, its a question of fund-raising and generating income. Take the whole asset scenario and see how it can be managed.

Even without that insurance, people have been known to get by. Five years ago, a 45-year-old housewife found herself in a financial mess after the sudden death of her husband.

She gathered courage, listed out all the things she was good at. In three months, she started supplying tiffin to a school. She had two children who were nearing graduation. She sold her home and moved into a smaller place and the children took an educational loan. Today, they are all comfortable. But why take that chance?

RUCHA BIJU CHITRODIA

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