This is a guest post titled “Need Based Financial Analysis – Are you investing the right way?” by Jayant Bhat. He has over 7 years experience in life insurance and reinsurance field as a Senior Financial Underwriter and Risk Analyst. By looking at the immense amount of questions being posted on this blog by various readers, I have invited Jayant to write a guest articles. I am glad he has agreed to write various things that an individual must know when it comes to finance and investment.
The New Era, the one which saw Liberalization, Globalization and (a new word=>) Agentization. Agents have always been needed to fulfill our needs. However, the advent of private life insurance companies saw unprecedented recruitment of agents or a sheer misnomer used for agents “Advisers”. The thirst for growth and thereby sales was so high that the recruitment of Advisers happened manifold on an ad-hoc basis. The training module is for namesake and most of the agents usually sell the products which are but obvious rewarding to themselves. Most of the agents are part time and have very little knowledge of financial planning. Though they got the designation of Financial Advisors they were actually selling or should I say (mis)selling the incorrect life insurance products.
The onus lies on you to safeguard yourself. Not the one who is selling. Basically, you need to get yourself analyzed financially. What I mean is get a need-based financial analysis done. You need to have brainstorming sessions with yourself.
Before deciding to buy life insurance or for that matter before any investment, ask yourself two major questions:
1. What if you live?
2. What if you die?
I mean ask yourself do you have enough provisions of cash which will support your short term, medium term and long term needs. Ask yourself; tomorrow if god-forbid something unfortunate happens to you, then do you have sufficient life insurance cover so that your dependents can almost lead the same quality life without you? I understand that without main person of family there is a huge lacuna, but life has to go on and your kids & spouse need money to lead a good future life.
Hence, first think of buying an insurance product. Now this insurance product should offer you enough Life cover and this should not be considered as investment product at the first instance. Say you buy an insurance product with an intention of savings first and then in about 2 years from now there is some emergency wherein you require money urgently then you would be shocked to hear that you cannot withdraw ULIPs for min 3 years. Also, there is huge loss if you want to withdraw money after three years. Hence saving should first be in FD’s, RD’s, etc in which at least principal is guaranteed in case of emergencies. This should be your short term goal.
What if something unfortunate event of death happens: Suppose your current income is 10 lacs per annum. Then within age of 40 when kids are very young and esp if spouse is a homemaker plus dependent parent/s, then you should have a minimum life insurance cover of 1.0 crore. Logic is if your family receives 1.0 crore claim from Life Insurance Company and that money is kept in FD, your family gets somewhere between 8 to 10lacs per annum without any risk. This amount should easily justify and continue the same life style and education needs which you would have provided during your life.
Few points to ponder:
* First priority: Always buy a Term insurance offering a higher life cover with a small premium. Never opt for traditional Term insurance with return of premium as they work out to be costly.
*While buying a term product: Do not buy a term product in a hurry as you would not get anything if you survive the period. Do a thorough market comparison. Personally, I would not shell out even 100 Rs extra for my own life insurance policy.
*Never Go for Traditional Endowment/Money back policies as they prove to be very costly in todays urban/semi urban scenario.
*If you are having Risk Taking ability and minimum 10 year premium paying capacity under all good and bad times, then go for Equity based ULIP which offers you both higher life cover and good account value with minimum upfront charges. Generally, amidst all ups and downs of share market, the net result at the end of 10 years should give you minimum 15% returns per annum. ULIPs will offer you good returns over longer term in addition to life cover. All the maturity benefits I am sure you are aware that the returns in ULIPs can never be guaranteed and they are always speculative. Never withdraw money from ULIPs when market is down.
* It is wiser to invest in Safer Debt Based ULIP(max 65% in debt funds and 35% un Equity), if you do not wish to take undue risks.
*Always invest in PPF and this would prove very beneficial when you actually retire. PPFs have a lock in period of 15 years.
* As of now do not invest in any pension plan as government in final stages of setting a Pension Fund Regulatory Authority and the new guidelines would prove beneficial to wait for those who delay their pension plan especially when we all salaried have provident funds. Returns from Pension funds are mostly taxable and hence think twice before opting for a pension plan.
To sum up: of the total income, First have 5% liquid cash in savings account, 15% in FD or RD, invest some amount in PPF or Postal savings with 5 year lock-in period, simultaneously opt for term insurance and safeguard your family, invest in additional mediclaim, then opt for other investments like mutual funds and ULIP’s. Never take insurance on your kids name. One last point, when you realize and identify the need JUST DO IT and NEVER DELAY DECISIONS TO BUY LIFE INSURANCE as with each passing year premiums go on increasing.
Very soon, we will start a series which will explain details of various types of Insurance as well as other investment modes.