In the previous blog we read about aligning tax saving investments with goals. If you haven't read it click here. Today we will read about an important step before planning the investments.
So what is more important than planning the investments? It is insurance. But wait, haven't we all bought life insurance as an investment? So let me clarify one thing: insurance is not an investment, it is an expense.
Usually the family insurance agent or the friendly bank executive proposes a tax saving instrument which secures the future of your family and pays you periodically or on maturity. But have we thought who needs insurance and how much should be the insurance cover? Probably this doesn't cross the mind as the focus is merely on the tax saving part.
So who needs insurance? If someone is dependent on you financially, you need insurance. The idea is if you die, your dependents should be able to pay off the debts and maintain the standard of living.
So how much would be enough? Ideally the life cover should at least be 5 to 6 times your gross annual income. So someone with pay package of 10 lakhs should buy a life insurance cover of at least 60 lakhs. Now if you calculate the premium of an endowment, ULIP or money-back policy with sum insured of 60 lakhs the yearly premium would run into lakhs. So should the idea of life insurance be dropped? No. There's a way out. Buy a term plan.
A term plan offers you a higher sum assured for a specified number of years at much lower cost. The premium paying frequency can be annual/semiannual or one time. The annual premium for 60 lakhs cover for 30 year old male will work out to be around 5-7k. The cover is valid as long as you pay the premiums. There are no survival benefits for a simple term plan. It simply means that the term plan has no maturity value.
So why doesn't the insurance agent propose this product? The commissions are very less as compared to the endowment plans. And what if you still insist on buying a term plan? He would convince you that the premiums paid will be waste and you won't get anything back if you survive the term.
But let us think differently for a moment. What is more important - getting meagre survival benefits at higher costs or higher sum assured at lower cost? I would prefer the latter.
And what if you don't have dependents? Don't buy life insurance. So if housewives, retirees, youngsters don't have financial dependents they should not buy life insurance.
There are some more steps before starting investment planning about which we will learn in upcoming blogs.
Till then keep sharing ideas, experiences and alternate views.
Prasad Patwardhan
