BALAJI RAO | The Hindu
A term assurance provides financial stability in case of unforeseen events and ensures that EMIs are paid.
Rangan is 35 years old, married, has twins aged three years. His wife, Ragini, is a home-maker. She teaches music to a few young aspirants and earns a small amount of money every month that takes care of her personal expenses. But Rangan is the main earning member of the family. He works for an IT company, earns well, has a home loan which still has another 17 years of repayment (Rs.50 lakh more to be paid including principal and interest), has a car loan to be paid for another three years, and has to take care of his children’s education over the next 20 years.
Rangan is bit worried about unforeseen events such as accidents, illness, loss of job and premature death. He has a beautiful house on which he had spent quite a bit of his savings and also taken a hefty loan. He also wants to secure his family financially.
What could Rangan do that ensures his family is not into any financial mess if some unforeseen event occurs? The one solution for all these is insuring the risks adequately. There is a general confusion due to lack of financial education and awareness that insurance plans are purchased to meet life’s events, whereas the purpose of insurance is to protect against unforeseen events leading to financial risk. Financial goals and risks should not be mixed; it would be a bad marriage.
Segregate goals, risks
Rangan should segregate his financial goals and financial risks. His goals are to meet his children’s education expenses, their marriage, expenses upon retirement some 25 years from today, vacations, upgrading of house, upgrading of car, pre-closing his home loan, etc. His financial risks are losing his job, health scare leading to hospitalisation, and premature death that could risk his house (not being able to pay the EMIs).
While Rangan is investing in financial instruments such as debt and equity to meet his financial goals he has inadequate cover to meet his financial risks. He should split his risks in such a way that he manages them diligently with low investments. Let’s see how Rangan can do it.
He should buy three separate pure risk covers by way of term assurances. For the home loan outstanding, he should buy a term assurance which could cost him Rs.5,000 per annum (approx.) for a period of 17 years. In case of premature death the insurance company would pay his legal successor the sum assured which could be utilised to repay the home loan and retain the house.
For the children’s education he should buy another term assurance plan for Rs.1 crore for a period of 20 years which could cost him Rs.6,500 per annum (approx.). In case of his untimely death, the sum assured would be paid by the insurance company to cover the children’s education-related expenses.
For his life risk until retirement, he can choose another Rs.50 lakh to Rs.1 crore as sum assured under term assurance for 25 years which could cost him Rs.5,500 to Rs.6,500 per annum (approx.) that would take care of all other financial risks.
In case no untoward incident (such as his untimely death) happens, at the end of 17 years during the repayment of his home loan the premium payment will stop. Similarly, 20 years from today the premium payment for education too stops; only the overall risk-related premium payment would continue till he is 60 years old.
This is by far the best method of addressing financial risks. People make the mistake of buying traditional plans such as endowment, money back and whole-life policies which are highly expensive and impractical to cover the entire financial risks across different stages and requirements of life.
Rangan should also buy health insurance. Though he argues that his company has medically covered him and he will not need another insurance cover, this has no rationale because if he quits his job, his company-covered insurance would become invalid. Even if he works till his retirement, post-retirement his insurance cover would cease to exist. Hence, he should buy a health cover worth at least Rs.15 lakh which could cost him approx. Rs.15,000 per annum.
Source : http://goo.gl/xXVEqh
Don’t tinker with your long-term investment plan. But it is always better to make some critical changes, based on new tax laws and instruments
Sanjay Kumar Singh | April 3, 2016 Last Updated at 22:10 IST | Business Standard
The start of a new financial year is a good time to review your financial plan and take stock of where you stand in relation to your goals. If new goals have emerged, this is the time to make fresh investments for these. While having a steady approach is a virtue here, make some adjustments in the light of developments that have occurred over the past year.
Large-cap funds have fared worse than mid-cap and small-cap ones over the past one year (see table). Over this period at least, the conventional wisdom that large-cap funds tend to be more resilient than mid-cap and small-cap ones in a declining market was overturned. Nilesh Shah, managing director, Kotak Mahindra AMC, offers three reasons. “For the bulk of the previous year, FIIs were sellers of large-cap stocks, whereas domestic institutional investors (DIIs) were buyers of mid- and small-caps. Large-cap stocks are also more linked to global sectors like metal and oil, whereas mid- and small-caps are linked to domestic sectors. The latter has done better than the former, leading to stronger performance by mid- and small-cap stocks. Large-cap stocks’ earning growth decelerated or remained subdued throughout last year while mid- and small-caps delivered better growth,” he says.
Despite last year’s anomalous performance, investors should continue to have the bulk of their core portfolio, 70-75 per cent, in large-cap funds for stability, and only 20-25 per cent in mid-cap and small-cap funds. Large-caps could also fare better in the near future. Says Ashish Shankar, head of investment advisory, Motilal Oswal Private Wealth Management: “IT, pharma and private banks, whose earnings have been growing, will continue to do so. Public sector banks and commodity companies, whose earnings have been bleeding, will not bleed as much. Many might even turn profitable. FII flows turned positive this month and FIIs prefer large-caps. With the US Fed saying it won’t hike interest rates aggressively, global liquidity should improve. If FII flows continue to be stable, large-caps should do better.” Valuations of large-caps are also more attractive.
Among debt funds, the category average return of income funds and dynamic bond funds was lower than that of short-term, ultra short-term and liquid funds (see table). Explains Shah: “Last year, while Reserve Bank of India (RBI) cut policy rates, market yields didn’t soften as much. The yield curve became steeper. The short end of the curve came down more than the long end, which is why shorter-term bonds did better than longer-term gilts.”
Stick to funds that invest in high-quality debt paper, in view of the worsening credit environment. Shankar suggests investing in triple ‘A’ corporate bond funds. “Today, you can build a triple ‘A’ corporate bond portfolio with an expected return of 8.5 per cent. Many of these have expense ratios of 40-50 basis points, so you can expect annual return of around eight per cent. If bond yields come down, you could end up with returns of 8.5-9 per cent. If you redeem in April 2019, you will get three indexation benefits, lowering the tax incidence considerably.” Investors who have invested in dynamic bond funds should hold on to these. “A rate cut is expected in April. Yields will drop and there may be a rally in the bond market,” says Arvind Rao, Certified Financial Planner (CFP), Arvind Rao Associates.
CHANGES YOU NEED TO MAKE
- Fixed deposit rates from banks will be better than returns from the post office deposits in the new financial year
- Choose your tenure first and then, do a comparison of bank fixed deposit rates before making the final choice
- Invest in the yellow metal via gold bonds
- If your liabilities have increased, revise term cover upward
- Revise health cover every three-five years to deal with medical and lifestyle inflation
- Revise sum assured on home insurance if you have added to household assets
- Conservative investors should invest in PPF at the earliest
- Those who can take some risk should bet on ELSS funds via SIP
- Invest Rs 50,000 in NPS
Traditional fixed income
The recent cut in small savings has jolted conservative investors. The rates on these have been linked to the average 10-year bond yield for the past three months. These will be revised every quarter now, make them more volatile. “People who want to invest in debt and want sovereign security should continue to invest in Public Provident Fund (PPF). No other instrument gives a tax-free return of 8.1 per cent with government security,” says Rao.
As for time deposits, financial planner Arnav Pandya suggests, “From April, fixed deposits of banks will give better returns than those of the post office. Decide on your investment tenure, see which bank is offering the best rate for that tenure, and invest in its deposit.” Lock into current rates fast, as even banks are expected to cut their deposit rates.
Tax-free bonds are another good option. Nabard’s recent issue carried a coupon of 7.29 per cent for 10 years and 7.64 per cent for 15 years. Beside getting tax-free income, investors stand to get the benefit of capital appreciation if interest rates are cut.
“People who have some risk appetite may also look at debt mutual funds and fixed deposits of stable companies,” adds Rao.
The sharp run-up in gold prices over three months, owing to the rise in risk aversion globally, took most people by surprise. The sudden spurt emphasises the need to stay diversified and have a 10 per cent allocation to the yellow metal in your portfolio. However, instead of using gold Exchange-traded funds (ETFs), which carry an expense ratio of 0.75-1 per cent, invest via gold bonds, which offer an annual interest rate of 2.75 per cent. The Budget made gold bonds more attractive by exempting these from capital gains tax at redemption.
Start investing in tax-saving instruments from the beginning of the year. “Don’t leave tax planning for the end of the year, otherwise you may have to scramble for funds,” says financial planner Ankur Kapur of ankurkapur.in. For those with the money, Pandya suggests: “Invest the entire amount you need to in PPF before the April 5. That will take care of tax planning for the year and you will also earn interest on your investment.”
Investors with a higher risk appetite could start a Systematic Investment Plan (SIP) in an Equity Linked Savings Schemes (ELSS) fund, which can give higher returns. “If you invest early in the year via an SIP, you will reap the benefit of rupee cost averaging,” says Dinesh Rohira, founder and Chief Executive Officer, 5nance.com. Pankaj Mathpal, MD, Optima Money Managers suggests linking all tax-related investments to financial goals.
If you live in your parents’ house and pay rent to them to claim House Rent Allowance benefits, which is perfectly legal, get a rent agreement prepared.
With 40 per cent of the National Pension System (NPS) corpus having been made tax-free at withdrawal in this Budget (the entire corpus was taxed earlier), this has become more attractive. “Open an NPS account if you have not done so already and enjoy the additional tax deduction of Rs 50,000,” says Anil Rego, CEO & founder, Right Horizons. In view of the low returns from annuities, into which 60 per cent of the final corpus must be compulsorily invested, don’t invest more than Rs 50,000.
Tax deduction under Section 24 is available on the interest repaid on a home loan. “Buying a property to avail of the benefit is not advisable if the family has a primary residence,” says Rego.
While reviewing your financial plan, check if the term cover is adequate. A family’s insurance cover should be able to replace the breadwinner’s income stream. Financial planners take into account household expenses, goals like children’s education and marriage, and liabilities like home loans when deciding on a person’s insurance requirement. “If goals have changed or liabilities have increased, raise the amount of cover,” suggests Mathpal. Kapur says the premium rate is likely to be lower if you buy the term plan before your birthday.
Your health insurance cover might also need to be raised to take care of medical inflation. The same holds true for household insurance if you have reconstructed your house and the structure has become more expensive, or if you have added expensive assets. Rohira suggests buying add-on covers like accidental insurance and critical health insurance for comprehensive protection.
TNN | Apr 2, 2015, 05.29AM IST | Times of India
Motor third-party liability insurance with the cost of the mandatory cover set to rise by 30% for cars with an engine capacity of less than a 1,000 cubic centimeters (cc).
MUMBAI: Small car owners will bear the brunt of the increase in motor third-party liability insurance with the cost of the mandatory cover set to rise by 30% for cars with an engine capacity of less than a 1,000 cubic centimeters (cc). Owners of heavy commercial vehicles and two-wheelers will also see an increase in their premium payments.
The Insurance Regulatory and Development Authority (IRDA) on Wednesday issued a circular stating that general insurance companies are not finding the current premium rates adequate to pay for the claims. General insurers also reminded the regulator of its directive asking insurance companies to provide 175% of the premium collected under declined insurance premium from the declined pool towards possible claims. The declined pool is a concept where claims in respect of vehicles which no company is prepared to insure are covered under a policy.
The vehicles which will not see any change in premium rates are goods carriers with capacity of up to 12,000 kg. Two-wheelers see increases ranging from 14% to 20% while for goods carrying vehicles, the increase ranges between 19-20%.
For hatchbacks and other cars with capacity of below 1,000 cc, the increase in premium will range from 20% to 30%. For larger cars, the increase is only around 20%
“Unlike in comprehensive cover where the claim depends on the value of the vehicle, in third-party insurance the claim depends on the income of the victim of an accident. The higher the income of the victim, the higher the third-party claim,” said an official from an insurance company.
“It is observed that there is a wide variation in the premium charges among various sub-classes of a given vehicle. It is observed that the estimated premium rate increase over the previous year in some of the vehicle classes is much higher. At the same time, some vehicle classes are shown as having negative change,” IRDA said in its circular.
Source : http://goo.gl/JtnfsA
Aparna Ramalingam, TNN | Mar 30, 2015, 05.29AM IST | Times of India
CHENNAI: Confronted with a suspension order or a pink slip? May be because an M&A (merger and acquisition) is in the works? Worse still, you are the sole bread winner in your family and have been diagnosed with a life-threatening ailment and have lost your job. Now, there is some temporary respite in the form of a job loss insurance policy.
Under such covers, the insurer steps in to pay three EMIs (equated monthly installments) of your biggest burden, the home loan, where the loan eligibility is normally 50% of your monthly income.
Under it’s recently launched Safe Loan Shield (a critical illness cover) to salaried employees, Royal Sundaram provides a loss of job coverage of a maximum of three home loan EMIs. “It covers borrowers who are unable to repay their loan due to onset of critical illness or injuries due to accidents that either result in the death or total disablement of the borrower and loss of job,” managing director of Royal Sundaram, Ajay Bimbhet, said.
By and large, job loss covers are bundled as an add-on in a critical illness plan and personal accident covers in India with the premium surcharge on it ranging between 5% and 10%. Such policies cover termination from employment of the insured, or his or her dismissal, temporary suspension or retrenchment during the policy period. The exclusions in such policies are termination of employment due to fraud or dishonesty on the part of the employee.
Explaining the rationale of ‘three home loan EMI repayments’ by insurers, officials state that it is the normal time taken by a person to find another job. Also, from an accounting standpoint, a home loan account also slips into NPA (non performing asset) category if payments (interest and/or principal) are not made for over 90 days.
“There is growing traction for such add-on covers. The Indian economy is changing fast and technology-related changes and automation have brought about disruption in many sectors with many jobs becoming redundant,” chief of underwriting and claims at ICICI Lombard, Sanjay Datta, said. The company has an employment loss cover as an add-on to its personal accident as well as critical illness cover. “The add-on policies have registered 10% growth in premiums in the last one year and a job loss supplement to the main cover definitely enhances the overall value proposition,” Datta said.
Like ICICI Lombard, HDFC Ergo’s Home Suraksha Plus covers you in case you are handed a pink slip post a merger or acquisition of your organization. “A comprehensive package, we have designed it as a one-stop solution rather than multiple policies covering different risks or eventualities,” executive director of HDFC Ergo, Mukesh Kumar, said.
And as such products gain more acceptance, insurers are looking to offer a cover even when the resignation is voluntary in nature. For instance, Bajaj Allianz is currently working on plans where home EMIs can be paid for a temporary period by the insurer when the insured would like to take a sabbatical from work. The company currently has a job loss cover under its critical illness plan.While mental health experts state that insurance coverage for job loss would be helpful to family members in times of critical illness of the prime earner, there’s some caution for those who have multiple loans and a poor history of personal finance management.
“The back-up option of insurance being there could get them to indulge in deeper debts,” psychologist Saras Bhaskar said.
Under such covers, the insurer steps in to pay three EMIs of your biggest burden, the home loan, where the loan eligibility is normally 50% of your monthly income.
Source : http://goo.gl/YSxxqE
By Sanjeev Sinha | ECONOMICTIMES.COM | 31 Dec, 2014, 01.51PM IST
Every asset has an economic value, but after its life-time, the asset needs to be replaced with a substitute. However, there can be an unfortunate event like an accident which may destroy the asset (including human) early or make it incapable of generating any income. For reducing the financial effect of such adverse situations, insurance comes into the picture. So, the simple rule is: all those things, which will cause you economic loss to replace or reinstate, should be insured.
“But practically it’s not possible because if you try to insure everything under the sun, you will be left with no money for your living expenses & financial goals. One should, therefore, consider two things before taking any insurance – the probability of an event & its financial impact on your life,” says Hemant Beniwal, Director, Ark Primary Advisors Pvt Ltd (a Sebi-registered investment adviser).
It can be simply understood by this grid:
Six insurance policies you should avoid buying
A: High Probability, High Financial Impact – type should be covered without any second thought – e.g. health insurance & motor insurance.
B: Low Probability, High Financial Impact – type can have a significant financial impact. So should be considered after looking at personal situations & assets; e.g. term insurance, accidental insurance & critical care insurance.
C: High Probability, Low Financial Impact – In this case risk should be retained or transferred to insurance companies; e.g. extended warranties.
D: Low Probability, Low Financial Impact – Such insurance can be outrightly ignored, like credit card insurance.
Sometimes the probability of an event may depend on your job profile or individual situation. Take the case of IT professionals, for instance. They sit in front of their computers or laptops for most part of the day. The prolonged sitting leads to problems such as back pain. This means they have a greater risk of physical health problems and so they will be more concerned about them. Now consider a manufacturing company. The probability of an accident taking place there is high. So, accidental insurance may be essential for the people working there.
Still there are some insurance policies which people don’t need in normal circumstances. Here we take a look at some of them:
Insurance for Investment Purpose: Insurance is an investment is a myth which companies or agents have played around with to maximize their earnings. Since we are used to looking at receiving a return on every penny we spend in our lifetime, agents or companies push expensive products with return maximization strategies. This leads us to buy the wrong product every time.
Therefore, “you should never mix insurance and investments. This is also applicable on investment products which offer insurance benefits. Like some mutual funds offer the benefit of health & life insurance, if you invest in their schemes. These offers should be ignored as they always come with some hidden T&C of exit loads & expenses. Also, ignore health insurance policies which have investment components and go for plain vanilla health insurance products instead,” explains Beniwal.
Life Insurance for Children: All parents want to ensure their child’s future. And to do this, some want to buy a child policy which can meet their child’s financial requirements. But buying a policy on child’s name is not the right solution as the objective of insurance is to support your dependents financially when you are no more. Hence, the insurance has to be in your name rather than that of your child.
Also, “child plans — be it ULIPs or traditional ones — are highly costly and can fall short of inflation-adjusted corpus at the time of need for education or marriage. Even coverage may fall short of requirement, taking into consideration the high cost of primary education, leave aside higher education,” says Subhabrata Ghosh, Certified Financial Planner and Member of The Financial Planners’ Guild India.
Excess Accidental Insurance: Accidental insurance is a must have insurance, but in India there are some limitations in the product. The biggest flaw is that in most of the cases accidental death is the base policy, which is already covered in the term insurance. So if someone already has sufficient life cover through a term plan, this insurance is not required. A lot of people also opt for accidental death benefit rider in case of traditional insurance policies. They should check their total life coverage before taking any decision. In international markets, dismemberment policy can be bought with accidental death benefit, which is not the case in India.
Wedding Insurance & Flight Insurance: Both of these fall under the low probability but high impact category. Flight insurance can be clearly ignored as that will be covered under life insurance. Wedding insurance is a new category in general insurance, which covers loss due to wedding cancellation, damage of property, personal accident & public liability.
“Accidental & property damage is already covered under any comprehensive accidental insurance and householder insurance policy. So a separate cover is usually not needed for it. It’s wedding cancellation & public liability, however, which can have a significant financial impact. But in India people are more accommodating in case of cancellation of an event in comparison to the western world. Add to it the list of exclusion in such policies, and wedding insurance is still not in a priority list,” informs Beniwal.
Credit Card Insurance: How many times you lost your credit card? Even if once, what’s the first thing that you did? In fact, you asked to block your card and the card company issued a new card. So rather than taking insurance for loss of credit card, make sure it’s not lost or rather keep lesser-limit cards in your wallet.
There is another issue too. Whenever you get your credit card from a bank or financial institution, they usually start pitching a lot of insurance policies which are marketed as ‘especially available for our card holders’ – health insurance and accidental insurance are the most common. In most of the cases, either these policies are expensive or come with a lot of limitations. Moreover, insurance in these policies may not be transferred if you don’t want to continue with your card company. So, why to get stuck with such policies?
Source : http://goo.gl/kRbVOn