Do you really need Insurance

Don’t buy insurance only for tax benefits



Do you really need insurance? “I am not saving enough”, “I need to generate better returns on my investments” or “I need to save regularly” are the common reasons we hear from the investors when they first come to meet us. As we start to evaluate their existing portfolios, virtually all of them come peppered with at least a couple of life insurance policies wherein the information available is sketchy.On being probed on the amount of life cover available under these policies, the expected rate of return and the targeted maturity amount, most investors are unable to give a clear answer.Tax saving, need for life coverage or saving for the future are the most common reasons given for having bought the life insurance cover. The question is do you really need that insurance policy? Ideally insurance should be bought to compensate for the financial hardships that your family would undergo in case of your untimely demise.Unfortunately most insurance policies are bought keeping the tax benefits and expected return instead.The ideal way to buy insurance is as follows:


Estimate your correct insurance requirement


Essentially the best way to estimate your insurance needs is to make a list of your likely household expenses in your absence, assuming that your current lifestyle is not compromised.Remember that inflation will continue to hit regular expenses, even when you are not there. Also estimate the costs that would be required to meet various life goals such as education for your children, medical expenses for your spouse and outstanding loans.This will give you a reasonable estimate of the life coverage that you should have. If you find that you need help for this, approach your financial planner. If you find that your existing assets are sufficient to cover all the above expenses, there may not be a need for any insurance cover.



Buy a standalone term cover:

Term covers tend to be the cheapest and most efficient method of buying insurance as they allow you to cover yourself to the desired extent at a reasonable cost. Most investors tend to under insure themselves by focusing on the premium rather than the ideal sum insured. By keeping your insurance and investments separate from each other, you also have the flexibility of deciding on parameters like ongoing performance independent of the insurance cover.

Cheapest insurance cover is not necessarily the best :



Just like other products that you buy where price is not the sole deciding criteria, you should focus on items like claim payment track record, amongst others before deciding on the insurer you want to go with.


Re-evaluate your insurance need every two years :


Since goals, finances and responsibilities tend to changes with times, there may be a need to increase or decrease insurance as changes occur. Buy your term insurance in smaller lot sizes, though it may be slightly more expensive, so that you have flexibility to increase or decrease covers.

Young and Carefree ? Plan for your sunset years

Retire Rich


Eight things you must know about retirement



New, young clients of mine, whom I’ll call the Kumars, visited my office.“With the hectic lifestyles that we lead,” Mr Kumar told me, “we’d like to retire when I’m 55, so that we may pursue our other interests, like travel and photography. And at 55, I’ll still be fit.” “Good idea,” I said, “I hope you’ll also be financially fit for that.” 
They then showed me their file containing a neatly compiled list of stocks, mutual funds, insurance policies, bank FDs and suburban property they’d invested in. “So, what do you think?” asked Mrs Kumar after I had gone through the list. I admired their thinking about retirement even though the Kumars were only in their early 30s.Meanwhile, other average clients of mine put numbers to every one of their financial goals: house, car,children’s marriage and education,holidays… everything except retirement. I think it’s only because when people are young, even in their 40s,retirement seems too far away. But you’ll be surprised at the speed at which the good years go by.If you’re working today, retirement is quite a certainty—almost as certain as the bad old death and taxes.That’s why it’s critical to create a detailed plan, both from financial and emotional standpoints, and then go about executing it. And while you do that, there are eight truths you need to consider.

1. Inflation is your enemy :
   The average annual rate of inflation in India has been about 7.6% during the last 25 years. This means most of the things you buy are at least six times more expensive than they were in 1986. That won’t change when you survive long enough to look back in 2036, after another 25 years.So, if you spend Rs40,000 per month today and plan to retire in 2036, wishing to maintain the same lifestyle,you might then need about Rs.250,000 every month. In fact the future may not even be so bright! Considering all the excess money that has been printed across the world since 2008 to tide over the global financial crisis, don’t be surprised if you’ll need even more spending money in 2036. “Quantitative easing,” the economic euphemism governments use to describe printing excess money, is a known inflation enhancer.And then there’s what’s called “lifestyle inflation,” which can happen as you earn more. Foreign trips replace your domestic holidays and parking in with relatives back in your native place. One car for the family becomes one car for each family member. You wore the same clothes for years, but you find yourself buying new ones every season. If all this sounds familiar,you’ll need loads of spending money even after you retire.
   
2. You could live much longer than you think :
   Human life expectancy has steadily increased. A large number of us will end up spending as many years retired as we were working, maybe more. Some of my clients often disagree. They argue that the killer called stress, too, has increased. But then, medical advancements also increase dramatically, with newer stress, clot, cholesterol and cancer busters that help lengthen our lifetimes.Thus your retirement plan must address expenses over a much longer period, well into your late 80s, maybe longer. Factoring in inflation, those monthly expenses that could grow to `250,000 by 2036 may touch `15 lakhs if you survived till 2061, a “normal” 25 years after retirement. Scared? The “risk” of living very long is now very real. That’s why it’s essential to continue to make investments that will have the ability to beat inflation over long periods. Equity shares, equity mutual funds and real estate must be part of your investments, and good portions of them should be held even after you retire.
   
3. Your retirement plan needs to be your own :
   Without batting an eyelid, one of my clients who had fixed financial goals for everything except retirement, told me, “My son is my retirement plan.” A very endearing thought. But with an increasing trend towards nuclear families, your retirement plan needs to be far more robust. Your children will have their own financial goals which may not include you. Remember the Amitabh Bachchan-Hema Malini starrer Baghban, where the old parents they portray are made to stay separately after retirement, since none of their children will take in both of them? If your account book has such a retirement plan in place, watch the movie, if you haven’t already. It may actually be better than the book.
4. Buying pension plan is not a solution :
   Not long ago, the tax laws gave a separate annual benefit of  Rs10,000 if you bought certain pension plans. A very large number of people bought them for the tax benefit, and also in the belief that it will take care of their retirement. Yet, the amount they will receive on retirement will probably be enough for a couple of years’ expenses, nothing more. Any investment that you make for retirement need not have the word “retirement” in it. Stocks, bonds or good mutual funds can yield much better results and offer greater flexibility than the so-called retirement specific investments.
   
5. Your Expenses will not halve when you retire :Over time and from my clients’ experiences, I’ve learnt that there is a tendency for post-retirement expenses to increase in the first couple of years, as the increased leisure time could result in more holidays and trips to the mall. It may decrease 10 to 20% afterwards. But your employer no longer pays for the newspapers,leave travel, house rent, petrol or the doctor. And with a probable significant increase in medical expenses, or the desire to spend on grandchildren, any reductions in living expenses may be neutralized to a great extent.
   
6. Start planning very early :A part of your first salary cheque should go towards retirement, just like a part of it goes towards buying gifts for your dear ones. If you didn’t do that bit of saving, treat the next salary as your first.Albert Einstein is said to have called compound interest “the most powerful force in the universe.” When you are young, time is on your side. Take advantage of this by starting your investments at an early age. Unless you’re going to win a lottery, this is probably the only sure-fire way of retiring very comfortably. See examples of how compounding works. The Indian stock market has returned a compounded annual rate of at least 15% over any 20-year period. So Rs.1 lakh invested in an index fund today (or in a bunch of good companies) could become Rs.33 lakh in 2036. Adding Rs.1 lakh annually could leave you with a Rs.2.77-crore nest egg. If you stay invested, adding Rs.2 lakh a year could boost that to Rs.5.23 crore! Or take a safe scheme like the government’s Public Provident Fund, which returns a decent, tax-free 8% annually. Rs.70,000 (the maximum allowed in any year) invested with an addition of Rs.70,000 every year could leave you with Rs.60 lakh by 2036. You could double that by opening a second PPF account in your spouse’s name. And since your employer will also have a provident fund scheme, you could contribute any additional amount over the minimum 12%. If that works out to, say, Rs.1000, even doubling it to Rs.2000 per month can make a huge difference to the compounded tax-free returns you collect when you retire.
7. Avoid major changes in your lifestyle soon after retirement :
   Retiring from an active work-life is itself a very significant event and requires a lot of readjustment. Combining this with other events like changing your residence, children getting married or moving to other cities for employment, may make it even more difficult. If possible, try to avoid letting several major events in your life coincide with or around your retirement date.
   
8. You don’t have to stop working just because you retired :
   Most people today retiring at age 60 are healthy and in the prime of their careers.Your expertise could be sought after by other companies in your area of work.You may also have hobbies,like painting or writing, which you could convert to a full-time career. So while you are young, work around this and have a hobby you are passionate about. What’s important is that you keep your brain sharp and active. Any money earned can be a boon that will help you preserve, or even grow, your lifelong investments. Most people don’t realize that a regular salary, even a small one, is really worth a lot. I mean, if you retire today even with a modest Rs.50,000 monthly take-home pay, you’re actually as fortunate as a crorepati. Because if you wanted to generate a work-free,after-tax Rs.50,000, you’ll need Rs.1 crore invested in a fixed deposit at a good 8% interest.

I examined the Kumars’ file. Although they had a basket of wide-ranging investments, the amount invested in equities and equity mutual funds were limited. Equities are risky, but only in the short term—not for the young Kumars who have time on their side.Also, they didn’t separate investment earmarked for their sunset years from the rest. So I helped them fix this.Finally, I would also like to remind you that we can’t control regular inflation, but we can control lifestyle inflation by living a simpler life. If you plan well and reap the rewards,you can also continue to save and invest regularly even after you retire.