A pure term plan, with no return of capital, is a cost-effective life cover
I am 36 years old and earn Rs10 lakh per annum. My wife earns Rs12,000 a month. Our monthly expenses are Rs35,000. We have a 2-year-old daughter and my dependent parents. My father has a debt of Rs6 lakh, which I am repaying. I have taken a 20-year LIC Jeevan Anand plan and will get about Rs20 lakh on maturity in 2031. I also have a health cover of Rs10 lakh for my family and parents. We also have an emergency fund of Rs3 lakh. Should I continue with the LIC policy? I also wish to save for my daughter’s education and marriage, and my retirement. How should I go about these goals?
It is good to understand the true purpose of insurance before you start investment planning. The intent behind insurance is to provide financial protection to your family in case you are not there, and to ensure that the financial plan you have drawn for them runs smoothly. In your case, your family and parents are dependent on you. Hence, all the more importance needs to be given to insurance. Ideally, the insurance cover should be 8-10 times your annual income. You can target a cover of Rs1 crore. Consider a term plan that provides purely insurance protection with no return of capital and, hence, is a cost effective way to protect your life. The insurance policy that you have is a traditional endowment-cum-whole life insurance plan. It also offers cover after the policy term is over for the entire life of the insured. Therefore, based on your sum assured in the said policy, you can reduce the sum assured under term insurance.
At the same time, after you have taken a term insurance, there is no need to have any more insurance policies. However, it is prudent to review the sum assured under insurance based on your income.
You have already taken health insurance from your company. Do ensure that the policy has portability benefits when you leave the organization.
Next is loan repayment. It is better if you can consider repaying the debt by either using part of your existing corpus or planning to save on a monthly basis.
Also, you should not be holding too much in savings account. While you can continue to maintain the emergency corpus, it can ideally be invested in bank fixed deposits or in ultra short-term debt funds.
Coming to investments, you do have a good potential to save and the savings needs to be done both for your daughter’s education as well as your own retirement planning. You are underestimating your potential to save as you can very well save more than your current as well as proposed savings.
Determine your potential to save, i.e., surplus of income over expenses, and target to save for a long period after providing enough cushion for short term.
Create a short-term corpus for needs beyond emergency, which could be invested in debt short-term funds.
Over and above these, start investing via systematic investment plans (SIPs) in mutual funds. The investment strategy and your asset allocation can be based on your risk appetite.
Do consider equity as an asset class for long term and prefer mutual funds for creating a long-term portfolio.
I want to take a sabbatical from work to study for 2 years. How should I prepare for this financially? I have a running home loan, life cover and health cover.
You need to put together your own financial data—your income, and expenses including housing loan and insurance payments. The surplus of income over expenses is what needs to be put to good use for investments.
You need to decide the corpus required for sustaining your fixed expenses; not only housing loan and insurance premiums, but also the education loan if required and if not, the one-time payment to be made for the course fees.
Once you know the number to sustain yourself for a 2-year period, you need to work backwards to determine how much time the surplus of income over current expenses will take to create the desired corpus. And once done, the said corpus needs to be invested in short-term debt instruments, which provide adequate safety and liquidity to provide the regular income. So bank fixed deposits, ultra short-term and short-term debt funds are good investment options for creating the portfolio. You can use a monthly withdrawal plan to sustain your regular expenses.
Surya Bhatia is managing partner at Asset Managers.
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