'Traditional insurance plans offer safety, steady returns in volatile times'4 min read . Updated: 01 Jan 2021, 07:48 AM IST
- There is no fixed formula, but ideally, 20% of your monthly income should go towards savings
- It can increase or decrease depending upon your age, financial condition, and your future goals
By Amit Palta
We all spend some of our waking hours thinking about money and how our lives would be so much better if we had an infinite amount of that in our wallets and bank accounts. However, the ground realities are different for most. Sometimes, situations where individuals lose their source of regular income can affect their ability to pay bills, find challenge in being able to afford a good education for their kids or handle expenses when retire. These are very real concerns.
However, fantasies of winning a lottery or inheriting your family’s long-lost treasure may not help much. The answer to addressing these concerns lies in the simple act of saving money and starting this journey early. It is worth the effort and gives you peace of mind knowing you have the ability to handle tricky financial situations in life.
Culturally, we are taught to understand the value of saving money from a young age. India is an emerging economy with a high savings rate. The gross domestic saving rate has risen from 6.6% in the 1950s to 23.1% in 2000.It has subsequently remained in the range of 30-34% in the last decade.
So how much should you save to create wealth over the long term? There is no fixed formula, but ideally, 20% of your monthly income should go towards savings. It can increase or decrease depending upon your age, financial condition, and your future goals. There are a couple of key attributes that can help you achieve your long-term wealth creation goals.
Reactionary Spending to Intentional Spending
In a world filled with unlimited distractions, it is extremely important to control our attention and change our relationship with money. We should shift from purely reactionary spending to a more intentional mode of spending, where we also focus on the needs and wants of our future self.
As the saying goes, ‘The early bird catches the worm.’ The earlier one starts, the more benefits one can derive from the power of compounding. Let us understand with an example. Raj and Sekhar,both working professionals aged 30 years. Both aim to build a retirement capital worth one crore by the time they reach 60. Raj understands the importance of intentional spending and starts early towards achieving his goal, whereas Sekhar procrastinates his investment decisions until he reaches his early 40’s. Assuming a rate of return to be 8% p.a., Raj would need to invest approximately ₹1 lakh annually for the next 30 years to achieve his financial goal of accumulating ₹1crore, whereas Sekhar would have to shell out ₹2 lakh annually for the next 20 years to reach the same figure.
What are the avenues to invest your hard-earned money to secure your future? Several financial instruments in the market can help you address your long-term wealth creation needs. We will briefly discuss how life insurance savings products can help in addressing these needs most proficiently. Primarily, there are two categories of long-term savings plans offered by life insurance companies i.e., non-linked and linked. The non-linked category is further segregated into participating and non-participating products. In this article, we will focus on non-linked participating products.
Non-Linked Participating Savings Products
Non-linked plans or traditional savings products are considered safe investments as they offer the safety of capital along with steady returns as they typically invest in fixed income/debt instruments. Both these features are important, especially in times of economic uncertainty and volatile markets. As exposure to volatile assets is negligible, it is one of the best options for a risk-averse investor looking to build long-term wealth.
Participating products offer a guaranteed maturity benefit, which is calculated at the time of purchase. These products are eligible to receive annual reversionary bonus, if declared by the life insurer. The bonus is a share of profits generated by the company on the participating policyholders funds. These bonuses are added to the guaranteed maturity benefit of policyholders, enhancing their maturity corpus. The life cover component in these products provides financial security to the family.
A notable feature of these plans is that they offer liquidity. This is particularly useful in case an unforeseen financial liability crops up. Policyholders can avail of a loan against their policy to meet the financial obligation without disturbing their savings plan. Repayment of the loan can be made in EMIs or a lump-sum payment anytime on or before the policy matures.
Investing in the right long-term savings plan based on the risk appetite and financial goals provides a better mechanism to cope with unforeseen situations. Long-term savings plans are an important component of an individual’s financial plan. These versatile products can help customers to achieve their financial goals: wealth creation, receiving income for a limited time, or receiving regular income till 99 years.
(The author is Chief Distribution Officer, ICICI Pru Life Insurance. Views expressed are his own.)