Wealth Preservation and Income Protection
Many of us make investments for meeting our retirement, child’s education and marriage expenses, and for other long-term and short-term objectives. We need to review our investment on regular basis to see that we addressed all our financial objectives. Have we done enough to secure our family from financial insecurity that may arise out of any eventuality happen to us or our business?
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Let us analyze the situations that we come across in daily life.
Assume that we have taken a term insurance for a sum of 65L INR or 10 to 15 times of annual income just for the calculation purpose. (Enough coverage to take care of family life style if any thing happen to us)
– Assume that we have made systematic Mutual Fund investments to create enough fund for child’s education and marriage as well.(Adjusted to 7% average inflation rate per year)
– Took few other investments to create corpus for comfortable retirement.
– Finally, took a health insurance policy to cover the whole family.
We have now set everything right and start making payments towards the insurance premium and Mutual Fund SIP (Systematic Investment Plan) investments as per our plan set above. Everything will be fine and things will go on as we planned. However, as you know, life is full of uncertainties. What if we – or the bread winner of our family – involved in a serious accident or anything such thing happened to our house or properties due to any natural calamities – like the one happened in Japan and Chennai few years back and still continue happening at many places in Asia and Europe?
Are we prepared for all such situations? What will happen if we are not prepared.
– We will not be able to contribute or find it difficult to contribute towards the commitments that we made for our long-term and medium-term investments to create funds for retirements, education, marriage etc.
– In such cases, average level investors will have no other option but to exit from their regular investments and sometimes compel to withdraw money from the accumulated fund to meet emergency expenses arising out of any contingency issue mentioned above. Of course, our health insurance will take care of our medical expenses but only to some extend.
Wealth and Income Protection is an important part of our financial planning. All investors should have a proper mechanism to safe guard their accumulated wealth and income from any eventuality should happen to them.
Let us now look at this case. Assume that we have done enough for our retirement and relaxed a bit now thinking that we would be going to have a comfortable and financially stable retirement life. However, unless we have a concrete plan in place to take care of our existing liabilities – such as home loan, personal loan or any other long-term or short-term commitments – we will end up with inadequate retirement corpus at the time of its need because we would have utilized the major share of retirement fund by then to meet the expenses incurred during the emergency situations in the past.
How to overcome this situation and preserve wealth? What is the solution: We need to find out the way to Safe Guard our Income and Wealth. Let us see how can we go about it.
First thing first. The most priorities should be given to liabilities. When mentioned about liabilities, I mean loans taken from banks for buying assets such as house, land, automobiles or for meeting any emergency expenses such as education. As we know, banks give loans on hefty interest rate and it fluctuates every year. I know a person whose housing loan interest gone up from 7.5% to almost 14.4% in just five years time! Now we can imagine the extend this interest would likely to change in the coming 15 to 25 years.
We need to take adequate insurance cover against our bank loan. Some insurance companies offer special insurance products only to safe guard loans and such products work in such a way that its sum insured would get reduced every year based on the outstanding loan amount. Better go for such products because they are much cheaper than traditional term plans.
What If we have a car loan/ Home loan?
Take term insurance coverage equivalent to the outstanding loan amount. If we have a housing loan, then we need to take insurance coverage for that as well. This way we can take care of all our liabilities. Now, they (dependents and survivors) do not need to dig in to the fund created for child’s education or marriage expenses for meeting their daily expenditure.
How to protect child’s education fund?
As mentioned before, child education fund is very important. We take child’s investment plan to create enough corpus for meeting education expenses and we need to protect this fund. We have to make regular investment to create corpus for the same but what if something happened to the payor who pays the premium for such child insurance plan and unable to pay premium any more? Here comes an amazing add on rider to take care of that.
There are many good child investment plans promoted by leading Asset management companies in India. Many of them do well in the market, offering decent returns over the years but hardly any of such equity exposed product offers any type of security in case of any uncertainties happened to the payor.
It would be wise enough to go for a mix of high growth mutual fund investment and a traditional insurance plan. As far as mutual fund investment is concerned, we can choose any good performing fund that is predominantly investing in blue chip companies in the diversified sectors. We can expect reasonably good return from such investment if we keep invested for over 5 years. Besides this investment, we need to put some money in a good child insurance plan as well. Take a juvenile insurance plan for a sum of the corpus that we plan for each child’s education expense.
For example: Assume that you have only one child and wanted to keep 10 Lac INR for his/her education. We can either start investing in Mutual fund SIPs to build that much corpus and/or take a child insurance policy that could offer us the maturity amount somewhere close 10 lac INR. We should attach a Payor benefit rider to this child’s policy. This will cost us an additional small amount but it is worth buying.
Payor benefit is a very useful add on rider which would protect child insurance plan against any lapse when the premium is not paid due to any eventuality happened to the payor. In normal cases, our life insurance policy will get lapsed when we do not pay premium on time. However, when we attach Payor benefit rider to a child policy, all future premiums for basic policy and riders would be waived up to maturity of the basic policy or the child reaches 21 or the payor reaches age 60, whichever happened first will be applicable. All young parents should consider adding this rider to insurance policies taken for their child.
- Take adequate health insurance coverage (Read: How Much Health Insurance Cover Should You Have?) for self and family: This way we can protect ourselves from any unexpected medical expenses. Take a separate accidental policy as well. Accident policy is available for very less premium and we get covered for death and dismemberment happened due to an accident under this insurance policy.
- Take a term insurance equivalent to 10 to 15 times of annual income. Term insurance offer coverage for larger sum assured for relatively less premium than endowment plans. Term insurance is a pure risk plan and has no investment component in it so we are not going to get any bonus or maturity amount from such plans.
- Though we have taken all precautions against major uncertainties from our side, there are other types of insurances for our house, office buildings, physical assets and factories as well. Most of these are usually taken care by bankers, employers or builders. If it is so, then we need not worry about them any way but otherwise keep a check on them as well. If they are not insured yet, then go ahead and do it now before it is too late!
What is your views about the facts discussed here? Have you come across any such uncertainties? Share your experience in the comment box below.
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