We find it easy to spend time on complex things. This is not surprising. Complex is exciting and simple is boring, especially when it comes to finances. You’re more likely to spend hours researching the best stock mutual fund than spending 10 minutes shopping for a term insurance plan.
Therefore, it is not too difficult to overlook simple aspects. When it comes to investments and financial planning, the simple things matter a lot, perhaps even more than the complex ones.
For example, buying the right life insurance is a million times more important than finding the best equity fund. Everyone knows the importance of life insurance, but it often doesn’t get the priority it deserves.
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Diwali, the festival of lights, symbolizes the victory of good over evil. In some parts of India, the day after Diwali is also celebrated as the New Year. What better time to step back, review your finances, and make sure you got your personal finance basics covered. Here is a short list to get you started.
- Get it right with your insurance
If you make a mistake with your investments, you will have a second chance. There is no such luxury if you mess up with your insurance. You may not be present to rectify your mistake.
Therefore, consider the events that may negatively affect your family’s finances. The most frequent adverse situations are death, prolonged hospitalization and accidental disability. During such events, family finances can deteriorate very quickly. What should you do?
Well, you can’t prevent adverse events from happening, but you can purchase insurance to reduce the financial impact of such events.
By purchasing sufficient life coverage, you ensure your family can close on their dream home and maintain a comfortable lifestyle. You also make sure that money is not an obstacle and that your children study in the schools and universities that you wanted. By purchasing sufficient health coverage, you ensure quality health care for your family and that a prolonged hospitalization of a family member does not harm you financially.
An accident can result in death, disability, prolonged hospitalization and recovery period along with possible loss of income due to disability. While life and health coverage can cover death and hospitalization, you need accidental disability coverage to make up for lost income due to disability.
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Therefore, it is essential to purchase adequate life, health and disability insurance. Adequate is also important. Don’t just check the checkboxes. While there are many ways to calculate coverage requirements, a good rule of thumb is 10-15 times annual income for life insurance and ₹5-10 lakh per person for health insurance.
- Do not mix investments and insurance
Unit Linked Insurance Plans (ULIP) and traditional life insurance plans give you the double benefit of insurance and investment. While investors love these products for both the tax savings and wealth creation, these are high-cost products and provide lower returns.
When it comes to investing, making a slightly suboptimal choice is acceptable if it helps improve investment discipline. Therefore, the biggest drawback is not that these products offer low yields. The biggest problem is that you can remain without enough insurance.
If you need ₹1 crore life cover and want to buy through a ULIP or traditional plan, you will have to pay an annual premium of ₹5-10 lakh. Very few people can afford such premiums. The easiest compromise is to buy coverage you can afford. So if you can afford an annual premium of ₹1 lakh, you will buy cover for ₹10-20 lakh. However, in case of premature death, his family will only receive ₹10-20 lakh. You know they will need much more.
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A term insurance plan is the best and cheapest way to purchase life coverage. You can buy coverage for ₹1 crore for as little as ₹10,000 per year. Therefore, your ability to pay premiums will not affect your life coverage.
By keeping your investments and insurance separate, you ensure you purchase adequate life coverage and free up capital for low-cost investments.
- Make goal-based investments
Don’t invest just to save taxes. Invest to achieve financial goals.
Consider a high-debt portfolio for short-term goals and a high-equity portfolio for long-term goals. For short-term goals, you can keep the money in fixed deposits, recurring deposits, liquid funds, or money market funds.
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For long-term goals, create an asset allocation portfolio. Allocation to riskier assets, such as stocks, will depend on your age and risk appetite. Rebalance at regular intervals. Take a rules-based approach rather than an intuitive approach to investments.
If you’re wary of risky investments like stocks and stock mutual funds, start small and build comfort before committing larger amounts. SIPs are a very useful tool. If you can’t select investments on your own, start with a couple of index funds or seek professional advice.
The costs are guaranteed. Returns are not. Therefore, choose simple, low-cost investments.
- Keep the family informed
More than ₹1.5 lakh crore was left unclaimed with Indian banks and insurance companies in December 2020. LIC alone had around ₹21,000 crore of unclaimed funds and these are only for non-temporary insurance policies that they have won
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Your family cannot make a life insurance claim unless they know you have purchased a life insurance policy. This will not even count as an unclaimed amount. This would only count as an expired policy.
Your family will not approach a bank, AMC, or insurance company to access your investments unless they know about your investments. Such investments and insurance plans are not good.
Therefore, buying adequate insurance is only half done. You must tell your family about your investments and insurance policies. Collect this information in a physical folder or document and share it with trusted family and friends. Write how you would like the family to use the life insurance proceeds.
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Get your nominations right. This will help your family easily access your investments. A will can help avoid disputes during the distribution of assets.
Also, your assets need to be well managed even after you are gone. You should help your family learn how to manage investments and connect them with a trusted friend/advisor who can help them manage money in your absence.
(deepesh raghaw is a SEBI registered investment adviser and writes at www.PersonalFinancePlan.in)