Q1. I am 35 years old, working with an IT company. My spouse is an HR professional, and she is also employed full time. We have two children, 4 and 7. While my employer covers me for life insurance, I have been advised that I should also have my own, personal life cover. How much cover should I be opting for? And is it necessary for me to take an additional cover especially since my wife is also working?
A. You have been advised very correctly to obtain a life cover for yourself and the same is suggested for your wife, too. It is observed that when you leave the company, or are in between jobs, the cover provided by your employer is not available. In case something happens to you, the insurance can take care of your loved ones. Even if your spouse is employed, it is necessary to take an insurance to make sure that the spouse has that financial cushion and does not get stressed over loss of one income. Also, it is not necessary that the insurance provided by your employer is sufficient. Hence, it is always better to have personal life insurance coverage.
Coming to your first question: How much life cover should you be opting for? Many financial advisors’ advice the life cover to be 10 times of the answer to this question cannot be a certain, fixed amount. The amount of insurance cover depends on varied factors like how much funds your loved ones may need after you, number of dependents (including parents), income replacement, loans taken etc. While deciding on how much cover to take, remember that the cover should be sufficient to take care of all the outstanding loans (dues) and to generate an income for the family.
How to calculate required insurance cover?
Step 1: Factor in your income and your spouse’s income, along with the total expenses that you incur every month. Total expenses minus spouse’ income = shortfall that the family may face. Multiply the same with number of years that the family may need this fund for, calculate the future value with inflation. Also take into consideration expenses of your parents if they are dependent on you. [A]
Step 2: Calculate the amount required for achieving different goals at various stages of life. These goals could be children’s education, their wedding, any travel goals, buying a house, buying a car or anything else. This is the amount that you need to fulfil your goals. [B]
Step 3: Calculate the amount of loans outstanding. This is the amount that must be paid irrespective of you being there. Add this to amounts calculated in step 1 & step 2. [C]
Now you know the total funds required.
Step 4: List down all the assets that you currently have. This will include your savings balance, investments, PPF, tangible and intangible assets etc. [D]
The insurance coverage required = [A] + [B] + [C] – [D]
Please remember that this calculation differs from person to person. If your spouse is earning very well, you do not have any loans, you do not have any other obligations, or if you have built a portfolio large enough to support your goals, retirement etc, you may not need a hefty sum of insurance. Your financial advisor can help you plan your insurance.
Q2. I have a 7-year-old daughter. We want to plan for her further education beginning now. My husband and I are keen on making sure that under no circumstances, her education should suffer. My husband is a businessperson and I work as a consultant. How do we plan for our daughter?
A. As Sadhguru says, “Education is about empowerment, about cultivating a human being to the highest possible potential – a tool for fulfilling the immensity of Being.”
As education is the priority for parents today, rising education costs are a major area of concern. The sooner we start planning for that, the better it is. Over the past decade, the cost of general and professional education has soared sharply in India and across the globe. Apart from the tuition fees, the other costs include books, stationary, coaching classes etc, and if the child is not studying in the same city, then travel, accommodation, food etc also must be taken into consideration. Also, keep in mind the 10% inflation YOY in education expenses.
Step 1: Define the time horizon. How many years you have before your child takes admission in graduate programme and then post-graduation.
Step 2: Estimated cost of education. What is going to be the total cost of education for your child? This depends on factors like whether you want your child to have a global exposure and study abroad or, you want the child to study in India. While calculating the approximate cost, do factor in 10% inflation in the cost of education.
Step 3: Assessment of existing assets, inflows, and outflows. To plan how much, you can put aside for child’s education, first determine what assets (investments etc) you have, what the income is and what the expenses are. For example, you have a Fixed Deposit that you do not want to touch until your daughter completes higher secondary, take the current value and maturity value into consideration.
Step 4: Decide on the amount you would like to keep aside for your child. Once you have assessed the current assets and liabilities (including regular expenses), calculate the amount that you can invest on a regular basis for your child’s education.
Step 5: Invest smartly. Take help of your financial advisor, assess your risk profile and accordingly, decide on the asset allocation – keeping in mind the inflation rate. Diversify your investments to optimise your returns. Since you have a longer horizon (daughter’s age being 7 years), you can look at long term equity investments.
Step 6: Adequate life and health insurance. Having adequate insurance will ensure that in case of unforeseen circumstances, your child’s education does not suffer. You can even invest in good children plans which are being offered by renowned insurance companies.
Step 7: Start Now. The sooner you start, the better it is. By starting to invest right away, you will make sure that you have a longer time to invest and can reap better benefits. Power of compounding results in better wealth creation.
A well-diversified asset allocation will help your portfolio grow exponentially. It will ensure that even in the times of uncertain economic situations and volatility, your portfolio doesn’t get adversely affected. Invest on a regular basis rather than investing lumpsum or impromptu.
Q3. I am 36 years old man, working with a marketing company. I have taken a separate health insurance for myself and family, apart from what the employer has provided. Recently, a friend mentioned that they have also taken an additional cover- critical illness policy. Is it necessary?
A. With change in lifestyles, our health has taken a backseat. Today, we hear about cases where young people have suffered from stroke/heart attack or other life-threatening illnesses. Such incidents can create a dent in a family’s financial planning. It can not only hamper the income flows, but also can affect the savings and investments. Sometimes, the health insurance that one avails, or corporate health insurance may not suffice or cover the expenses.
A critical illness policy covers costs that arise due to any such critical disease or disability that arises out of it. Here, a lumpsum amount is provided as compensation unlike the normal health insurance policies that cover only the hospitalisation expenses. This amount can be used for treatment or any other expenses that may occur. Some of the major illnesses that are covered under critical care policies are cancer, stroke, heart attack, kidney failure, renal failure, liver transplant, Alzheimer’s etc. and more as mentioned in the policy document. Once the payment is made, such policy lapses.
Why critical illness policy should be taken?
By taking a critical insurance policy, you are ensuring that in case of a sudden sickness, your financial planning does not get hampered, and the additional costs do not disrupt your current investments and make a dent in your savings.
The compensation can also be used as an income replacement. Certain critical illnesses may affect one’s working ability severely or partially, which may lead to a loss in the income. A compensation from the critical illness policy can be used for treatment as well as household expenses.
With the innovations and technology, the cost of treatments is also rising. Especially in the case of critical illnesses, the treatment cost is high. In such case, a critical illness cover gives the family a comfort where they do not have to run around to arrange funds for treatment.
Higher coverage at a lower cost. Critical illness policy premiums are lower as compared to the normal health insurance cover. The reason for a lower price is that a general health insurance policy covers multiple ailments, whereas a critical health insurance policy covers specific ailments as mentioned in the policy document.
Generous sum assured for a longer term. Sum insured under a critical illness policy is larger and for a longer period. Some companies offer a cover for the lifetime.
No Hospital proofs needed. In regular health insurance policies, one needs to submit proof of hospitalisation – bills etc., to avail the amount spent on treatments. However, in a critical illness policy, once the diagnosis is done, one can get the claim processed. There is no need of providing with hospital bills or such other evidence.
Tax benefits. A critical care policy is also exempted under the provisions of Section 80D, subject to prescribed limits.
To sum it up, with the increasing cases of life-threatening diseases like cancer, and sedimentary lifestyle, it is good to have a critical illness policy – either as a separate plan or a comprehensive rider, as it ensures that you receive the best medical treatment without exhausting your savings.
Q4. I am a working professional and have been investing since last 10 years. I read in an article that portfolio management is important, and one should review the portfolio on regular intervals. How should the same be done and at what intervals?
A. Portfolio management is a way to optimise your returns while keeping in mind your risk appetite, goals for investments and overall asset allocation. Portfolio management looks at investing into different instruments according to your capacity to take risk, horizon available for investments and objectives behind making such investments.
Portfolio management becomes important for a few important reasons:
It will help you understand your risk profile better, and hence, you can build a portfolio based on your risk bearing capacity. For example, if you are a conservative investor, your financial advisor may advise you to invest more in stable assets and lesser in growth assets.
It helps in diversifying your portfolio, instead of concentrating your investments in a particular class of investments.
It helps in optimizing your overall returns on the portfolio, enabling effective and efficient investments. It helps your financial advisor to provide you with a customised solution.
Portfolio management helps in arriving at an investment plan taking into consideration the goals and objectives attached to it, be it long term, medium term, or short term.
While portfolio management is important, reviewing your investments at regular investments is also equally important.
Regular portfolio reviews will help you assess your achievements in the financial journey. It also helps you rebalance your portfolio as and when required. A review would also ascertain that the asset allocation is maintained as per your risk profile and correct product mix is present in the portfolio. Also, by doing so, you avoid concentration risk. Mistakes if any, can be rectified at an early stage by reviewing the portfolios on a regular basis. Moreover, it brings discipline in the way you handle your investments and any overlap in the investments can be taken care of.
Different people have different opinions on when portfolio reviews should be done. There is no thumb rule when it comes to reviewing the portfolio. Mostly, an annual review is necessary. Apart from the annual review, when the markets are very volatile or there have been changes in the policies, one can consider reviewing the portfolio. Apart form that, when one is in the transitioning phase of life, portfolio review and rebalancing should be done.
One should keep in mind that reviewing very frequently may not yield any positive results and may lead to irrational financial decisions. What matters is the parameters on which you evaluate your portfolio. While reviewing, have an objective framework, and do not let emotions take over.
Q5. I am 40 years old businessperson. Recently, my banker suggested me to invest in RBI Floating Rate Savings Bond (Taxable). According to him, the interest rate is 7.15%, which no banks are offering in FDs. Can you tell me more about the same?
A. RBI Floating Rate Savings Bonds (taxable) are debt instruments which are issued by the government of India. As the name suggests, the interest rate / coupon rate is not fixed and will change from time to time. Currently the interest rate is 7.15% (subject to change). One can invest a minimum amount of Rs. One thousand and the interest is payable half-yearly. These bonds have a lock-in period of 7 years (6 years for 60+, 5 years for 70+ and 4 years for 80+). There is also an option for senior citizens for pre-matured withdrawal subject to certain criteria. The interest is payable half yearly – in January and in July.
While investing, one should remember that the interest rate is not fixed, and subject to change every 6 months. If the benchmark rate changes, the bonds rate shall also change. Also, the interest is taxable and will get added into your taxable income and will be taxed at the applicable tax rate. So, if your income falls in 30% tax bracket, effectively, your post tax returns will be 4.5% even when the rate of interest is 7.15%.
Also, the lock in period is longer for investors who are not senior citizens, which means liquidity is not available. The option to borrow funds against these bonds is also not available. The bonds are not tradeable and cannot be transferred. Only nomination facility is available, meaning, upon death of the bondholder, the bonds can be transferred to the nominee.
However, these are 100% risk-free, government bonds and no credit risk are involved. Also, the interest rate being offered is higher than the fixed deposit rates of banks. If one is looking at risk-free investment options, they can invest in these bonds. Also, retired investors who are looking at a regular income to sustain their lifestyle can also allocate some funds into these bonds.
You can take a decision to invest or not keeping the above-mentioned points in sight.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
International Money Matters Pvt Ltd is a SEBI registered personal finance firm.