Diwali and your money: Here are 4 ways to set right your finances
If you go wrong with your investments, you will get a second chance; there is no such luxury if you go wrong with your insurance
We find it easy to devote time to complex things. This is not surprising. Complex is exciting and simple is boring, especially when it comes to finances. You are more likely to spend hours researching the best equity mutual fund than spending 10 minutes to buy a term insurance plan.
Thus, it is not too difficult to overlook simple aspects. When it comes to financial planning and investments, simple things matter a lot, perhaps even more than the complex ones.
For instance, buying adequate life insurance is a million times more important than finding the best equity fund. Everyone knows about the importance of life insurance, but it usually doesn’t get the priority it deserves.
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Diwali, the festival of lights, is symbolic of 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 take a step back, relook at your finances, and ensure that you got your personal finance basics covered. Here is a small list to get you started.
- Get your insurances right
If you go wrong with your investments, you will get a second chance. There is no such luxury if you go wrong with your insurance. You may not be around to rectify your mistake.
Therefore, consider events that can affect your family finances adversely. Most common adverse situations are demise, prolonged hospitalisation, and accidental disability. During such events, the family finances can deteriorate very quickly. What should you do?
Well, you can’t stop adverse events from happening, but you can buy insurance to reduce the financial impact of such events.
By buying a sufficient life cover, you ensure that your family can close the home loan for your dream house and maintain a comfortable lifestyle. You also ensure that money is not an impediment and your children study at schools and colleges you wanted them to. By buying sufficient health cover, you ensure quality healthcare for your family and that a prolonged hospitalisation of a family member does not set you back financially.
An accident can result in demise, disability, prolonged hospitalisation, and recovery period along with potential loss of income due to disability. While a life and health cover can cover demise and hospitalisation, you need an accidental disability cover to make up for loss of income due to disability.
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Therefore, it is critical to buy adequate life, health, and disability insurance. Adequate is important too. Do not just tick the checkboxes. While there are many ways to calculate coverage requirements, a good thumb rule is 10-15 times annual income for life insurance and ₹5-10 lakh per person for health insurance.
- Don’t mix investments and insurance
Unit-Linked Insurance Plans (ULIP) and traditional life insurance plans give you the dual benefit of insurance and investment. While the investors love these products for both tax-saving and wealth creation, these are high-cost products and provide inferior returns.
When it comes to investments, it is acceptable to make a slightly suboptimal choice if it helps improve investment discipline. Thus, the biggest drawback is not that such products offer poor returns. The biggest problem is that you may remain underinsured.
If you need a life cover of ₹1 crore and want to buy through a ULIP or a 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 the coverage that you can afford. Hence, if you can afford an annual premium of ₹1 lakh, you will buy cover for ₹10-20 lakh. However, in case of untimely demise, your family will only get ₹10-20 lakh. You know they will need much more.
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A term insurance plan is the best and the cheapest way to purchase life cover. You can buy a cover of ₹1 crore for as low as ₹10,000 per annum. Thus, your premium payment ability won’t affect your life cover.
By keeping your investments and insurance separate, you ensure that you buy adequate life cover and free up capital for low-cost investments.
- Make goal-based investments
Don’t just invest to save taxes. Invest to achieve financial goals.
Consider a debt-heavy portfolio for short-term goals and an equity-heavy portfolio for long-term goals. For short-term goals, you can keep money in fixed deposits, recurring deposits, liquid funds, or money market funds.
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For long-term goals, build an asset-allocation portfolio. Allocation to riskier assets such as stocks shall depend on your age and risk appetite. Rebalance at regular intervals. Take a rule-based instead of gut-based approach to investments.
If you are wary of risky investments such as stocks and equity mutual funds, start small and develop comfort before committing more meaningful amounts. SIPs are a very handy tool. If you can’t select investments on your own, start with a couple of index funds or seek professional advice.
Costs are guaranteed. Returns are not. Therefore, choose simple low cost investments.
- Keep family in the know
Over ₹1.5 lakh crore lay unclaimed with Indian banks and insurance companies in December 2020. LIC alone had around ₹21,000 crore of unclaimed funds and these are just for non-term insurance policies that have matured.
Also read: Your insurance agent will never suggest a term plan; here’s why you should insist on one
Your family cannot make a life insurance claim unless they are aware that you have purchased a life insurance policy. This won’t even count as an unclaimed amount. This would just count as a lapsed policy.
Your family won’t approach a bank, an AMC, or an insurance company to access your investments unless they know about your investments. Such investments and insurance plans are no good.
Therefore, buying adequate insurance is just the job half-done. You must inform your family about your investments and insurance policies. Compile such information in a physical folder or document and share it with family members and trusted friends. Write down how you would want the family to utilise the life insurance proceeds.
Also read: How much life cover do you need? Here’s how you can calculate the amount
Get your nominations right. This will help your family access your investments easily. A will can help avoid disputes during distribution of assets.
Additionally, your assets must be managed well even after you are gone. You must either help your family learn how to manage investments and put them in touch 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)
