Plan for your Financial Goal
Are you financially secured, do you have Life Insurance & Mediclaim?
In continuation with my previous blog https://kushansblog.wordpress.com/2016/03/05/3-important-tips-for-young-professional-to-save-money/this time lets first start with doing a profiling of an individual.
Firstly the most important thing which should be clear in your mind is
Are you an investor or speculator?
Technically an investor is someone who provides (or invests) money or resources for an enterprise, such as a corporation, with the expectation of financial or other gain.
But I have defined investor a bit differently, accordingly to me; if you want your money to grow in a planned way meeting your goals and someone who wants to safeguard future is an ‘Investor’.
Someone who doesn’t fit the above definition is a ‘Speculator’.
The differentiation between investor and speculator is very important as this will define your investment temperament.
As world is full of people who have different needs and requirements, investment opportunities available are linked to their needs or should I say goals which needs to be achieved in specific time frame. Every investment option has its positives and shortcomings depending on your investment temperament.
As you would have known or heard, there are various investment vehicles or channels available to invest your money and allow it to grow. A few of the prominent ones are mentioned below.
Equity or Shares
Debt – Government or Private
Gold / Commodities
Real Estate
Mutual Funds
But for young professionals and beginners who are starting their careers, before you look into any of the above investment options, the most important and must have Life savers are
- Life Insurance
- Medical/Health Insurance or Mediclaim
Make no mistake in today’s day and age this is a pure lifesaving instrument against uncertainty and on this foundation you will move on to more evolved investment options, which will allow you to grow your money.
It’s like a 20 floor building with weak foundation, one small earthquake and the above 20 floors means nothing.
So the above 2 investments is your foundation. A strong foundation will lead towards a strong and stable building and similarly your future.
These 2 foundation pillars are so deep and evolved in itself that I could go on and on, but what exactly is required from a young professional or say layman’s perspective is what I shall cover, so it just helps in our day to day understanding and helps take informed decisions.
Life Insurance:
I am sure you would have seen various Ads on Life Insurance. The basic differentiation to look at is, is it a Pure Insurance – Term Plan or Return on Insurance Plan (that’s how I would like to call it) – famously known as Endowment Plans, Annuity Plans etc etc.
Term Plan
What is a Term Plan?
It’s an instalment that you pay for a year’s cover, whereby in unfortunate event of demise or death the sum assured will be given to the nominee mentioned. It acts as a replacement of your regular income provided you have insured yourself as per your needs post your demise.
Importance of Term Plan
- Covers you for your working / productive years of life against loss of cash flows
- In terms of eventuality of death the amount is provided to your nominee, so they still can be independent and move ahead as per goals.
- Yu pay a nominal low premium amount compared to Return on Insurance Plan and use the excess money on pure investment
Return on Insurance Plan
What is Return on Insurance Plan?
It’s an installment you pay for a year’s cover, whereby in unfortunate event of demise or death the sum assured will be given to your nominee mentioned. Also once the time frame of policy is over the money you have given as premium will be returned back to you with some interest and that’s why I like to call it Return on Insurance plan
Importance of Return on Insurance Plan
- Covers you for your working / productive years of life against loss of cash flows
- In terms of eventuality of death the amount is provided to your nominee, so they still can be independent and move ahead as per goals
- If you live your full insurance period you will get all the money back along with interest and bonus amount, as declared by Insurance firms.
On the onset and Return on Insurance Plan looks perfect. You get life cover plus your money back on maturity, which grows, so there is no loss of money but growth of it
But here is where most of us get it wrong and we need to closely look at the details. The excess money you pay to get those return, if invested in a proper investment product as listed above would fetch him more returns than what he gets on any Return on Insurance Products.
Let’s look at this with an example:
Mr. XYZ aged 25, is a young MBA professional starting his career, his mother being a home maker and his father is getting retired this year and the responsibility of running the house will be solely on him now. So any loss of income will be of direct impact to his family and the way his family would lead their life.
He is looking out at an Insurance whereby he gets covered for the present and future income loss in an unfortunate event of his death whereby his family can still be independent and lead a normal life
Looking at this scenario a Term plan suits him well, where by in eventuality his dependents are covered, and the premium amount he pays is also affordable. But then what about the money he pays each year, as it’s a Term Plan it will not be provided to him with some interest back once the term is over.
Here we need to understand there are various investment avenues available outside of insurance whereby you could grow your money and insurance needs to be used purely as a tool against uncertainty & eventuality of death where by your requirements are taken care of.
You will find lot of people trying to sell you Endowment plans etc, but understand they also have to earn their living.
Insurance has to be part of your life goals and can’t be looked at in isolation, and according to me, insurance is not an investment to earn returns, but as a safeguard against life or any liability. Returns on Insurance products may not be even inflation proof let aside growth of that money.
Government also provides you Tax benefits on Insurance premiums you pay, because they too understand how important it is for an individual to have.
So the core question comes, is that extra return on insurance really giving you growth, to take care of future requirements and the prevailing rate as inflation ? The answer is ‘NO’.
I myself had an Endowment plan paying high premiums, but I realized it soon enough to move to a term plan, which would still take care of my liability in terms of eventuality at almost 1/10th the cost. And the rest of the money that I saved was invested in proper investment products, giving me an annualized return of 11-13%, beating the inflation and giving me true returns on my money for my future and I am still covered for any eventuality.
We shall look at those investment products subsequently in my blogs.
Next time we shall look at Medical Insurance or Mediclaim and why it’s the second pillar of prudent investment after having a Life Insurance.
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