Do you have the RIGHT insurance?

Insurance to compensate for financial losses started with traders who would seek compensation in the event of loss of goods due to natural disasters, accidents or robbery. Insurance is an instrument to transfer risk that one doesn’t want to bear. The traders were ready to bear risks of business but not of the things beyond their control.

When do you need insurance?

Insurable interest is defined as ‘The financial interest that the assured possesses in whatever is being insured’. In other words, it is the right of a person to insure something which, when lost or damaged, would mean a financial loss.

You need to insure your vehicle and accidental harm caused to third party.

Your & family member’s health in case you incur substantial expenses owing to hospitalization.

Your life to ensure that those who are financially dependent on you continue to receive financial assistance till it is needed. Others can be property and any other assets that are financially valuable.

Common pitfalls in buying insurance

Mixing investments & insurance- Many investors feel ‘stuck’ due to wrong insurance policies being pushed to them. Heavy commissions in these products eat away the gains that investors expect.

Insurance of minors- Agents often insist on insuring children or grandchildren in order to reduce mortality expense. Usually a person is never financially dependent on future generations and hence there is no insurable interest. This gimmick leads to ‘penny wise pound foolish’ decision. 

Not being ready to let go of the premium- especially in life insurance people cannot fathom the fact that the premium becomes an absolute expense if you don’t claim insurance in a given year. Well, being alive for another year is a far bigger reason to be happy! This thought of ‘losing out’ premium leads one to choose a mix of investment and insurance. Such decisions usually lead to either inadequate insurance or excess premium outlay.

What should you do?

Buy pure insurance products such as term insurance for life.

Have adequate health insurance for your family.

Insure your home/property & vehicle.

Certain individuals may have some specific insurance requirement where a financial advisor can help.

Ensure that you have RIGHT insurance!

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Life Stages & Investing

At different stages in life, the objectives and needs are different.

During one’s earning life, money is saved from the current income to take care of the future. This is the Accumulation Phase.

The investment objectives in the 4 stages in Accumulation Phase are:

  1. Single, starting employment
    • Starting a saving habit
    • Emergency fund equal to at least 6 month’s expenses through bank deposits
    • Small beginning of equity investments through SIP
    • Start PPF, NPS accounts
    • Setting aside “margin money” for housing loan
    • Getting adequate term insurance & accident insurance
  2. Marriage
    • Monthly and annual budget of income, savings and expenses
    • Buying a house and getting a housing loan
    • Monthly instalments of housing loan build your house ownership
    • Family floater health insurance
    • Increasing equity fund SIPs
  3. Starting a Family
    • Changes in monthly budget
    • Buying a car and getting auto loan
    • Education funding for children – short term through debt funds, long term through equity SIPs
  4. Approaching Retirement
    • Children education goals nearing completion, responsibilities reduce
    • Income increases as career advances
    • Housing loan EMIs as percentage of income come down
    • Increase equity investments through SIPs and stock portfolio
    • Term insurance needs come down
    • Joint names and nomination in investments

After achieving financial stability, one has earned the “freedom to retire”. The income and cash flows from the accumulated wealth enable living with self-respect and comfort. The 5th & 6th stages in the life cycle fall in this Distribution Phase. The investments considerations are:

5.Retirement

  • Cash flows from existing investments used for expenses – systematic withdrawal plan
  • Golden period in life – when time, money & energy are all present
  • Discretionary expenses – such as travel – need to be budgeted
  • Portfolio partly shifts to fixed income investments, but equity still continues
    • Provision for health care expenses – top up on health insurance 

6.Succession & Estate Planning

  • Creating a will
  • Financial security for single spouse
  • Careful distribution after your life to next generation