Life Begin's After 50

If you fall under this category, go for a conservative asset mix & adequate cover while securing your finances.

In today’s world, it’s a Herculean task to fulfil all your family responsibilities. It takes all your savings and emotions to make sure that your kids find their feet in today’s highly competitive world. And when these fledglings finally spread their wings and move on, you find yourself emotionally and sometimes monetarily drained. Take the case of 51-year-old K D Sharma. Within a few months of their daughter’s wedding, their son also decided to move out. The couple suddenly realised that now they are financially strained. Their life-long savings been utilised for securing the future of their kids and it appeared that they have to start afresh. So, if you are also undergoing through the same pangs, here are some tips that can help you chart out a new chapter after you’re done with all your responsibilities. 

Asset Mix 

Considering that most empty nesters belong to 50+ age category, financial planners recommend a conservative asset allocation, which could comprise of up to 30% allocation to equities. While current income generating securities such as small savings schemes, fixed maturity plans, and long term bank fixed deposits can form 50% of the asset mix. The remaining investment (20%) should be made in fixed income securities with low maturity such as short-term income funds, liquid funds and short-term bank fixed deposits with an objective of maintaining liquidity for contingencies. The main priority for empty nesters is to preserve existing wealth and plan for retirement. Hence such a mix would generate growth with added stability apart from current income.

However, analysts caution that it may not be appropriate to implement the same asset allocation across investors as conditions differ significantly across empty nesters. For the uninitiated, asset allocation for any investor is determined based on the investor’s age, socio-economic background, lifestyle, risk appetite, liquidity requirements and finally the investment horizon. 

On the equity market investments, financial planners believe that the exposure should be restricted to a complementary blend of three to five quality diversified equity funds with low risk. And they should avoid the temptation of sector/thematic funds or/and a direct exposure to equities by purchasing individual securities. The investor should view equity exposure as a long-term asset class in the portfolio and hence a systematic investment plan could be the ideal strategy for investing in equities.
 

Financial planners also advise such families to set aside at least three months household expenses as contingency fund, which ideally should be risk-free and can be easily liquidated. It is pertinent to calculate amount needed to meet living expenses for remaining life, amount needed for charity or passing on to the family members. You should not wait till the end for such decisions. 

Adequate Cover
 

Insurance advisors suggest protection against early death, disability and medical coverage as important insurance covers an empty nester must have. Normally being on the other side of 50’s, the insurance premia for such insurers is very high. Some unit linked insurance policies offered by private sector insurance companies provide both medical and life insurance coverage, which empty nesters could look to take cover under.
 

Since being on their own, empty nesters have significant amount of extra time and cash to pursue long cherished interests and hobbies or some new activities. So while pursuing these interests, it is advisable that they should fine tune the financial plans to accommodate the new lifestyle. The biggest mistake people make after the kids leave the house is not reviewing the insurance policies. What they forget is that it’s one of the key times to look at insurance and plan accordingly.
 

According to Aggarwal, a whole-life Ulip will be the ideal cover for such category of people. Choose a product with lesser premium paying commitment of maximum 5-10 years and coverage for whole life with asset allocation of 50% in Debt and 50% in Equity. You can also use these policies for tax-free retirement planning since such a product gives you the flexibility of liquidity every year. They also advise a second look at your health insurance. It is important that you should have enough coverage as it may become difficult to take larger cover after certain age.

It’s Never Too Late

A conservative asset allocation, comprising up to 30% equities, is recommended Current income generating securities such as small savings schemes, fixed maturity plans and long-term bank fixed deposits can be 50% of the asset mix Around 20% can be put in fixed income securities with low maturity such as shortterm income funds, liquid funds and shortterm bank fixed deposits Choose an insurance product with lesser premium paying commitment of maximum 5-10 years and coverage for whole life

5 rules on how much insurance you need

Introduction

If you are an earning member of your family, and there are members of your family who are financially dependent on you, you need life insurance. But how much life insurance do you need?

There are many factors that are relevant in determining the amount of life cover you should buy.

Need for minimum protection

It is essential that a particular level of income should be maintained for the family even when its breadwinner is not around. Suppose a family's present needs are Rs 25,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family's monthly expenses of Rs 25,000.

If one also wants to provide for the future fall in the purchasing power of rupee due to inflation, one must necessarily take policies for higher amounts. No widow, they say, has ever complained that her husband bought too much insurance.

Current income level

Payment of insurance premium results in an outflow of disposable income. You may, therefore, not like to buy too much insurance. One might have to limit the quantum of insurance keeping in mind the cash flow problems that will be created as a result of the obligation of regular payment of insurance premia.

Tax benefits

You should also take into account the tax benefit under Section 80C.

Accumulating for specific needs

If you expect to spend a particular sum of money for the education and / or wedding of your children, you may like to buy an insurance policy for a specific sum to meet such a lump sum commitment.

Present age

Your present age is a critical factor in deciding the quantum of insurance that you can afford. The rates of premium go up with the advancing age of the life assured. Hence, one can buy more insurance for the same premium at a younger age than at an older age.

The final decision rests upon a careful consideration and balance of all the above factors. The need for minimum protection may be quite high, but the current need for disposable income may not immediately permit buying adequate insurance.

You then have to make a compromise and buy extra insurance as and when you can afford it.

The 5 simple rules

In the event of any misfortune, well-planned life insurance can protect your loved ones from financial difficulties. However, in most cases, people find it difficult to estimate the correct value of insurance they need.

Partly this is because life insurance needs change through different stages of life. Young people with no dependents may not have much need for life insurance.

As one's family responsibility grows, life insurance needs too increase. Thus, a periodical review based on your family circumstances is required in order to ensure that the coverage is adequate.

There are several simple methods available to broadly estimate your life insurance needs. Five simple rules are:

1. Income rule

The most basic rule of thumb is provided by the income rule which holds that individual insurance cover should be at least around eight to ten times one's gross annual income. For example, a person earning a gross annual income of Rs 1 lakh should have about Rs 8 to10 lakh in life insurance cover.

2. Income plus expenses rule

This rule suggests that an individual needs insurance equal to five times your gross annual income, plus the total of basic expenses like housing or car loans, personal debt, child's education, etc.

3. Premiums as percentage of income

By this rule, payment of insurance premium depends on disposable income. In other words, one should decide the quantum of insurance after meeting the regular outgo from salary.

From the first two rules, you can make a broad estimate of the minimum insurance you should have. The premium as percentage of income rule can help you fine-tune your cash flow by committing an appropriate percentage of your income for paying life insurance premium.

4. Capital fund rule

This rule suggests that if you need Rs 1 lakh p.a. for your family needs, and assuming you do not have any other income-generating assets, you may like to create a capital fund of Rs 12.5 lakh (Rs 1.25 million) which can yield Rs 1 lakh (Rs 100,000) annual income @ 8% p.a. You may therefore buy a life insurance policy of Rs 12.5 lakh.

5. Family needs approach

This rule holds that you purchase enough life insurance to enable your family to meet various expenses in the event of key earning person's death. Under the family needs approach, one has to divide his family's needs into two main categories: immediate needs at death (cash needs), and ongoing needs (net income needs). 

Stage of Life	Needs	Assets
Initial stage. No family responsibilities.	Premature death leads to minimal needs like funeral expenses	No worthwhile assets. Just a beginning. May be some cash balance.
Married, with children.	Premature death causes serious financial problems, as most of the needs continue	Some assets available. Growing assets
Empty nest	The needs decline once children grow up and get settled. No major financial problems	Strong assets base, surpassing the financial needs

You may also like to keep in mind that if your family is reasonably wealthy and its protection needs relatively low, you can buy a smaller amount of insurance. Similarly, if your family members have independent earning capacity you may reduce your insurance.

There is a broad relationship between needs and assets over a period of time. Thus, not much life insurance is needed in the initial stage. The same is true in the empty nest stage.

The maximum need for life insurance arises during the mid-phase, when one is married and has children. In other words, one may go for life insurance so long as the asset-level is lower than the need-level. As highlighted above, once the asset-level surpasses the need-level, the importance of life insurance declines.

Caution: Insurance is not investment You should always remember that life insurance is a protection and not really an investment because financial returns are rather meagre. (This is equally true of the life insurance portion of even a ULIP scheme.)

 

If you take inflation into account, there could even be a negative rate of real return at the time of maturity of your insurance policies. So, while it's important to secure your family's well being through adequate insurance of the lives of the earning members, over-investing is a mistake.

Why people dont like Term Insurance and why they are wrong

Introduction

One of reason why most of the people do not take term Insurance is because “They don’t get anything back at the end”. In this article, I will show you why this is psychological issue. Even if you get your money back at the end of the tenure, it wont make much difference. In this article I will prove that the argument that “Term Insurance is waste of money because you don’t get anything back” is amazingly idiotic .

What is the main Issue with People not liking Term Insurance

Why people don’t like Term Insurance is the question? The answer is simple, because you don’t get anything if you survive the whole tenure and hence the amount paid as premium is wasted, this is claimed by millions. Fair enough. The first thing is, these people do not understand or appreciate the Importance of Life Insurance. Now lets see this situation from a different angle. Assume you get the money at the end in your Term Insurance. Lets see a case study of a general Family. How does a family look like.

Manish is 28 yrs old and got recently married (oops!!). He earn close to 40,000 per month. His monthly expenses is around Rs 25,000 overall and he saves 15,000 per month. He also have his parents dependent on him financially. He is 30 yrs away from his retirement. He calculated his Insurance Requirement and it was close to 50-60 lacs minimum. Lets take it as 50 lacs for simplicity for now.

Analysis of Case Study

Now is the fun part, his current monthly Expenses are close to 25k, How what will it be his monthly Expenses when he retires after 30 yrs? So the average inflation for last 30 yrs was 6.5% (based on past data), lets assume it will be 6.5% for next 30 yrs on an average. Then the monthly expenses after 30 yrs would be 25,000 X (1.065)^30 = 1,65,359 (1.65 lacs). If he takes a Term Insurance at the start, his yearly premium per year for 50 lacs cover would be Rs 11802 for 30 yrs tenure from Aegon Religare. Do you know how you can do your Retirement Planning in 6 steps ?

Which means, he is going to pay total premium of 3.54 lacs in his entire life. How even if he gets this money back at the end, How much will it benefit him? How many months can he survive on this money? 2 months is the answer!! With expenses of 1.65 lacs per month, the money he gets back from term insurance is enough for not more than 2 months, Lets take maximum 3 months. That’s it !!! Are you confused with Calculations, See this Video presentation by me where I explain how to do important Calculations in Personal Finance.

So Following are the questions needed to be asked

• Do you want to put your Family at Financial Risk because you are not getting 2 months worth of expenses back?
• For a small amount you “don’t get” at the end , are you not being childish to Secure your family.
• Don’t you think you are seeing Term Insurance from a wrong attitude?
• Are you not concentrating on “what you are not getting” rather than “what you are getting”.

We already have “Return of Premium Term Policies”, but they are themselves idiotic because they are again designed to just exploit the weakness of people who feel that term insurance is waste of money because they dont get their money back. Read this to understand why Plain Term Insurance is better than “Return of Premium Term Insurance policy”.

Reason why Indians dont like Term Insurance

Reason 1# : Most of the people concentrate on number and explicit data, like the money they are not getting back or its a waste of premium if nothing happens to them. They fail to look internal advantage which term Insurance provides.

Reason 2# : We are emotional with Money, we are more concentrated with Growing money and getting money back rather than what value it provides in our life.

Reason 3# : Most of the people think that the probability of dying is much lower than an average person which is again totally idiotic. We just don’t want to visualise a bad situation and hence do not concentrate on that situation.

Conclusion

In life we don’t appreciate things like Health, small moments of happiness, nature, time spend with our loved ones which are most wonderful and real things in life. Term Insurance is one of the similar things in personal finance domain. You just need to shift your focus of view from “what you are losing” to “what you are getting”, once you do this with Term Insurance and your Life, Both with become wonderful.

Best Term Insurance Plans in India

Introduction

LIC Term Insurance or Pvt Life Insurance Term Plan? Which is the best term insurance in India? Which Insurance company has the best claim settlement Ratio? Online term Insurance or Offline Term Insurance? These are some of the questions which comes in the mind of every Term Insurance buyer! . So are you looking for Term Insurance comparison at one place? Do you have all the sufficient information to decide which is the Best Term Plan you can buy?

Today I will show you all the data like riders, maximum/minimum tenure, max age till when term plan covers a person and data on the premium, Claim settlement Ratio at one place! . There are many term insurance plans in India, but all of them have different premiums and features which confuses a prospective customer to choose the best term plan for him. If you any question about Term plan you can look at these 9 most asked questions about Term Insurance.

Looking at above comparison chart you would have got a fair idea about the online term plans also, which have recently made its entry in India.

Note: The premiums displayed are indicative and should not be considered as final premiums as they are taken from online insurance comparision sites. Its only for illustration purpose and very much correct as on Dec 2010. They might change in future, please check the premiums on the respective websites.

Brief overview of Riders

AD (Accidental Death): The policy pays you additional sum assured in case the death happens due to an accident . Note that even if you don’t take this rider, the sum assured is always paid on death, whether accidental or not!

CI (Critical Illness): This rider gives you a lump sum amount if you are diagnosed with an illness which is mentioned in the policy . Generally all the major illnesses are covered in Critical Illness cover.

DR (Accidental Disability Rider): This rider covers you for disability and pays you Sum assured in 10 installments per year  incase you becomes temporary or permanent disabled person.

WP (Waiver of Premium): This rider makes sure that incase you are not able to pay future premium due to disability or income loss, the future premiums are waived off , but your policy is still in force like always !

Claim settlement Ratio of Insurance Companies

While deciding on a term plan, the biggest point which a person concentrates is the Claim settlement ratio (read this comment). So here is the list of all the Insurance companies in India with the claim settlement ratio . The data are from the recent IRDA report for 2009-2010. One important detail you should note down is that 8 out of 23 life Insurance companies have reported profits, which are LIC, ICICI Prudential, Kotak Mahindra, SBI, MetLife, Bajaj Allianz, Sahara India and Aegon Religare.

Online Term Insurance vs Offline Term Insurance

With online term plans coming in market, two things has happened. First, Customers have really got excited seeing very low premiums which insure them at throw away prices, however low premiums does not appear on the top wish list of customers and what everyone needs is very high claim settlement ratio and excellent customer service. This is where online term plans have disappointed customers, there has been huge disappointment from ICICI iProtect and Aegon Religare  iTerm Plan in terms of customer service. There have been cases where customers bought the online term plan and after that, they had horrifying experiences starting from increase of premium once they bought it, No-response from the company for long duration and Long & frustrating delays in medical tests. This is what pisses off customers most and they get a feel that If situation is bad at the time of buying the policy, then what will be the response when their families for claim settlement.

Another important point which comes to a persons mind is Are private Insurance companies safe? and what is the claim settlement ratio of the company. From last year IRDA report, we came to know that Aegon Religare did not settle even a single claim out of total 7-8 claims they got . However, this years IRDA report (2009-2010) shows that its better at 48% settlement ratio for Aegon Religare, but Life Insurance is not a maths exam where 90-91% marks will make people happy. We all need 100% or 99% at least !. Because most of the companies are very new, the trust factor is missing from public. Note that not everyone who bought online term plans had bad experience, there are many buyers who got very good response and good customer service, but it was a smaller section.

So if you a kind of buyer who understand Insurance very well and how things work in this area and you also have trust in online term plans then you can go for online plans. But if you are not comfortable with it, then you should try the old way of buying insurance through an agent. However it would cost more than online term insurance, which many are comfortable with!

If you concentrate on the claim settlement and trust factor then the only option is LIC Term Insurance (Jeevan Amulya). However if you are fine with the pvt Insurance, but still want the best features, I personally see Kotak-preffered Plan as a good option. The premium for Kotak-Preffered is the lowest in the offline term plans and this plan has good riders along with other good options. Term Plan from LIC is obviously the best option if you do not believe in the pvt companies and insist on high claim ratio, but premium for LIC term plan is too high . So I think you can consider a mix of the LIC term insurance and any one from Pvt insurer.

Special Features in Some Term Insurance Policies

There are some term plans with very different set of features. Lets have a look at some of the those. These features can help you further in your decision.

How to choose the right insurance policy

Introduction

Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in your financial plan. There are many benefits of an insurance cover; however, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider. As getting the insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.

With the increasingly uncertain times, what with terrorist attacks and tumultuous financial markets, getting an insurance cover for you and your family has become imperative. However, many of us do not take decisions because of it being such a big ball of wax.

Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in your financial plan. There are many benefits of an insurance cover; however, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider. As getting the insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.

First and foremost, choosing an insurance policy must be based on your current and projected income or simply put your current and projected ability to pay the insurance premiums, your medical state, your age, future financial plans etc.

Secondly, you also need to look at:

Cost-Benefit Ratio

The cost of the insurance cover depends upon many reasons, some mentioned above and other factors depending on what is covered in the cover or its riders. Thus, you have to keep a close eye on the cost of buying insurance and ensure that it justifies the benefits covered under the policy. Simply put, a right balance must be struck between the cost and benefits available.

Cover

You need to ensure that the insurance covers all your dependants and that it also covers the majority of health problems.

Thirdly, the promises made by different insurance companies are all fine; however, it depends on you whether you need a pure insurance cover or you need an insurance cover coupled with an investment opportunity. The four major kinds of insurances that most people opt from are:

• Term Insurance – Term life insurance or term assurance is life insurance which provides coverage for a limited period of time
• Endowment Policy- An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on earlier death.
• ULIPs – Unit Linked Insurance Plan (ULIP) provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time.
• Money-back Policy – Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money back policies provide for periodic payments of partial survival benefits during the term of the policy

When comparing between these plans it is important that you keep in mind the factors that were talked about in the first point. Let’s take a look at an example:

Arun is a 25 year old businessman who wishes to take an insurance cover for Rs. 20 lakh for a period of 20 years. There are two options he can choose from.

• Option 1 – He can opt for an endowment/money-back policy and pay a premium of Rs 90,000 annually. If he survives through the policy term, he shall be eligible to receive the entire sum assured and vested bonuses, if the same are declared by the insurance company.
• Option 2 – He pays Rs 4,000 annually and enjoys the risk cover of Rs 20 lakh. Being a term insurance cover, he is not eligible to gain any survival benefit from the insurance company and the insurance premium paid can thus be treated as the cost of covering his life for 20 years.

Whereas under Option 1, he has earned an annualized return of about 6%; Option 2 gives him about 9% returns during the period. Therefore, it is important for Arun to decide what he wants and opt for a plan accordingly.

It’s important to correctly identify your dependants’ financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used. Basically you decide how much you want your dependants to receive in the event of your death, and your premiums will be determined accordingly. Hence, make sure you keep all these factors in mind, compare different plans and choose your cover accordingly.