Dare to talk about Life Insurance?

Life Insurance is one of those topics which many of us do not want to discuss. We simply do not want to face the darkest side of life. Some people buy insurance as an investment option or just for saving tax without actually understanding the primary purpose of it. Let’s try to answer some of the most common questions about a Life Insurance.

Why do I need a Life Insurance?

In an unfortunate event if you are no more in this world, imagine the life of your near and dear ones without you or your support. So if you are the only earning member and your family completely depends on you, insurance is a must. However, there are a few scenarios when one may not need an insurance like for e.g.

1. If you are single and don’t have any dependants
2. If both husband and wife are earning enough and are financially independent of each other
3. If you and your family is super rich and accumulated enough wealth for maintaining a steady lifestyle, then you may consider not buying a life insurance. If you’re reading this article, most likely you don’t fall under this category 🙂

Do I have enough insurance?

Insurance amount varies for different individuals. It depends on the standard of living, financial liabilities etc. Experts say that on a broader basis person should have at least 10 years in hand salary or cover all the liabilities including home loan, personal loan, car loan, child education etc. for calculating the insurance amount. You may work out the exact amount with your financial planner.

Which type of insurance do I need?

For buying the life insurance, one can choose Unit Linked Insurance Plan (ULIP), Endowment Plan or Term Plan.

Unit Linked Insurance Plan (ULIP):

Unit Linked Insurance Plan is a combination of insurance and investment. Depending on the plan, payment made is invested towards equity or debt products or a combination of both. One is entitled to receive some maturity amount plus bonus when the policy matures, however it is not guaranteed. On the down side, charges associated with ULIP are generally very high. If you are planning to buy any ULIP, please pay attention to various charges like allocation charges, fund management charges, administration charges, fund switching charges, surrender charges, mortality charges etc.

Endowment Plan:

Similar to ULIP, saving component is associated with this type of insurance too but charges are not disclosed in these products. All these policies have surrender value or individual will get the maturity amount when the policy ends. The investment return on these policies are low as most of the funds are allocated to debt products. As an investment option, endowment plan returns may not even beat the inflation.

Term Plan:

These plans are the pure life insurance product. The premium you pay for a term plan goes towards mortality charges. This is cheapest of all but least marketed or advertised product compared to ULIP or endowment plans for a simple reason – agents do not earn fancy commission by selling term insurance. You may earn some handsome discount if you buy term insurance online. Term insurance does not have any surrender value, these are useful to your family only in case of an unfortunate event.

Is your debt good or bad?

Is taking loan is really a bad thing? Are all loans bad? The answer to these questions depends on the type of loan you are taking. First let us understand what the difference between good debt and bad debt is.

When you are borrowing money for buying something which will appreciate over the period or act as catalyst to generate extra income then that may be called as good debt. The most common example of good debt is home loan. You borrow the money for building home that will appreciate over the period. It will save you rental income, it will give you tax benefits. In short you are using loan money for building the asset at present cost which will appreciate in the future. Gone are the days when people use to save money and purchase / build houses without taking any loan. For that also, there were varied reasons.

1. Home loans were not easily available,

2. Interest rates on home loans were too high.

Now a day’s easy access to home loans, better income tax benefits makes home loan better instruments for wealth generation

Another example of good debt is education loan. You are investing money to complete your education which in turn will create better job/ business prospect for you. It will fetch better income for your family.

Someone can take a loan to start his own enterprise / business also categorized it into good debt. However one should be cautious to check your risk appetite before applying for a loan.

Before taking a personal loan, ask yourself whether loan money will be used for fulfilling the need or attaining desire goals. E.g. you might take personal loan for medical emergency. This is your need. You cannot compromise on your health. You have to raise money for it. But if you are taking a personal loan for buying costly mobile, imported gadget this is your desire. You should stay away from buying such things on loan.

If you are using debt money for buying depreciating assets, it can be treated as bad debt. Car loan, personal loan for buying consumer durables, going on vacation and then paying the money by choosing an EMI option etc. can be considered as bad debt. In the medical profession, doctors always say prevention is better than cure. Same thing applies for bad debt also. As far as possible try to avoid taking these type of loan. Even if you have taken it, give preference to closing these loans at earliest. These loans are one of the biggest hurdles in wealth creation. Not taking a loan for a vacation doesn’t mean cancel your dream vacation. The only thing one has to do to plan the vacation well in advance. Set goals for vacation, calculate approximate expenses, start saving towards this goal. Once you have accumulated the money, enjoy debt free vacation. It will be more enjoyable and relaxing. Remember the golden rule: Invest today and spend tomorrow, don’t spend today and (over) pay tomorrow.

What is I and Finance?

I and Finance is an endeavour to simplify finance for everyone.

Money should not be your primary or most important goal. Money cannot buy you all the happiness, but if used wisely it will surely work as a medium for a happy life for you and your dear ones.

Unfortunately the foundation of our education – schools – don’t teach much about personal finance unless of course you opt for a Finance course as a career choice. This blog emphasizes an educational approach to personal financial management in very simple, easy-to-understand way for non-finance people.

Let us start our journey by busting some myths about personal finance.

Personal finance management is required only for the uber-rich

It is required for everyone irrespective of monthly income. In fact it is more important if one’s income is less. Such people need to manage their funds more smartly as their risk-taking capacity is comparatively lower than that of higher-net-income people.

You need a certified financial planner for financial planning

You really do not want to let someone else manage and in a way control all your hard-earned wealth, do you? Personal financial planning is not rocket-science. It is just like driving a bike or car; you do not really require to know everything about the its internals, but all you need to know is how to drive it and have good knowledge of traffic rules. For financial planning too, you are not required to understand all the fancy jargon of finance world but you should know how to build a good portfolio and what are the best practices that need to be followed. A paid financial adviser will help you with servicing of your financial engine, but how to build your finance prowess ultimately lies in your hands.

An increase in salary will make a person financially stable

Wealth generation in not only depends on your salary but it also depends on your financial habits, that is, how you manage your wealth, what are your liabilities, your lifestyle, spending habits etc.

Personal finance management is a time-consuming process

No, it does not take too much time. The only requirement for good personal finance management is a systematic approach, a periodic review of your financial goals and taking corrective action, whenever required. Do not become too greedy about your finance. Do not try to remember every penny you are spending, but keep track of significant spending details. Also, simply watching your financial details everyday does not take you anywhere.

On a home loan front, the bank only deducts interest component in the initial period

When someone is paying an EMI (Equated Monthly Installment) on a home loan, he is paying both, the principal as well as the interest component. In the initial period, the outstanding loan amount is high, so the interest proportion is higher based on the outstanding loan amount. We developed some easy to use and visually rich personal finance calculators to help you quickly calculate interest and principle components for your EMI.

Taking an insurance for saving income tax

Insurance is mainly bought for securing you and your family’s future against some unexpected event. Generally life insurance and medical insurance products offer tax saving. Remember tax saving is a secondary benefit of these insurance products. Do not take any insurance product just because it will save you some tax. Ask yourself – why you need to buy a particular insurance product?

Throughout its journey, I & Finance aims to give you detailed insight into various aspects of personal finance and help you take better and calculated financial decisions.