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In the first part of our exploration into Monika Halan’s insightful book, “Let’s Talk Money,” we delved into the fundamental concepts of personal finance, compartmentalizing money, building an emergency fund and covering the basics of health insurance. Now, let’s continue our journey by diving into the second part of the key takeaways from the book, where we explore the value of life cover, the significance of separating investment and insurance products, and how to embark on your investment planning journey.
The Value of a Life Cover
Purpose of a Life Cover:
Monika Halan emphasizes that a life cover should primarily serve the purpose of financial protection in the event of an untimely death. It is not a tool for tax saving, generating returns, or similar objectives. Instead, it serves as a safety net to ensure that your loved ones can maintain their financial stability in your absence.
Meeting Obligations:
Life insurance can be instrumental in meeting various financial obligations such as EMIs, children’s future plans, bills, and fees. By having an adequate life cover, you provide your dependents with the means to continue their lives without facing undue financial hardship.
Calculating Dependency:
Understanding and calculating the level of financial dependency your family has on you is crucial. This assessment helps determine the appropriate coverage amount needed to secure their financial well-being.
Opting for a Term Plan:
Halan recommends term insurance as the preferred option. A term plan provides coverage for a specific period (term) and pays out the sum assured in case of the policyholder’s demise during the term. It offers high coverage at relatively low premiums. For instance, a 35-year-old can secure a term plan with a coverage of up to 25 years and a sum assured of 1 crore or more by paying just 8,000 to 10,000 rupees per year.
Contingency Plan vs. Investment:
Term insurance is not an investment tool but a contingency plan. It’s essential not to confuse it with endowment plans or unit-linked plans that promise returns. The purpose of term insurance is to provide financial security to your family, making it vital to keep this distinction clear.
Rule of 72:
The “Rule of 72” is a quick formula to estimate how long it takes for an investment to double in value based on a fixed annual rate of return. Dividing 72 by the annual rate of return gives you an approximation of the number of years required for your investment to double.
The Average Guaranteed Return:
Many insurance policies that promise returns offer an average guaranteed return of about 3-4%. However, it’s important to note that the primary focus of life insurance should be protection, not high returns.
Separating Investment and Insurance:
Halan strongly advocates for keeping investment and insurance products separate. Bundled products often fail to serve either purpose adequately. It’s more effective to identify the best-suited products for each of these financial needs and address them individually.
Estimation of Required Cover:
Determining the appropriate coverage amount for your life insurance involves considering your annual take-home income or your annualized monthly expenditure. Halan suggests that a cover of 8-10 times your annual take-home income or 15-20 times your annualized monthly expenses is a prudent guideline. This coverage should ideally allow your dependents to earn a comparable income through safe investments like fixed deposits.
When to Buy Life Insurance:
Halan advises purchasing life insurance as soon as you have dependents or the possibility of having dependents arises. This typically occurs around the age of 30. Ensuring that you have adequate coverage early on safeguards your family’s financial future.
Starting Your Investment Journey
Why do we defer getting started?
Accumulation Fallacy: One common misconception is the need to accumulate a large sum before starting to invest. Halan dispels this myth, emphasizing the importance of consistently setting aside small amounts for investing.
Fear of Mistakes: The fear of not knowing enough about investing and making mistakes can hinder people from starting their investment journey. Halan encourages individuals to invest the necessary time to learn about investing and tailor financial products to their specific needs.
How Do You Start Investment Planning
Halan divides investment goals into three categories:
Almost There: Short-term or “almost there” expenses are those that you anticipate within the next 2-3 years. Examples include getting married or sending your kids to school. Which expenses these would be depends completely on your life stage.
In Some Time: Expenses expected to occur within 3-7 years fall under this category. These might include funding your children’s education or making a down payment on a house.
Far Away: Goals beyond the 7-year mark, such as retirement planning, fall into this category. Halan recommends creating a list of current essential expenses and estimating how these might increase over the next decade due to inflation. Online calculators can assist in this estimation.
Now that we’ve covered the basics of how to get started on your investment planning journey, In our final segment of this series, we’ll be going over the plethora of financial instruments available in the market and how to pick the ones that suit your needs the best so stay tuned!
