Month: October 2019

Nawanidhi Financial Services > Blogs > 2019 > October

Term Insurance v/s Endowment Plan

Posted on by Ram Hegde

Majority of the people in India take Endowment plans mainly due to the lack of their knowledge or they are trapped by the agents with promise of “guaranteed return”.

Endowment plan is one of the most mis sold product. It is generally sold in multiple “emotional” forms such as children education, retirement, tax saving investment, money back plan, dual benefit plan etc. You will seldom come across an agent selling you a term plan.

  Term Insurance

Endowment


1.Protection offered till
what period?

Limited period as per your policy term
Limited period as per your policy

2.Do you receive money after
maturity?
 No
Yes


3.Is it an investment ?


No, Only life cover
Yes


4.Premium Amount


Less expensive
More Expensive


5.Premium paid for an Insurance cover of Rs.1 Crore by a 30 Year
old for 30 years period


Insurance is cheap. A non-smoker man needs to pay about Rs.9500 annually


Insurance component is very
expensive. He needs to invest of around Rs.1 lakh annually



6.Insurance for about Rs.20,000
premium paid annually by a 30 Year old, 30 years period




You can get sum assured of about Rs 2 crore+




You can ONLY get a sum assured of around Rs.16 lakh





7.Is it linked to market returns?


No

Yes, ULIP’s


8.Any bonus offered?


No

Yes. Varies across companies


9.Surrender Value



No



Yes. Depends after how many years after the policy is surrendered.


10.Section 80C tax benefit on the premium paid


Yes


Yes


11.Is the return taxable?


Not applicable


Yes, 1/3 of lumpsum received is not taxable

12.Are the returns good?



NA, no returns are offered




Effective returns are low, typically 5% to 6.5%


Both term plans and endowment plans offer multiple rider options. Though you will have to pay extra premiums to buy these extras, the benefits offered by them are good.  There are some riders that are available only with term plans, while some are available only with endowment plans. Some of the extras include critical illness rider, accidental death benefit rider, hospital cash rider, premium waiver rider etc. Life insurance plans are good tax-saving instruments. All the premiums you pay under a term plan are exempt from income tax deductions as per section 80C. The sum assured you receive are non-taxable under section 10(10D) of the income tax Act, 1961. Therefore, income tax exemptions are higher in endowment plans as compared to term plans.

Recommendation:

If your family is financially dependent on you, it becomes mandatory for you to have a term insurance plan. This is because in an event of death of the breadwinner of the family, the nominee will receive large sum assured depending on the chosen plan. Whereas in case of endowment/money back plan your dependents will receive only about 10 times the annual premium paid by you.

If your aim is wealth creation, then avoid endowment plans at all costs and stick to investments in Mutual Funds & Equity with option to enter & exit at your will. If you are a conservative investor you can explore options such as PPF, VPF & Sukanya Samriddhi Yojana (if you have girl child) etc in addition to a term insurance.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency. Consult your trusted financial adviser for further details.

Time Value of Money

Posted on by Ram Hegde

A common question that many of us have is “How much money I need to accumulate for a future goal?”

For the sake of understanding, lets plan for your child’s graduation. Let us assume that it costs Rs 30 lakh as of today. Next, let us assume 15 years are left for your child to join the graduation course.

Now, we need to find out how much will the course cost (which costs Rs 30 lakh today) after 15 years. That means we will have to find out how inflation will impact the course fee in 15 years. In this case you would need to accumulate ~Rs.72 lakh assuming 6% inflation.

The money that is available NOW is worth more than the same amount in the future, due to its potential earning capacity. This is called Time value of money.

When committing for a long-term investment it is very important to remember this aspect.

Do not make the mistake of thinking “Anyway, I am investing only Rs.20,000 per year, but I will get Rs.75 Lakh by the end of 30 years “. Get down to the basics & decide the future value first and then check the net returns a product would offer, else you may always take services of a trusted financial adviser.

Do you want to retire in your 40s?

Posted on by Ram Hegde

Early retirement is a dream for many, especially those who are in their mid 30s.

I have heard people repeatedly talking about quitting their current job & starting farming, poultry, dairy business, taking up some dealership business, setting up a food van etc; primarily to pursue their passion.

Almost all of them seem to be fed up with Corporate BS & 996 culture. Some genuinely forgot how to code, after being in Management for very long. Yet many of them are hanging on dearly to their job, that they don’t like anymore.

Very few could muster up enough courage, to really jump out of their jobs that they did not enjoy;

But why so many people are unable to retire early?

Here are possible reasons

1. Majority do not have enough. They did not spend enough time, in investing prudently. Almost all of their earning is taking rest in bank FD’s, while inflation is eroding their wealth.

2.Few of them have health scare.Its quite normal to find a diabetic in their 30s these days.

3.Many of them are worried about raising education expenses & some believe in accumulating for the marriage of their children.

4.Few of them going through adverse family situations such as divorce or large family to take care of or dependent parents.

5.Few of them are stuck with EMI’s /Loans; especially with real estate investments. Some of them are stuck with bad debt.

6.Many of them have invested in stocks / mutual funds /ULIPS/Endowment Plans based on star rating on popular finance portals & by “agents”

7.Few of them tried riding on their colleague’s investment strategy, without understanding their financial situation, goals & risk appetite.

8.Many of them don’t know how much saving is enough; Primarily scared of the unknown.

9.Of course, there are a few smart ones, who have invested prudently and accumulated enough wealth, but can’t stomach the idea of their new retirement status in society. Some of them can’t live without being in power and others do not know what to do next, as they don’t have any alternate plans.

From my personal experience, you don’t need to win a lottery or have a big inheritance or get a fat VRS cheque. You just have to be smart and disciplined with your money. You should be willing to put your journey to financial independence on fast track. If you have means of secondary income it will be a lot easier.

As long as you are not of Type 9 (as above) we can always assist you towards early financial independence.

Do get in touch with us.