Planning for a family? Plan your finances first!

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Birth of a child is one of the most important life changing events for a couple. Having a healthy child, doing up the baby room and buying all the kiddy stuff are topmost on the minds of wannabe parents. But amidst this excitement, they forget about future finances. It costs a bomb to raise a baby in present times. It is not just the maternity costs, doctor visits and regular baby expenses like clothes, toys, baby foods, stroller, cradle, pram, medicines, etc. Check out this list of additional expenses:

  • One time cost incurred on social functions in the range of Rs.30,000 – 70,000 like baby shower, naming ceremony of the new born, etc.
  • Vaccination costs at periodic intervals till the child completes 10 years, starting from minimum of Rs.700-Rs.3.500.
  • Massage costs of the baby (usually done for six months at least) about Rs.8,000-10,000 every month.
  • Cord blood banking to secure the health of the baby from future problems, costs around Rs.20,000-70,000. (click on the link to know more about it)
  • In the absence of support system, if a full time maid is required to look after baby, then it costs around Rs.8,000-10,000 per month. Alternately, if parents arrange to put the baby in day care, it costs roughly around Rs.6,000-10,000 per month.

Parenthood thus brings along big financial changes after the birth of a child. Following are the main check points to prepare in advance:

  • Review income changes: Before your bundle of joy arrives, ascertaining income changes would help to stay prepared if you have a working spouse. She would have to check the maternity policy with her company. Also, she needs to find out if she can extend her leave beyond maternity and can afford to take leave without pay for few months. In the absence of a strong support system, your spouse may also decide to take a break from work and become a stay-home mom for a while. These factors are likely to impact the total family income, especially if your spouse is a significant contributor to it. Doing the math in advance will help you & your partner anticipate the likely monetary situation and will enable to rework on your budget, if required.
  • Review your expenses: With expenses bound to rise in the post natal phase, it is important to manage cash flows diligently. Usually, new parents go overboard in shopping rather than spending on only the essential items for the child. Once you have reviewed your income changes, prepare a list of all your living expenses including potential baby costs and then adjust your budget accordingly. Cutting down on spending and getting into the savings mode will help to tide over additional expenses before the newborn arrives.
  • Review your insurance requirement: With the addition of a new member in the family, your financial responsibility as the bread earner increases. It is thus important to enhance your life insurance cover as your child will be financially dependant on you at least till the time he/she finishes college. Avoid child plans as they do not serve any purpose. Also, add your child’s name in your health insurance policy.
  • Create a contingency fund: Kids have a greater risk of hurting themselves and the probability of an emergency is thus more. Unexpected medical expenses related to child may crop up anytime. It is thus prudent to have a contingency fund which would help you financially during a medical emergency.
  • Review goals: As expenses shoot up after the baby is born, the propensity to save reduces. Channelising the limited savings towards various goals appears difficult. And with the new financial responsibility of raising a child, it is easy to forget about personal goals. Creating a corpus for the baby becomes a priority as not just higher education but schooling has become very expensive. However, this does not mean you compromise on your essential goals like retirement. Continue your investments in the retirement kitty. If need be, postpone some of your aspirational goals for a while like buying a bigger car, house renovation, etc. As for education fund of the child, start investing small sums and you can bridge the gap later gradually over the years with an increase in income & savings.

Preparing for parenthood isn’t just about buying tiny clothes and other baby items. A lot of financial preparation is required too. Laying a strong financial foundation early on will help to make your parental journey smoother in the future.

The perils of last minute tax saving exercise

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Around this time every year, you will see frequent advertisements of tax saving financial products in the print and electronic media. There would be countless posts on financial blogs about how to save tax under S/80C and innovative ways to save tax beyond this section. It becomes a priority as the year draws to a close and investments are then done in a haphazard manner with the sole objective of saving tax.

This is the typical tendency of majority of investors as they do tax planning at the near end of a financial year. Tax saving takes precedence over investment planning. Let us examine the problems associated with such hurried approach of tax planning.

  • Tax saving decisions not aligned with financial goals : 

    Usually during the March quarter of a year, investors get obsessed with the word 80C. With limited time on hand to submit tax proofs to the HR department in their organisation, investors become vulnerable and usually fall prey to crooked agents.

    Endowment policies and unit linked insurance plans (ULIPs) are the typical products pitched to investors to take benefit of section 80C. Just to save tax in a particular year, investors buy life insurance policies committing to pay premiums for 20-25 years. These policies are very expensive as they yield abysmal returns in the long run with high premiums and a small cover. Worse still, majority investors discontinue the policies once they realize they cannot afford the premiums and suffer losses. Not only do they stay grossly underinsured but also miss out on better investment opportunities which could have yielded higher returns than the traditional policies. Such haphazard tax planning affects both their insurance and investment goals.

  • Investing huge funds in one shot to save paltry tax amounts : 

    Many a times, people do not understand the basic calculation of arriving at taxable income after taking into account all exemptions and deductions of the Income Tax Act. As a result, they invest a huge sum just to save tax in products that do not suit their requirement & risk appetite.

    The Rajiv Gandhi Equity Savings Scheme launched in 2012 is a real case to cite. The scheme solicits funds into direct equity, mainly for first time investors. Only investors having a gross annual income of less than Rs.10 lakh (in the 10-20 per cent tax bracket) are eligible to invest in the scheme. It has a lock-in period of 3 years with redemption rules (cannot sell in the first year at all!) too complicated for a beginner to understand. The maximum investment limit is Rs.50,000 and the tax benefit available is 50 per cent of this limit, i.e., only Rs.25,000 is eligible for deduction. This means if you fall under the 10-20 per cent tax bracket, you would be able to save a measly Rs.2,500-5,000 on a huge investment of Rs.50,000.

    The RGESS is thus not a good deal for investors looking to save paltry tax amounts given the associated volatility and complex redemption rules of the scheme.

The Right Approach

Rather than making new investments with the objective of saving tax, you should chart out your financial plan first. Once your current situation and financial goals, both short term and long term are articulated, an investment planning exercise can be done. Suiting your requirement and risk profile, an asset allocation can be decided which would give you the choice of multiple investment products. Depending upon your goal horizon, you can invest in them and in due process also save tax to the maximum limit. For instance, you have chosen PPF to invest for retirement. You know a fixed amount needs to be saved and invested every year, and importantly, at the beginning of the financial year as you would not lose out on the entire year’s interest. In this manner, your investments stay aligned with you financial goal of retirement and you also avail tax benefit.

Remember, tax planning is secondary to investment planning and not the other way round.

How to be financially prepared before starting your own business?

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Thinking of quitting your 9 to 5 job? Want to be your own boss? Starting a business is not easy. It is like your baby which needs care, nurturing and 100 per cent full time dedication and commitment. You need to think through a host of issues before starting your venture such as upfront investment, product/service offering, business model, distributor tie-ups, warehousing, merchandising, marketing, break-even, margins, etc. But before you start brainstorming on your business plan, you need to review your personal financial plan. You need to put your house in order first before you tread the rocky path of starting your business. The transition period requires owning up huge financial responsibility. You need to be prepared for facing the monetary challenges that lie ahead.

Here is a checklist on how to get your personal finances in shape before you take the plunge:

  • Create a 3 year sustenance kitty: It could be a while before you start enjoying the fruits of your labor. Your business will take time to break-even and then start earning profit for you. This would imply no regular income, no salary to sustain for that period. Hence, create a 3 year survival fund for living expenses in advance before you quit job. You can work on your business plan by the side and also do you full time job for a while to save.
  • Review your personal budget: Since your cash flows would be tight in the initial years of business, you would have to spend less as well. Determine your living expenses and prepare a budget. You may have to compromise on your lifestyle for a while and cut down on frivolous spending in the absence of a regular income stream. Assess your fixed and variable expenses. While your utility bills, insurance premiums, etc., would be constant, you can closely introspect your variable expenses and keep a tight leash on it. You may have to miss frequent eating out, short vacations, movies, etc. Getting into the savings mode before you start your business would create a reliable nest egg which would help later in the transition period.
  • Create an alternate income stream: While you may have planned a sustenance kitty, a passive income stream would also be useful. It is possible your expenses may surpass your fund kitty over a period but your business would still be in the red. As a last resort, you would be compelled to dip into your savings which you may not want to touch. In such a scenario, an alternate income stream would be act as a safety net. It could be rental income or any other investment income. Your spouse’s earnings would also be helpful for a temporary period.
  • Ensure to have adequate life and health insurance: At a time when your business would be testing the waters and would demand your 100 per cent focus, it is very crucial that you are prepared for any kind of financial emergencies. Any serious medical emergency in your family could prove to be a big blow to your entire savings. It could throw your finances out of gear and even disrupt your business plans. Hospitalisation costs are rising by the day due to rising healthcare inflation. Also, you would be losing the health insurance cover provided by your employer. It would be your responsibility to pay for any medical emergencies. It is thus prudent to have an independent health insurance cover which would be sufficient to cover you and your entire family. Also, ensure to have adequate life insurance which would cover your family’s living expenses, liabilities and your children’s goals.
  • Prepay your personal loans and become debt-free: In the initial years when cash flows would be negative, you would not prefer any personal debt burden over your head. Hence, prepay your outstanding loans, be it credit card or home loan and become debt free before starting your enterprise. This would free up a lot of your cash flow and boost your savings. You will always feel comfortable with the float around and you can invest that into your business whenever additional capital is required.
  • Do not compromise on essential goals: While your income will take a hit during the start-up period, do not ignore your important goals like children’s education and retirement. Aspirational goals like buying a bigger house, buying a car, foreign trips, etc., can wait. Since you would have quit your job, your investment in provident fund would stop. So it would be your personal responsibility to ensure that investments for your retirement kitty continue. Similarly, do not stop the investment contribution for your children’s education goals. Do not wait for your business to take off and then resume investing for these critical goals.  When you create a sustenance kitty for living expenses for 3 years, take into account the investment contribution for these goals. So in the initial years, even when your business is low, the investments for these goals will continue out of your sustenance fund.

What if your business does not work?

Firstly, do not get into a business because you are bored with your job, do not like your boss or want to get away from the 9-5 routine. Start a business because you have an idea which you are very passionate about and are mentally prepared to go all out and make it a success.

Inspite of this, if your business idea does not work and you find yourself in a situation where you may have to go back to the job market, then you need to think of a Plan B too. Would you be prepared to go back to the job market? Are you willing to compromise on low pay? These are the critical questions you would have to address beforehand.

Starting a business can be a very tough and demanding experience. While the rewards are great if it works out, the initial journey usually is a struggling one. There may come a point where you may even doubt your own decisions. It is thus important to be financially prepared and work out your personal finances before you start your journey. Doing a handful of things right on the personal front will help you to survive the initial period of your start-up. It will enable you to pursue your dream, your passion with confidence and save you a lot of unnecessary stress.

Want to avoid loan rejection shocker? Check your credit score!

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Loan approval from a bank can be a harrowing experience nowadays. Banks follow a strict loan evaluation process. Apart from a whole host of documents being demanded, banks assess your income earning & repayment capacity. Besides these other factors, having a good credit score is critical for deciding your loan eligibility.

The concept of credit score is gradually gaining significance in India. There are many agencies like CIBIL (Credit Information Bureau India Ltd), Equifax Credit Information Services, Experian Credit Information Co of India, etc., who prepare credit reports of borrowers. Every penny borrowed from a bank, loan enquiry made, your loan payment history, everything is being tracked. So for example, if you have defaulted on you loan payment or even casually made a loan enquiry, your bank will inform CIBIL or other accredited agencies.

Such information is collated from various banks and lending institutions across loan types over a period of time. Subsequently, a credit information report (CIR) is prepared and a credit score is generated for every loan or credit card applicant.

All banks use these reports to evaluate your credit worthiness before loan sanction. The higher the credit score better are the chances of loan approval. A score of over 600 is considered decent and greater than 750 is even better.

If your credit score is high, the lender will further look into your application to determine your credit worthiness. If your credit score is low, the lender may not even consider your application and reject it outright. The credit score works as a first and very important impression for the lender.

Let us examine the critical factors which make or mar your credit score:

  • Late payment: If on any occasion you miss the deadline to pay your EMIs and make a late payment, it affects your credit score badly. Also, not paying your credit card dues in full and rolling over the outstanding balance is detrimental for your credit score. It is thus crucial to remain disciplined and pay your dues in time. You can use Google Calendar or mobile apps like Evernote, Colournote, etc., for payment reminders of all loan installments and bills. You can set a recurring reminder daily 4-5 days in advance from the due date for payment. Automate the payments of your loans and bills through ECS facility. Also, it is better to instill a discipline of arranging funds in advance, especially in the case of credit card dues.
  • High proportion of unsecured debt: Having a high proportion of unsecured debt like personal loans is not considered healthy. While getting a personal loan is easy, it may imply that banks are not willing to grant you secured loan because of your inadequate repayment capacity. Personal loans usually are the last resort for any borrower as they charge heavy interest and are the most expensive. Too much dependence on them would thus mean you are a heavy borrower and your credit score will take a hit. It is prudent to strike a balance between the secured (home loan, auto loan, etc) and unsecured debt you take on. This may reflect well in your credit score.
  • High utilization of credit limit: If you are a frequent credit card user and utilizing full limit every time you buy, it may reflect too much dependence on credit in your scorecard. While you may be paying your dues on time, it may imply an increased repayment burden every time you utilize 100 per cent of your credit limit. So it is better to utilize your credit limit judiciously. You can split your purchases between 2 cards and utilise half of the limit of each card.
  • Too many loan inquiries: If you casually enquire about a loan or credit card, even though you may not require it urgently, banks communicate such information to CIBIL. Many a times, people apply at multiple banks simultaneously for home loans. Too many enquiries or multiple loans sanctioned may not reflect well in your credit score. So apply for a new credit card or loan cautiously and enquire only if you genuinely require it.
  • Loan settlement: Many people irresponsibly pile up huge debt beyond their repayment capacity. They fall into a deep debt trap and then loan settlement becomes their last resort. Loan settlement does not mean you can start with a clean slate later in the future. It would negatively impact your credit score and you would be blacklisted by lenders for grant of future loans.
  • Risk in being a Guarantor: Many people for personal reasons or under some obligation become a guarantor for other’s loan. In the event of default by the primary debtor, the bank will hold you equally liable and it can badly affect your credit score. Avoid being a guarantor except for your spouse, sibling and parents.

Note that these are the not the only factors but they are critical reasons which a lender will consider for loan approval. While not all the factors have equal weightage in determining your credit score, ensure you follow the best practices to have a good score.

How does the credit score benefit you as a borrower?

There are instances where people’s loan application have been rejected because of bad credit score and they weren’t even aware of it. It is better to review your credit history once in a while. Just like banks, even loan applicants can subscribe to CIRs. Before starting a loan hunt, it is advisable to first subscribe to your CIR. It would guide you in understanding the factors based on which the lender will evaluate your credit worthiness. You can thus buy time to sort out the discrepancies, if any, found in your CIR and accordingly take actions to rectify them. This would help to avoid last minute unpleasant surprises in the form of rejected loan application.

CIBIL provides reports for a nominal fee of Rs.159. You can also apply for the CIBIL Transunion score which ranges between 300-900. Subscribing to the CIR and credit score together would cost Rs.500. It is not expensive at all given the fact that such vital information would help you in the loan process. A good credit history and a good score would help to negotiate a better deal with the lender.

Should you invest in Sovereign Gold Bond Scheme this Diwali?

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The Government has come out with the issuance of the first tranche of sovereign gold bond (SGB) scheme announced in the Union Budget earlier this year. Application for the bonds would be accepted from 5 November to 20 November 2015. The bonds would be issued on 26th November. SGBs would be available only for Resident Indians.

Key highlights of the scheme:

  • The gold bonds can be held either in paper form or demat form. Each bond unit is equivalent to 1 gram of gold.
  • The Government has fixed the minimum investment in bonds at 2 grams and the maximum investment is capped at 500 grams per investor per fiscal year. Presently, the issue price for the first tranche of bonds is been fixed at Rs.2,684 per gram of gold. This translates into a minimum investment of Rs.5,368 and a maximum investment of Rs.13.4 lakhs.
  • The tenure of the gold bond is 8 years. There is a lock-in period of 5 years and one can exit/surrender after that. The gold bonds would be listed and tradable on the stock exchanges. So anyone who wishes to exit before 5 years can redeem on the stock exchange in the secondary bond market. Anyone who wishes to stay invested can further extend for a period of 3 years after maturity.
  • Income from investment in SGBs will be in the form of fixed interest and capital gains. SGBs will earn a fixed interest of 2.75 per cent per annum. It will be simple interest and will be paid half yearly on the initial investment. Capital gains will accrue if there is a positive difference between the issue price and the redemption price.
  • SGBs carry sovereign guarantee. So there is no risk of default. But they carry price risk. The value of your investment would increase with the rise in gold prices and vice versa. Bonds have to be redeemed in cash on date of maturity at the then prevailing price of gold.
  • The interest income on SGBs will be taxable. Further, the capital gains would also be subject to taxation as per the holding period. If bonds are sold before 3 years, short term gains would accrue and taxed as per slab rate. If bonds are sold after 3 years or more, capital gains would be considered long term and taxed at 20 per cent with indexation benefit.

Good and bad points of SGB:

SGBs like gold ETFs are available in demat and paper form, so no need to bother about storing in a locker. You also need not worry about cheating or impurities in gold bond. You will always get 100 per cent of the value on redemption. The main point where SGBs score over gold ETF is the interest income even though it is taxable. An investor does not earn any interest while buying physical gold or gold ETFs. Further, ETFs carry an expense ratio which is not there in SGBs.

Liquidity however is an issue in SGBs with an investment lock-in of 5 years. Even if one wishes to exit before 5 years in the secondary bond market, it would not be easy because practically, there is no big trade market for such bonds. Further, you have to invest a lumpsum amount in SGBs at the stipulated price fixed by the government. So if tomorrow, gold prices fall below the issue price of Rs.2,684, you will not be able to benefit from it unlike in the case of ETFs where you can start an SIP and average out the cost.

Should you go for SGBs?

The objective of any investment has to be very clear and mapped to a goal. If you are planning your child’s marriage few years down the line, you need not invest in gold funds or gold bonds to accumulate gold. There are better options like equity mutual funds which would give you better returns over long term which you can utilise later to buy gold. You can also buy physical gold at periodic dips.

You can invest in SGBs if you want to diversify your portfolio. We at VSK have always advocated the importance of asset allocation & portfolio diversification considering that different asset classes behave in a different manner in economic situations. Gold should have a maximum 10 per cent exposure in your portfolio to provide hedge against any economic turmoil. However, if gold is already exceeding 10 per cent of your portfolio, then you can avoid SGBs.

How to make smart use of your credit card?

Credit Cards  Smart Use

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Credit cards have become an essential part of our daily lives. From eating at restaurants to shopping at malls or paying utility bills, it is used extensively. They are a convenient mode of payment and provide access to funds for an interest free period. The benefits of credit cards go beyond offering interest free float. Most people are not aware of these benefits and fail to utilize their credit cards to the fullest advantage. Here are a few tips on how to use credit card smartly to reap multiple benefits:

(1) Smart use of float: You can take maximum advantage of interest free period by planning your credit card purchases at the start of the billing cycle. So you get a maximum of 30 days float and a grace period which can go up to a maximum of 25 days. This means 55 days of interest free credit! If you are planning some big ticket purchase of over Rs.1 lakh, use your credit card to pay the bill. Then create an equivalent amount of fixed deposit for a 30 day period. If you have planned your purchase in advance, you can even create a fixed deposit for a 60 day or 90 day period to pay off the dues. This would earn better returns than the annual 4 per cent in a savings bank account. In this way, you not only fund your purchases for a certain interest free period, you also earn money on fixed deposit. Another advantage of this method is that it would instill discipline to keep funds ready in advance to pay credit card bills.

(2) Funding Financial Emergencies: Have you ever heard anyone paying hospital bills without spending a single penny out of own pocket? Yes, it is very much possible. To illustrate, a client underwent a hernia operation and his total bill came to Rs.40,000. He paid this bill via credit card and filed his mediclaim with the insurance company. By the time his credit card bill was due, he already received the mediclaim amount from insurance company! This was a smart way to fund hospital bills by using credit card.

(3) Reward Points: One of the prominent benefits of credit card companies is that they offer reward programme on purchases. These earnings are through reward points and are decided in proportion to the amount spent on using credit cards. The rewards also vary depending upon the type of credit card held. Today, the customer is flooded with multiple options for redeeming reward points accumulated on purchase through credit cards. Let us examine these benefits in general.

  • You can redeem points for clothes, jewellery, household goods including electronic items, etc. Many cards also offer shopping discounts and vouchers.
  • Many banks have tie-ups with retailers to offer benefits through co-branded cards. For e.g., HSBC has a tie-up with garments retailer Westside to offer benefits on HSBC Westside Credit Card. These include exclusive sale previews at Westside, complimentary gift vouchers on signing up, home delivery of altered garments, exclusive billing counters, more reward points compared to normal card holders, etc. Similarly, ICICI Bank has a tie-up with HPCL to offer fuel cards which provide discounts and cash backs when used at the time of refueling at designated oil filling stations.
  • You can avail discount offers on movies or free tickets when paid through credit cards. For e.g., the SBI signature credit card has a tie-up with the entertainment portal Any customer booking movie tickets through this site and paying through the SBI Signature credit card is entitled to 2 free movie tickets per month or Rs.500, whichever is low.
  • Many banks offer cash back offers on purchases. For instance, e-commerce portal, Flipkart has tie-ups with many banks to provide cash back offers for online shoppers.
  • There are cards which allow you to accumulate travel reward points. These can be redeemed for flight, hotels, holidays, excess baggage allowance and a variety of travel benefits. They also provide access to airport lounges and airfare discounts/vouchers with travel partners and facilities like priority check-ins and air miles.
  • There are lifestyle benefits offered like access to Golf clubs and discounts on dining at select premier restaurants.
  • There are cards which offer benefits to specific categories of individuals. For e.g., HDFC offers customised cards for doctors and teachers. There are also cards designed particularly to cater to women customers.

Conclusion: Avoid impulsive purchases and do not spend mindlessly just to chase rewards. Weigh the benefits first and then spend accordingly. It is important to select the credit card which best suits your requirements. For instance, if your profession requires you to frequently travel by air or if you take short holiday trips very often, then you can use a card which has a tie-up with airlines and offers various travel benefits.

All the goodies offered by credit card come with a caveat – not to buy stuff for which you do not have the money. Do not just pay the minimum balance and roll over the outstanding amount, or else you will be charged hefty interest ranging from 24 to 40 per cent per annum. Further, the additional bills would not enjoy a grace period and will be charged interest from the date of purchase.

Credit card is the most expensive form of debt with interest rate in double digits. If you do not regularly track your billing cycle, there is a good chance you may fall into a debt trap which can take many years to come out of. Your bad credit history will affect your CIBIL score due to which you may not be eligible for any future bank loans when you need one badly. (more on CIBIL score in our next article). Huge credit card debt will reduce your propensity to save and invest and affect your future financial goals. Credit cards can thus devastate your entire financial cart if not used prudently. So do not buy stuff with credit cards which you cannot afford. If you have the discipline to arrange the funds in advance, regularly track your billing cycle and pay in full on time, then credit cards are for you! Otherwise you are better off using a debit card.

Why a personal medical fund is essential in addition to health insurance?

Personal Medical Fund a Necessity final

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In today’s stressful times, cardiovascular diseases and diabetes have become common ailments. Ironically, people are living longer due to advanced medical science, but less healthy. As per a World Health Organisation (WHO) report involving a survey of 162 countries, India figures in the high danger zone of risk of cardiovascular diseases in the world.

It is thus very essential to have health insurance which funds medical costs during tough times. The average health cover usually bought by an individual is about Rs.2-5 lakhs. This is however a paltry sum and needs to be upgraded periodically with the rise in age.

There are health insurance plans available in the market like top-up plans and critical illness policies to enhance coverage. Top-up plans cover hospitalisation costs but only after a regular limit called deductible is crossed. Deductible is the portion of money which the insured has to pay before the policy comes into effect. For e.g., you have a basic health insurance plan of Rs.3 lakh and a top-up insurance of Rs.8 lakh with a deductible of Rs.3 lakh. Suppose you run a hospital bill of Rs.10 lakh, Rs.3 lakh will be covered by your base plan and Rs.7 lakh by your top-up plan. The premium paid on a top-up cover is cheaper as compared to a regular Rs.10 lakh health insurance policy.

Similarly, critical illness covers bought in addition to regular health insurance are useful. Especially, when there is a case of medical history in the family like heart attack, cancer, etc. One can thus maximize health insurance coverage by buying Rs.15 lakh top-up plan and Rs.5 lakh critical illness cover.

But would a health insurance package of even Rs.20 lakhs be adequate enough in the long run? Let us examine the reasons why one cannot rely only on medical insurance to take care of long term healthcare needs.

  • Inflation, the monster – Nowadays a single instance of hospitalization can easily wipe out about Rs. 2-3 lakhs. A by-pass heart surgery in a hospital presently costs in the range of Rs.3 lakh in an average hospital to Rs.7 lakh in a higher end hospital. Health care inflation in general is rising by about 10 per cent per annum. Assuming this inflation rate, the costs of a bypass surgery would cost a maximum of Rs.7.8 lakh after 10 years, Rs.20 lakh after 20 years and Rs.52 lakh after 30 years. The costs of other critical surgeries are likely to rise in a similar fashion. Do you think your current health insurance would be able to cover such huge costs? The answer is an obvious ‘NO’.
  • No options for long term healthcare funding Unlike the developed countries, India does not have adequate social security measures to take care of long term health care needs of its citizens. Unlike a government organization, a private employer cannot be relied upon for health care benefits after retirement. Senior citizens, old parents with no private health insurance have to depend upon children for their medi-care needs.
  • Health insurance not adequate to take care of medical needs during retirement – There are many health insurance products available in the market today which cater to senior citizens. However, while health insurance is a good safety net to prepare for medical emergencies, it has limited benefits during old age. Firstly, health insurance pays only for hospital bills. Even pre and post hospitalization costs are reimbursed up to 60 and 90 days respectively. Health insurance does not take care of medicine costs, preventive health-checkups, which are a routine during old age. Even domiciliary treatment, i.e. medical treatment taken at home is not covered under health insurance.Further, senior citizens have to pay a certain amount out of their own pockets, as usually 100 per cent of the medical bills are not reimbursed. And, premium loading can be high in the event of any hospitalization.

It thus immensely helps to have a personal healthcare fund to take care of medical expenses during retirement. We strongly advocate the creation of a medical fund as one of the essential goals in financial planning.

How much to save?

The target corpus would depend upon an individual’s situation. Someone who is already suffering from serious ailment and has incurred huge medical costs in the past 5 years may want to allocate more for the medical fund. We recommend an average of the hospitalization costs incurred in present times. In a worst case scenario, the average costs of treatment of critical illnesses like diabetes, stroke, cancer, etc can be considered as the base amount which comes to roughly about Rs.7 lakh. Considering healthcare inflation of about 10 per cent per annum, one can target to save approximately Rs.30 lakh for medical costs during retirement.

When to start saving?

Usually, creation of a medical fund would not be a topmost priority for an individual in his 30s who has more important goals to save for. While the medical fund is meant to be utilized during retirement, one can start saving for it after 45 and give it some time to grow. In some exceptional cases, where an individual has a medical history and has frequently spent on medical expenses, he can start a medical fund early on and contribute a minimum sum every year.

Where to invest?

To create a medical fund, you can start a systematic investment plan (SIP) in a debt fund. At the age of 45, you would have another 15 years to accumulate the medical corpus till retirement. Assuming a monthly contribution of Rs.3,000 in a debt fund which would rise by an annual 10 per cent and yielding 7.5 per cent per annum compounded return, you would accumulate roughly about Rs.30 lakh at retirement. This coupled with your health insurance package including critical illness cover and top-up plan would be adequate to fund your future medical costs.

Conclusion: You do not want medical costs to deplete your retirement savings and then worry about outliving your expenses. Remember, the purpose of creating an own personal medical fund is to take care of medical expenses in the twilight years. Consider it as a long term investment for your retirement period. In the event of any hospitalization before 60, you can utilize the health insurance cover first and then dip into the medical fund, if necessary. However, resist the temptation to utilize the funds for some other purpose.


How can you prepare against calamities?


Calamity Strikes

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In our recent article, we talked about ‘How to prepare financially for Emergencies’. In our latest post, we are going to talk about protection from calamities. While people seek protection for their life and health, it usually doesn’t occur to them that their belongings need protection too.

Last month there was a fire in one of the units in our office building. It started off with a spark in the air conditioner but quickly spread and in the process gutted the whole office. This gave rise to a whole host of problems for the owner like:

  • Monetary loss (mitigated if covered by fire insurance)
  • Loss of documents and computer network (again insurable)
  • Loss of data (unless saved and stored in a different location or on the cloud).
  • Additional issues like renting out another office for a short period which hopefully is near to the existing office.

Now imagine, instead of office, this kind of incident occurs in a residential house – your costliest asset. And it is exposed not just to the threat of fire. Your house and its contents face the risk of burglary. It can get destroyed by floods, earthquake, etc. Don’t you think most of the above challenges would remain? So how do you ensure its safety?

There are various types of covers available in the market which protects your house & belongings from unforeseen incidents and calamites. Let us examine these options:

  1. Fire Insurance: A fire insurance policy offers protection against any loss/damage/destruction of property arising out of fire. The different types of property covered under a fire insurance policy are residential house, office, shops, etc. and their contents. The policy also covers fire arising out of any lightning, explosion, riot, strike, storm, cyclone, hurricane, floods, etc. However, it does not cover loss or damage caused by war & warlike operations, nuclear perils, burglary & housebreaking, etc. Certain calamities like earthquake are covered with the payment of additional premium. Consequent losses such as start-up expenses, rent paid for alternate accommodation can also be covered through additional premium. The policy pays for depreciated value or replacement value of the items destroyed depending upon the type of policy and coverage bought.
  2. Burglary Insurance: A burglary insurance cover offers protection against theft in residential house, office, shops, etc. Besides offering cover for the contents in the insured premises, the policy pays loss/damage caused to any property caused during burglary. The policy pays for the actual loss/damage caused to the property due to theft/housebreaking subject to the limit of the sum insured.
  3. Home insurance policy: This is a comprehensive policy which provides security to your house/office and its contents against unforeseen calamities. These not only provide protection from fire, burglary but also from earthquakes, floods, terror strikes, riots, hurricane, cyclone, etc. There are certain policies which provide multiple covers and you have the option to choose from them at an additional premium. These insurance covers come at an unbelievably cheap cost but are largely ignored in India. For e.g. a 1,500 square feet house can be covered against fire and other perils for Rs.50 lakhs at a mere cost of Rs.2,100 per year.

Protecting your important documents from disasters

Proper insurance coverage can compensate you for the financial loss that you suffer during calamities. But it cannot retrieve your important documents which are destroyed forever. So how do you safeguard them?

Firstly, it is important to make a list of all your important documents. These include educational certifications, bank documents including KYC & home loan agreement, house property documents including share certificate, insurance policies including mediclaim card, identity proofs like PAN Card, Aadhar Card, Voting Card, Driver’s License, etc., investment documents like demat statements, mutual fund statements, etc.

Now let us examine the options of storing these documents:

  • Digi-Locker: This is one of the safest options to protect your documents in the event of any calamity. The Government of India recently launched Digital Locker, a facility aimed at eliminating the usage of physical documents and enable sharing of e-documents across government agencies via a mechanism to verify “authenticity” of the documents online. Resident Indians can also upload their own electronic documents and digitally sign them using the e-sign facility. This facility can store documents like Voter Id, Pan Card, BPL Card, Driving License, education certificates, etc. This cloud system ensures digital safety of data & the documents are considered as authorised. So even if your physical documents are lost during any calamity, you will have digital back-up. Even if you have to make physical copies again for any documents in any exceptional case, the digital data will act as a proof and make your job easier. Here is the link for further details –
  • Google Drive: This is one of the most popular systems to store your personal data. It is safe and comes with 5 GB of free storage which is sufficient enough to store your personal documents. The best part is that you can sync it with all your other devices like mobile, tablet, etc., and access your documents from anywhere in the case of emergencies.

Protecting your valuables from burglary & fire:

  •  Bank Lockers: These are a good option for storing your valuables. It comes with a cost ranging from Rs.1,000-Rs.5,000 depending upon the size of the locker. Banks however cannot be held responsible for the contents in the locker in the event of a burglary or fire. They can be held liable though if adequate security has not been provided to the lockers or they are not maintained properly. Nonetheless, this traditional way of storing valuables in bank lockers remains a safe bet. Banks have to follow stringent guidelines of safety as per RBI rules. They have to use the best quality lockers which undergo rigorous safety tests and are fire-resistant. Nowadays, it is not that easy to get a bank locker. We will cover this topic of hassles in renting a bank locker in detail in our next article.
  • Home Safe: While we usually entrust our valuables to bank vaults, what about the precious stuff that we use regularly? The banks have an annual limit on the number of visits for taking out valuables from lockers and it is a hassle to frequent the banks for taking out precious stuff used on a regular basis. To safeguard your treasures of regular usage (like gold chains, earrings, diamond jewellery, etc.) home safe is a good option. These are a better option than your traditional almirahs and cupboards which can easily be burgled or can get destroyed by fire. There are safes available in the markets which are certified to guarantee their strength and endurance. A home safe costs between Rs.3,000-Rs.60,000 depending upon their size and strength. There are various types of safes available in the market such as electronic safes, fire-resistant safes, fire and burglary resistant safes, etc.

To conclude, people realise the importance of insurance until a casualty hits them hard. Buying just life and health insurance is not enough though. Risk management should involve buying comprehensive covers which protect your property and its contents against disasters/calamities at an unbelievably lower cost. Having digital back-ups for documents and lockers for valuables can also help mitigate losses to a great extent. Being prepared does not cost a bomb and help to comfortably tide over tough times.

How prepared are you financially for any Emergency?

Financial Emergency. Are you prepared

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Life sometimes can deal a cruel blow to you and if not prepared, it can hit you hard. While many people buy insurance for protection, it does not go beyond life and health insurance for majority. But there are certain situations which can catch you off guard and later may prove to be a big drain on your financial resources. Let us examine them one by one.

(1) Loss of job: A couple with high paying jobs was working in a prominent healthcare company in the research department. The company one fine day decided to permanently shut the research wing. It was a big blow to the double income earning couple. Luckily, the husband was absorbed in another department by the company. The wife remained jobless for about six months and was at home. Recently in 2015, TCS, one of the largest software companies in India laid off thousands of employees. And not just the juniors, even middle and senior level managers who were working for over 5-7 years and earning fat packages. This can happen to anyone. It could take longer, even over a year, to get a new job, particularly in the recessionary period. Assume you lose your job today, then –

  • How many months living expenses can you afford to bear without a regular salary stream? (Living expenses here include – household expenses, EMIs, insurance premiums, children’s school/college fees, SIPs in mutual funds, etc.)
  • Have you maintained an emergency fund?
  • Can you compromise on your lifestyle and spending habits?
  • Do you have an alternate source of income when your steady job is lost?
  • Can you afford to continue your life insurance and health insurance policies?
  • Are you ready to compromise on low pay in a new job for temporary period?

These are crucial questions you would have to address were you to lose your job. So how prepared are you if such an eventuality strikes you?

(2) Exorbitant Medical Costs: Any medical emergency of a family member/relative can dent a big hole in your pocket, especially if the illness is chronic. One of our clients ran a hospital bill of Rs.17 lakh for his mother who was admitted in a heart institute for 2 months! His mother had a medical cover for Rs.5 lakhs and the balance Rs.12 lakh was paid by my client from his pocket. He was compelled to sell most of his mutual fund and stock investments. Let us examine a few options which can help prepare for sudden  & huge medical expenses:

       (I) Top-up Insurance Cover: With health care costs shooting through the roof, a medical cover of about Rs.2-3 lakhs (usually the average sum assured bought) is not adequate enough for a serious ailment or a chronic illness. To cover any shortfall, top-up insurance covers are a good affordable option. These are regular indemnity plans which cover hospitalisation costs but only after a regular threshold is crossed. This threshold is known as ‘deductible’, the portion of money which the insured has to pay before the policy comes into effect. For e.g., you have a basic health insurance plan of Rs.3 lakh and a top-up insurance of Rs.8 lakh with a deductible of Rs.3 lakh. Suppose you run a hospital bill of Rs.10 lakh, Rs.3 lakh will be covered by your base plan and Rs.7 lakh can be paid from your top-up plan. The premium paid on a top-up cover would be much cheaper as compared to the premium paid on a regular Rs.10 lakh health insurance policy.

       (II) Critical Illness Cover: Critical illness covers bought in addition to the basic health cover are of great help during inflationary times. If there is a case of medical history in the family like heart attack, cancer, etc., it makes sense to buy a critical illness policy. These policies give you a tax-free one time lump sum payment if you or your loved ones are diagnosed with a serious medical condition specified in the policy.

       (III) Emergency Funds: Last but not the least, emergency funds are a big help to tide over sudden medical situations. No matter how adequately insured you are, you would always require hard cash during health emergencies. It could be:

           (A) For uninsurable costs: There are certain expenses which do not come under the ambit of health insurance cover. For e.g., medical costs of certain equipment like ball usage in hip replacement surgery, hearing aids, external prosthetic devices like artificial limbs, 24 hour day care at home, etc. Emergency funds would act as a safety net to prepare for such uninsurable costs.

           (B) For advance payment: At the time of admitting in a hospital, one has to usually deposit large amount of cash even if the person has medical insurance. Emergency funds can be of great help to tide over temporary cash crunch.

           (C) For uninsured dependants:  What if your elder parents do not have any health insurance cover when the require the most in old age? A medical corpus is a must especially if an elder parent has a serious medical history involved. Maintaining an emergency fund of about Rs.5-10 lakhs could thus be of great help during any hospitalisation of the elderly.

(3) Disability: News of accidents are strewed over newspapers daily nowadays. Pick any newspaper and you will inevitably find at least one case of accident reported. Accidents cause not just death, but disability too. Disability could be temporary or permanent. It could physically impede you to earn potential income. Your earnings would not grow further but your household expenses and EMIs would be there to pay. While you may recover from temporary disability or any illness, it is not possible to recover from permanent disability. It stays for a lifetime. And, may bring along the routine of incurring regular medical expenses. You would need to address certain crucial questions in the event of physical incapacitation:

  • Do you have any personal accident insurance?
  • What if you are not in a position to work even from home after disability?
  • Do you have any alternate source of income to bear your living expenses?

Your health insurance would only pay for hospital bills but not cover for disability which may incapacitate you (temporary or permanently) to earn income. Personal accident insurance would go a long way in helping you cope with additional medical expenses in the case of accidental disability. These policies come unbelievably cheap but are the most ignored due to lack of awareness. These are easy to get and do not required any medical tests. The sum assured is paid depending upon the type of injury and the injury covered.

While your biggest financial asset remains your capability to earn money, it is better to be prepared and plan certain pertinent steps to sail through tough times. It is prudent to involve your family members in your entire planning otherwise it can go futile in your absence. A word of advice – Do not just read this article, take a notepad right now with you, make points and then assess where you are lacking.


Busting the Myth Series: Myth No 4: Life Insurance: Common misconceptions about Insurance

Myth I Don't Need Insurance

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Life insurance is one of the highly misunderstood products in the Indian financial industry. While some people buy insurance for all the wrong reasons, some do not believe in the concept at all considering it a waste of money. It is like saying ‘I do not believe in the concept of gravity’! Let us bust some bizarre myths & some common misconceptions about life insurance.

  • Do not require life insurance as I am going to live longer: This may appear strange but there are few instances where people think they do not require life insurance because they have a very healthy lifestyle and their ancestors had a high life expectancy. But they miss out on the fact that death is uncertain and can also occur due to accidents or medical negligence. Life insurance covers not only natural death but also any death caused by accidents. Life Insurance is not a wasteful expenditure. In the broader frame of financial planning, life insurance comes first before investment planning. It is a must to cover for the risk of loss of life of an earning member in the family.
  • Do not require insurance as I already have 2-3 life policies & I pay huge  premium: This is another common misconception among the insured people. Having multiple policies and paying huge premiums does not make one fully insured. In fact, it only implies that one has bought an expensive product and is still grossly under covered. It is not only essential to have life insurance but also the right amount of coverage. In the event of any unfortunate incident, life insurance should cover for

(i) Household expenses up to the spouse’s lifetime

                   (ii) Outstanding liabilities, if any

                   (iii) Children’s education & marriage expenses

  • Do not require life insurance because my spouse works too: Double income  earning couple certainly enhances the lifestyle of a family. With better repayment capacity also comes higher expenses and more liabilities. However, the loss of an earning member does put some pressure on finances, especially if the deceased spouse’s contribution to total family income is significant. The burden of household expenses and child responsibilities then have to be borne solely by the working spouse. Life insurance thus provides relief to the working spouse helping to recover from the loss of income.
  • Life insurance is a good investment & tax saving vehicle: Since the development of Indian economy in the 1990s, insurance needs have not only increased but changed for the people. Due to lack of choice of investment options earlier, people used to largely invest in traditional endowment policies. They were viewed as a compulsory saving tool and with tax benefits. Sadly, this approach of buying life insurance is still prevalent in these modern inflationary times. Traditional endowment and money back policies yield sub-optimal returns and with expensive premiums, one is left grossly underinsured. It is important to understand that the basic purpose of life insurance is to cover for the risk of loss of income of the bread earner in the family. It should not be mixed with investment and tax planning.
  • Investment in a child insurance plan is the best option to secure my kid’s future: One of the most important goals for any parent is to fund their educational goal. They do not want any hindrances to meet this important goal even in their absence. This insecurity and poor knowledge of financial products results in parents falling into the trap of buying child plans. These are nothing but modified endowment and money back plans which yield pathetic returns. Mutual funds can be a preferred option to invest for funding a child’s educational goal. Investing via a systematic investment plan (SIP) in a diversified equity fund would ensure financial discipline and allow the investments to grow and yield better returns for a child’s education funds.

It is important to understand that life insurance is a basic necessity & needs to be provided for just like we pay for our regular house hold expenses. The right amount of coverage also matters and sum insured should be arrived at after considering the financial implications in the event of loss of life of an income earning member. Term insurance is the cheapest form of insurance offering the best combination of coverage & cost. Term insurance does not pay any money against the premiums paid and is thus cheaper compared to the traditional insurance plans. It is also crucial to review life insurance needs at regular intervals and upgrade coverage as financial responsibilities increase at a later stage in the future.