Chintak Dalal is a
46-year-old resident of Mumbai who works for a private company. He lives in his
own house with a family comprising his wife Yogita, 43, 17-year-daughter Mitshu
and 14-year-old son Udbhav. His monthly income is Rs 1,05,000 and his wife
earns an additional income of Rs 5,000 as an insurance advisor. He even earns
rental income of Rs 10,000 per month from a second home. Of this overall
income, a big chunk goes towards household expenses; Rs 59,667 and Rs 16,667
for children’s education. Rs 10,500 goes towards EMI for personal loan, Rs
27,417 for insurance premiums and Rs 1,000 goes into public provident fund
(PPF).
Financial Goals of the Family
The goals for Dalal family include planning for on-going expenses
toward children’s education, building corpus for their marriage and Chintak’s
own retirement. Financial advisor Pankaaj Maalde thinks that sound financial
decisions in the past would have ensured a smooth inflow for Chintak. To begin
with, he first analyses his current insurance portfolio and gives
recommendation on necessary changes required.
Analysing Life Insurance Portfolio
Chintak has six traditional life insurance plans, two offline term
plans with life cover of Rs 25 lakh each and one online term plan with life
cover of Rs 50 lakh. Currently, Chintak is adequately covered under life
insurance. However, a chunk of his savings goes towards paying the premium of
insurance policies. At present, he is paying an annual premium of Rs 2.9 lakh.
He even holds one ULIP plan but has stopped paying the premium after completing
five years of minimum premium paying term in the policy. Analysing his
insurance portfolio, Pankaaj recommends continuing the online term plan from
Aviva which has a life cover of Rs 50 lakh. He however, suggests discontinuing
both the offline term plans of LIC due to high premium cost after taking new
online term plan with life cover of Rs 50 lakh.
Further, Pankaaj recommends surrendering traditional plans of LIC
(Jeevan Astha and Jeevan Saral on Chintak’s wife’s name) as the internal
rate of return (IRR) of both these traditional plans post considering present
surrender value, future premiums payable and expected maturity value based on
current bonus rates, is unlikely to beat inflation. If these policies are continued
then IRR will be around 5% - 6% only. So, as for corrective action on insurance
portfolio, it’s advised to better exit from both the traditional plans of LIC
and invest the proceeds received for other goals. It is also advised to
continue with other traditional plans and Max life’s plan as Chintak has opted
for limited premium payment term option in those policies.
Health and Disability Insurance Planning
As for health insurance, Chintak has bought health insurance
policies from New India with a cover for Rs 5 lakh and from LIC with a sum
assurance of Rs 8 lakh. Both the plans are family floaters covering wife and
children. Analysing both the plans, Pankaaj explains New India Assurance has
room rent sub-limit of 1% on sum assured, which means it reduces limit on all
other expenses if a patient admitted in higher costing room while undergoing
treatment. Even, LIC health plus is not a pure mediclaim plan. It is a ULIP
plan covering only major surgical benefits as mentioned in the policy document.
This plan has ongoing allocation charges of 6% on premium paid and also Rs 25 per
month as policy admin charges. Such charges reduce overall returns from ULIP.
Due to this deceive in both the policies, porting of the New India
insurance plan to other insurers such as Apollo Munich or Bajaj Allianz is
advised as both these insurers do not have room rent sublimit clause unlike New
India. He suggests discontinuing the LIC health plan and buying a top up health
insurance of Rs 15 lakh with deductible amount of Rs 5 lakh for family. This
change in health insurance policies will cost around Rs 35,000 p.a. as against
Rs 39,000 p.a. incurred at present thereby substantially increasing the cover.
Pankaaj also suggests buying critical illness and accident
disability insurance policies with sum assurance of Rs 50 lakh each. This will
incur an additional cost of Rs 35,000 p.a. approximately but will ensure a
cover for any uncertainty in future.
Analysing Loan Portfolio
Chintak has a personal loan of Rs 3 lakh with an interest rate of
13%. He pays an EMI of Rs 10,500 to the bank. This is one of the major cash
outflow from his income. Pankaaj advises that Chintak repays the entire loan
from his existing fixed deposit which earns him 7% returns post tax deduction.
By repaying personal loan with high interest he will become debt free. This
will increase his monthly surplus and the amount saved can be invested in
assets with better returns to build the desired corpus for future goals.
The Road Ahead
Having taken care of insurance requirements, Chintak can start
planning for his financial goals. The first goal is to set aside six months of
expenses as a contingency fund. This amount will take care of any unforeseen
expenses for his family. For this, Pankaaj recommends allocating the
existing sum of Rs 6 Lakh from fixed deposits. He recommends investing 50% in
ultra short term fund and 50% in arbitrage fund.
The next goal is to fund children’s educational expenses of Rs 2
lakh p.a. and have a corpus of Rs 3 lakh for their higher education as safety
of margin. Pankaaj has computed education expenses in the monthly cash outflow
which takes care of this expense over a period and aligned fixed deposits of Rs
3 lakh towards this goal.
Further, Chintak wants to build a corpus for children’s marriage
expenses. For his daughter’s marriage, Chintak requires a corpus of Rs 15 lakh
in today’s value (future value will be Rs 28 lakh) if she were to get married
at the age of 25. This goal is 8 years away from now. So, Pankaaj recommends
a monthly investment of Rs 18,000 in a balanced mutual fund scheme to
accumulate this corpus. Gold investment of Rs 75,000 is also aligned towards
this goal. For his son’s marriage, Chintak requires Rs 10 lakh as corpus in
today’s value (future value will be Rs 23 lakh) with the same consideration of
marriage at the age of 25, which is 11 years away from now. Pankaaj
aligns maturity proceeds of Rs 14 lakh from LIC Jeevan Shree plan towards this
goal and recommends starting a fresh monthly investment of Rs 3,500 in
diversified equity mutual fund scheme to accumulate the desired corpus.
Currently, Chintak’s income is limited, so it is recommended to start this
investment when there is growth in his income.
Another important goal for Chintak is his retirement. The corpus
required here is of Rs 3.85 crore and will be used up to 80 years of age after
retiring at 60. The corpus required has been calculated assuming household
expenses of Rs 50,000 per month in present value at an 8% inflation. Pankaaj
has aligned second home, direct equity investments, Birla Sun Life ULIP and PPF
which promise a corpus of Rs 2.27 crore, Rs 1.11 crore, 8.85 lakh and Rs 10.25
lakh respectively after 14 years i.e. at the retirement age of 60 years. Even
EPF contribution is aligned towards retirement goal which will give a corpus of
Rs 7.40 lakh at the time of retirement provided Chintak continues to contribute
to the EPF account. It is also recommended to shift from direct equity
investments to diversified equity mutual fund schemes, then review real estate
investment periodically as the retirement corpus is largely dependent on
appreciation in price. Additionally, surrendering Birla ULIP plan to reinvest
this amount in a diversified equity mutual fund scheme and continue investing
Rs 1,000 in PPF account is also suggested by Pankaaj. The balance corpus of Rs
20 lakh will come from Max and LIC traditional plans at maturity. No further
monthly investment is required towards retirement goal as the aforementioned
investments will help build a corpus of Rs 3.65 crore by the time Chintak turns
60.
Concluding Remark
Chintak should review the plan, rebalance his portfolio annually,
raise his investment amount with increase in income and take corrective actions
for insurance policies as discussed.
http://www.thefinapolis.com/article.aspx?c=1171
