How should a Financial Planning Look Like?

February 23, 2011   ·   0 Comments

Lesson 10: Which Life Insurance should I Pick?

www.stockssavvy.comWell to be Honest, to Decide which Plan one should Pick for Insurance totally depends on his Age & Why he is taking it? For a 25 Year Old Guy, the Financial Planning Strategy will be Completely different from the Person who is starting his Financial Planning at the age of 35.

The Earlier one Starts, Lesser he needs to save Per Month as it is a more planned Investment Strategy & Hence, he can get it covered on both the Fronts of Investments & Insurance.

The Perfect Plan for a 25 Year Old who needs to Start his Tax Planning having a Compensation Plan of about 3 Lac.:

Financial Planning for an IT Engineer:

How to do 1 Lac Rs. Saving:

S.No. Strategy Amount/Month Amount/Year
1) Mutual Fund (SIP) 6,000 Rs. 72,000 Rs.
2) Provident Fund 916 Rs. 11,000 Rs.
3) Tax Saving Infrastructure Bond 1,667 Rs. 20,000 Rs.
4) Term Insurance 750 Rs. 9,000 Rs.
5) Public Provident Fund 667 Rs. 8,000 Rs.
Total 10,000 Rs. 1,20,000 Rs.

In the above Mentioned Plan, the Ratio of Equity:Debt is 60:40 which is a very Good option for a Balanced Portfolio.

Now Let us try to see how does this plan works for you:

1)     Balanced Portfolio: Equity:Debt Ratio of 60:40 makes it a Lethal Combination for a Long Term Wealth Creation

2)     Insurance Covered: With Systematic Investment Plan & Tax Saving Mutual Fund, one will not only Build Corpus for himself but Some Mutual Funds also provide additional Benefits of Insurance Cover. So, If one opts for a 15 Year Plan,he will get Double the Amount of Investment Money he is going to Put in SIP as Sum Assured.

Saving per Month=> 6,000 Rs.

Investment Amount Per Year => 72,000 Rs.

Investment Amount after 15 Years => 72,000*15=> 10,80,000 Rs.

Insurance Cover for First 2 Years=> 10.8 Lac Rs.

Insurance Cover for Next 13 Years=> 10.8*2=> 21.6 Lac Rs.

Plus the Insurance Cover for Term Insurance Rs. => 35 Lac (About)

Total Insurance Cover=> 57 Lac Rs.

3)     Investment: SIP in Equities over Long Term (for More than 7-10 Years) is as safe as a Fixed Deposit i.e. Risk is actually Minimal. Not only he will make more than 20% per annum on your Money, But also the Amount that grows is Tax Free & he need not pay any Tax on the Interest. In Addition to it, Provident Fund will yield an Interest of 9.5% Annually whereas Tax Saving Bonds will yield an Interest of about 7.5 %

4)     Liquidity at Will: One will be Assured of More Amount than Other Policies such as Endowment or Money Back Policy. In addition to it, the investment will Yield a much better Returns than the above mentioned Policies. Plus one has the Liquidity Option of Taking out the Money from Mutual Fund after 3 Years or Partial Withdrawal after 5 Years in PPF.

5) Retirement Planning:

Systematic Investment Plan:

Saving 1000 Rs.

Returns Percentage/Years 3 Years 5 Years 10 Years 20 Years 30 Years
10 % 42,130 78,082 2,06,552 7,65,696 22,79,395
20 % 45,679 89,681 2,78,657 15,15,954 70,09,820
30 % 49,600 1,03,454 3,82,363 31,61,479 2,33,60,800

Saving 5000 Rs.

Return %age/Years 3 Years 5 Years 10 Years 20 Years 30 Years
10 % 2,10,650 3,90,411 10,32,760 38,28,484 1,13,96,626
15 % 2,28,397 4,48,407 13,93,286 75,79,774 3,50,49,103
20 % 2,48,004 5,17,27 19,11,817 1,58,07,396 11,68,04,008

Systematic Withdrawal Plan

For 1 Crore Corpus, Withdrawing 50,000 Rs.

Return %age/Years 5 Years 10 Years 20 Years
10 % 5,49,798 0* 0*
15 % 48,72,250 57,82,629 1,17,43,246
20 % 1,44,22,297 3,37,09,373 22,58,90,145

* After 71 Months, Amount will be zero.

Saving 5000 Rs with 20 % Returns will yield about 11.68 Crores which should be enough for one’s Retirement Planning. One has the Option of increasing his Savings/Month in Later Stage when he starts earning more. Whenever he will need money for his Expenses, he can Nullify the amount he is saving through Debt Instruments like PF,PPF & Infrastructure Bonds. In a salary of Rs. 25,000, Rs. 15,000 is kept aside as Expenses to give Enough Liquidity for day to day Expenditures.

Turn on to Our Retirement Planning Lesson for Details to know how we cover this as a Retirement Planning Tool.

One can add more Insurance Cover by means of Mutual Fund Savings as he gets more RESPONSIBILITIES in terms of Marriage or Kids. For a Start, this looks perfect.

So How about if One is not in the 25 Year Old Category But Instead a Married Couple & Somewhere close to about 35 Years Age Category: The Insurance he will require will vary according to the amount of Insurance Cover as his Spouse is having for Him. For the one’s who have not started SAVING yet, then they would have to chunk a bigger portion/month to Come at par with their Retirement Planning as well Planning for their Kids.

The trick here is to Decide on a Financial Goal & Start Saving accordingly to make sure one is not short of money when he needs it.The Different Types of Financial Goals can be saving for Children’s Education,for their Marriage or Retirement Planning.

Soon we will write on how to know Exact Amount you will need after say 20-25 Years Considering Inflation. Stay Tuned for that Section.

Coming Back, What if one is in the Category of 45-50 Years, At this age, Premium on Term Insurance will be very high & Even Mutual Fund Insurance Cover will be no Longer available.  One will definitely not want to be in that position as he will have to Chunk Out a LARGER Sum compared to people who are 10-15 years younger to him. At this Point of time, one’ll need to make some calculated Analytical Decisions as to what exactly he needs & how much is it worth.

How about if one is in the Fag End of Year say Jan-March & is struck with Tax Planning, I am sure a lot of People will Identify themselves here. Here, always remember the Thumb Rule. Don’t Enter the Market in one go with a lump sum Amount put in Mutual Fund. You never Know How the Market will turn out to Be. To Minimize Risk, always take Systematic Investment Plan. At that point of time, one Obviously can’t do that. Go for One Term ULIP Plan in this case as this will give you an option to balance out your Portfolio in Terms of Equity:Debt Ratio. Start SIP from next year onwards & Follow the Above Financial Plan. ULIP doesn’t cover Insurance Amounts that one needs. Hence, don’t go for Regular ULIPs.

Let me know if you feel you are not in any of the Above Category or Need any help in Taking your Decision for your Financial Planning here. I appreciate comments be it Love or Criticism. Let me know what you have in your Mind.

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Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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