How should we save money for our Kid’s future

Most of us, the moment we become parent, start thinking of the future of our child “ Mera Beta (Beti) bada hokar mera naam karega “ is a famous Indian saying.

To make his future bright we do everything so as to give him the best education and organize a stylish wedding and for all this we need money in fact lot of money. Here comes various things in mind; how to build the corpus for these expenses, some of them are:

1. Which instruments are suitable for my requirements?

2. Will these help me to build an adequate corpus for my all goals?

3. Are ULIPS/Child Insurance Plan are right investment option for future goals, or should we take PPF or Sukanya Samriddhi Yojana for my daughter?

4. What about real estate? Is this a good deal, or Gold is better option?

5. Or should I simply put all my money in fixed deposits?

Most of the time people keep on randomly putting their money in various options due to ignorance and/or wrong advice without understanding the long term implications of the same. The common mistakes people do while investing are:

1. Thinking too much about safety then return

2. Inconsistent Investments

3. Not starting early

4. Ignoring their own health

5. Not taking proper life insurance

These mistakes results to in-adequate corpus to fulfil child’s ambitions or then digging out the retirement corpus to compensate the same.

So what is the right way to create sufficient corpus for the child’s future and how should we go for it. Let’s understand this.

1.  Firstly we should know how much amount in current value is required based on his/our ambitions.

2. We need to calculate the future value of the corpus based on the time horizon

3. Based on time horizon we need to decide the right asset allocation for the investments. i.e. how much amount or percentage should be invested in debt, equity, gold, real estate etc.

4. Based on asset allocation we need to decide about the instruments i.e. which company’s equity? Should we invest direct equity or through mutual funds, In debt whether FD or PPF or Sukanaya Samridhi or Debt Funds or Balanced Funds, In Gold should we take physical gold or ETFs? In Real Estate residential or Commercial, and in which City? Etc..

Now let us find out the answers of some of the common questions.

(a) What is the right options for investments?

Mutual Funds could be one of the best option for regular investments through auto pilot mode. We need to construct an optimum portfolio with right mixture of equity and debt based on investors risk appetite and time horizon. For a long-term goal, it is better to have investments inclined towards equity, whereas for short-term goals, have more exposure to debt. Once the scheme/portfolio is finalised we can let the money keep on investing in those funds on regular basis through SIP route. For more details read my previous post the link of which is given below.

 Mutual Funds are not just Right, they are Better also

(b) PPF, FDs, Sukanya Samridhi Yojana (SSY) are Safe and Secure, So should we go for it?

These are debt products which are relatively safe and can be invested if our time horizon and risk appetite demands so. However we should remember that although PPF and SSY but there interest rates also changes every quarter based on the current interest rate scenario and we should not expect very high returns from them. Further PPF is 15 year instrument and SSY is also 10-15 years instrument so we should also keep in mind the future requirements.

(c) What about ULIPS or Child Insurance Plans, how good are they ?

Investment and Insurance are two other things and we should not mix them. All the Child insurance normal endowment plans gives 5-7% returns, while ULIPS are equity debt mix and give market return less of various expenses i.e. morality charges policy admin charges etc. and there will also be GST on the premium amount. We should always remember that It’s not the children who need insurance, but parents. A prudent option is to go for a combination of a term cover and mutual fund investment. For further details read my previous posts Mutual Fund Term Insurance: Best of Both Worlds .

(d) What about Real Estate, is this good investment option?

For last several years real estate has given almost negligible return. Apart from that it is kind of illiquid investment which cannot be sold in short notice in case of urgent The rental yields are 3-5% which are very low and unattractive. Besides, there are various other charges that we need to pay like property tax, maintenance cost, high transactional costs, or capital gains when you sell it. Further a property is not divisible and we cannot sell one room in a flat or a house to meet an immediate expense.”

All those issues makes real estate an un-attractive investment option.

(e) Is Gold better to invest for long term?

Normally we all Indians need gold for our Child’s wedding, but buying physical gold has its own draw backs. One is if we buy gold jewellery it may be outdated by the time our child marries or he/she may not like it. Secondly there are storage expenses and purity issues. 

So what could be the better option to buy gold? The answer is Either ETFs or Sovereign Gold Bonds, further as Sovereign Gold bonds gives interest of 2.5% besides paying back the market price of gold at the time of maturity so this could be better option if we need to buy gold in future.

(f) Should we take Education Loan or dig out form my Retirement Corpus to fund my Child’s Education?

Taking education loan is better option due to following reasons,

·        This keeps our Retirement Corpus safe,

·        Our Cash flow from existing corpus remains intact

·        By taking Education Loan we create sense of discipline and responsibility in the child that he should be sincere on his studies and take up the repayment responsibility

·     Education loans are easily available for good course, both for Indian and foreign higher education.

·      The interest rates start at a low 8-10% and no guarantor or collateral is required for loans below ₹4 lakh.

·        Education Loan has tax benefit also as the entire interest portion of the loan is eligible for deduction under Section 80E of the Income Tax Act.

·        There is grace period of one year, as mandated by the RBI, after the child finishes his education and starts repaying the loan. Hence child will have sufficient time to start repaying the loan

For further details read my post, the link of which is provided below.

Education Loan: An option to enrich your skills even if you can’t afford it right now

As we can see from above points it’s better to take loan rather than digging out from retirement corpus.

Nothing is impossible in this world, If we plan it properly and timely we can achieve great goals and dreams for our kids in a very easy and simple way.

Mutual Funds are not just Right, they are Better also

There are various options available for investments but why mutual funds stands out as compared to insurance products, let's understand it in more detail.

1. Mutual Funds are not an insurance but an investment product. Here our money is invested in market securities so that we get a better and inflation hedged returns which can meet our future financial requirements/goals.

2. Insurance means if something happens to the policy holder then his family/nominee will get a pre-defined lum-sum money. Although no one can fill the gap of that person emotionally however this money helps the family members to get financial support.

3. In Insurance only the cover amount is fixed not the bonus amount. Bonus is declared every year based on the company’s returns like in case of mutual funds.

4. In Insurance to cover your risk tem insurance products can be taken, where the premium amount is much less as compared to normal insurance policies.

5. For example if a 30 Year old person wants one crore coverage. Then if he takes normal policy of Jeevan Anand (with 35 years coverage) then he has to pay a premium of ₹2,99,434 (₹2,86,540 premium +₹12,894 tax). The same one crore coverage can be taken by LIC’s term insurance policy Jeevan Amulya where the premium will be only ₹32,096 (₹27,200 premium+ ₹4,896 tax). Please also note that in case of Jeevan Anand, policy holder has to pay a tax of ₹12,894 every year in which he did not gets any returns.

6. In mutual funds there is no tax at the time of investments and your whole money is invested in the scheme without any deduction. Whereas in case of Insurance approx. 4-5% of total premium goes to tax. Yes it is 4-5% of the total premium in which you do not get any returns. Since your investment amount is reduced so only because of this reason the total returns on investments comes down by 4-5% (actually it will be much more but for simple calculation let’s assume that only).

7. However no Insurance agent tells about term insurance, why? Because in term insurance schemes the commission to agents is very low which makes it unattractive from selling point of view. And the argument given is “You don’t get any return on term insurance”. Do you get any returns in Mediclaim policy or car insurance if there is no claim? then why do we need returns in life insurance? If we take term insurance and invest the remaining amount in a good return products then we can get multiple time returns as compared to normal insurance products. As well as our life is also covered by right product.

8. For example as mentioned in point no. 5, if we take term insurance instead of Jeevan Anand and invest the remaining amount ₹ 2,67,338  in a mutual fund with expected 10% P.a. then we can get almost ₹ 7.97 crores in 35 years.  And remember this money is additional to the insurance cover of one crore.

9. It is said that mutual funds invest in share market where your all money can be wiped out. Let’s understand this more.

(i) First thing mutual funds also invest in bond/debt market. In fact almost 60% of total mutual fund money is invested in Debt market, yes this is the same market where LIC also invests.

(ii) Secondly mutual funds have various different type of schemes wherein a person can invest for a week to a year or 5-10-20-30 years.

(iii) Mutual funds have schemes which invest only in bond/debt market and not a single penny is invested in equity shares. A person can invest in different schemes based on his/her financial goals, risk appetite and investment horizon.

(iv) There is no binding for investment in mutual funds, if due to some reason someone wants to stop the investments it is possible without any penalty whereas in case of insurance if we stop the policy in between it can lapse or forfeit.

(v) In mutual funds you can start investments with as low as ₹500.

(vi) In mutual funds you can increase, decrease the amount any time. You can stop the investment and also can restart as per your convenience.  All these facilities are not available in Insurance.

(vii) Share market goes ups and downs, it is volatile and this is the fact, but if we invest our money for long term like we do in insurance then chances of losses are very rare.

(viii) Share market is a reflector of the country’s economy. If economy is growing and getting stronger then share market also goes up. For example in 1979 BSE Sensex was 100 points which is today at 33000+. This is true that it goes down in between but it also comes back from its lows and goes up again.  Like our incomes is growing similarly as the companies make more profits then there share prices also goes up.

10. Mutual fund companies provides all details where the investor’s money is invested, Insurance Company’s do not provide these details.

11. All the portfolio details of each and every schemes of mutual funds are provided at the website of the company on monthly basis as well as other websites also. Whereas Insurance Company do not provide any details where they have invested the money this itself shows who is more transparent and honest.

12. “Mutual Funds are subject to Market Risk” this warning is given by mutual funds so that if a person is investing he/she should be aware about the risks involved and invest only after having full information. Mutual funds give back all returns (after deducting expenses) and do not keep a single penny with themselves. Insurance company do declare bonuses but it is discretionary and not necessary that they pass on all the profits.

13. The NAV (Net Asset Value) of mutual funds are declared everyday which is not the case for insurance; therefore Funds Mangers have to very actively manage and perform in case of mutual funds this is also one reason that their returns are better as compared to Insurance products.

14. Fund Manager of Mutual funds knows that if I do not perform then investor can take out his money whereas in insurance company they knows that once the investor has taken a policy he will most probably continue as otherwise it will get lapsed/forfeited therefore they do not have pressure to outperform. This is also a reason that most of the mutual funds do better than insurance products.

15. Insurance companies are legally bound to pay the insurance cover amount only. How much bonus is to be paid depends on performance of their investments and surplus money which is not guaranteed. And as mentioned at point no. 5 for life cover we can take term insurance then why should we buy normal insurance product by paying 9.5 times more for the same guaranteed amount?

16. In mutual funds there is very small commission as compared to insurance products.

17. Insurance products are generally sold by creating fear (what will happen to your family if you are not there) and emotional blackmail which is a negative marketing. Mutual funds are sold to meet your future financial plans/goals when you and your family both will be there and can enjoy the money which is a positive marketing.

TAKE INSURANCE FOR LIFE COVER AND INVEST IN MUTUAL FUNDS TO MEET YOUR FUTURE GOALS

Insurance: Are you covering Risk or just saving Tax?

Almost all of us have insurance policies, many of us have actually multiple policies, mostly sold by someone known to us. But do we really know whether we actually need them and how much risk cover we are having?

We should keep in mind that an insurance policy is supposed to protect one against a financial loss in the event of a casualty or untoward event. In the case of life insurance policies, such an event is the untimely death of an earning member of the family, resulting in loss of future income. The best way to buy protection against such financial loss is to buy an insurance policy for an earning member of the family such that the risk cover (or sum assured) is as high as possible for the lowest amount of premium payable.

Most of the policy holders do not know the amount of life insurance cover they have but they know exactly how much premium they pay each year and also insurance agents generally push more on investment based insurance products rather than pure risk cover products. Why is it so, let’s understand it?

1. According to the accounting principles followed by the Insurance Sector, the premium collected by an insurer is booked as its income, while the risk covered is the firm’s liability. A pure term plan is a policy that gives the least income to the insurance company, while creating the highest liability. Hence, it really does make good business sense for insurance companies to sell investment-linked insurance policies, to shore up their income. 

2. Since income is the main criterion, insurers fix sales agents target based on premium collected rather than total risk covered. This leads to the agents to sell those policies where higher premium can be collected.

3. The seller’s commission is linked to the premium and not the cover. Therefor pure insurance policies tend to lose out to investment-cum-insurance products in sales.

4. The Income tax deduction under section 80C is linked to the premium paid and not the risk cover. Therefore investors also focus more on the premium amount and how much they will save on tax rather than the risk cover.

5. The normal human psychology is to get something when we are paying for it. In pure term insurance policy a policy holder do not get anything if he survives over the tenure of the policy which makes it unattractive. But we should compare it with mediclaim or vehicle insurance where we don’t get anything if there is no claim.  In case of life insurance policy why we always want something. Read my earlier post Mutual Fund + Term Insurance: Best of both Worlds for to understand that how term insurance and mutual funds can give much higher returns as compared to traditional policies.

The most suitable policy for providing such protection is a pure term plan. Whenever a person tries to sell an insurance policy, we should ask for a comparison of features and costs across the various options available. The first step in buying insurance cover is to calculate one’s need. The next step is to find which insurance policy would serve the purpose.

As for tax planning, many options besides insurance are available. If we want to take risk, invest in an equity-linked savings scheme. If we do not want to take risks, there are longer-term bank fixed deposits, NSC, PPF, SSY etc.  which come under Section 80C. Certain expenses like: Children’s tuition fees, the principal repayment part of the home loan EMI, etc. are also eligible for Section 80C benefits:

We should always remember: As a life insurance buyer, our primary need is to get a risk cover. Focus on that. That will save us from mis-selling, too.

Are we Financially Independent ?

This month we have completed 70 years of Independence, so have we also got financially independent. If not then it’s high time to think of our financial independence.

Financial independence occurs when we have saved enough to support for the rest of our life without needing to work for money. We can still choose to work for other purposes – like for some passion/hobbies or any other purpose - but we no longer need an income to meet our expenses.

Attaining financial independence requires discipline and limitation of wasteful spending especially on non-essential items. It's a myth that financial independence can be achieved only by wealthy, It all depends on developing good money management skills.

Achieving financial independence is an ongoing process; it's a behaviour pattern that must be practised consistently. We are outlining some tips for achieving financial freedom:

1. Invest on self to increase future Income

We should continuously improve our skills. By being better at our profession will pay us more for what we do. We should learn new technologies, on-going trends and future of particular business so as to keep ourselves updated with them and learn to use the best from them.

2. Choose the lifestyle

It Is always advisable not to spend all our Income just to maintain certain lifestyle.

Also never use debt to fund the lifestyle; the use of credit cards to fund a particular lifestyle will only move backwards. First we should conduct a careful analysis of where most of our money is spent and we may figure out the wasteful expenditures that are unnecessary and can be removed from the list. This is all about gauging what is important enough for me to spend our money on. You can use our calculators at www.capstreetconsultants.com to gauge the money required for future necessities.

3. Evaluate financial decisions carefully

Before making any financial commitments, we should look at our financial situation holistically, for example, Instead of buying something we really want on credit rather save for it. It's better to save for the items we want to buy, it's delayed gratification but much cheaper. Start a Systematic Investment Plan to fuel our dreams.

4. Not just Save but Invest Wisely

By putting money aside we let your money work for us. We should also take advantage of the Tax Saving plans too by which we can save tax as well as invest the money for future. We should Invest in Equity and equity oriented funds for achieving long term goals. Ignore financial news and the fluctuations of the market keep investing In good times and bad.

5. Be sufficiently insured

Life Insurance provides the much needed peace of mind while we Plan for our Financial Independence. Health Insurance is also very important to keep ourselves secure for medical emergencies. Though people argue that if you have Financial independence, then you don't really NEED Life Insurance. However, real life is usually more complicated than what we think.

Staying Financially Independent is not one day job but is an ongoing process, even after we have realised our goal off financial freedom, We need to ensure it stays that way. We should stay abreast with our economic conditions and how they affect us personally. Our financial needs will change according to various life stages. We must ensure that our finances are also tuned according to the stage of our life.

Life Insurance as Investment is that makes sense??

Insurance is very important for every individual but is it right to mix it with investment products, different peoples will have different opinions lets understand the pros and cons of mixing insurance with investments.

1. TRADITIONAL POLICY GIVES LESS COVER

If we buy traditional investment policies the life cover offered by them is quite low as compared to buying a term insurance plan. Generally traditional plan offers 10 to 12 times life cover. So for example a person aged 30 years group wants one crore life cover, he may need to have policy of about Rs. 10 lakhs annual premium to cover that much insurance. Overall return of these products range between 4-6% P.a. Same person can get one crore insurance cover in Rs.12000-15000 by purchasing a term insurance cover. The remaining amount can be invested more smartly in other investment avenues where he can get 8-12% returns.

2. WE GET OBSSESSED WITH TAX SAVING

Another major reason for buying insurance is saving tax. Historically if we analyse the data, last quarter of the financial year gives as much business to insurance companies as the other three quarters together. In the last minute planning people buy insurance just to save tax; not for insuring themselves and without understanding the implications and future commitments, this results into lots of policy lapses later on.

If a person’s objective is to save tax then insurance may not be the best option for tax saving. There are various other instruments available which offer tax savings as well as better returns. PPF (8% tax free), NSC (8% but interest is taxable) and those with daughters below 10 year can even opt for the Sukanya Samriddhi Yojana (SSY) that offers 8.5% tax free.

NPS and ELSS can also be a good option for investors who are willing to take some risk. These two offers market-linked returns. In NPS the investment gets locked till retirement and only 40% of the corpus is tax free. In ELSS funds the investment is locked for three years and have the potential to give significantly higher returns, though the risk out there is also higher. For ELSS like PPF the amount received is also tax free

If we compare the returns of a traditional endowment plan with PPF and term plan combined or with ELSS funds and term plan combined we see the eye opening difference between their returns. If we assume a return of 8% for the PPF and 12% for the ELSS fund, both combinations would give far better returns and higher insurance cover to the buyer.

3. WHY PEOPLE STILL BUY IT

Although they do not offer very high returns but still people buy it mainly

•      High Commission to agents : As other products like term insurance and ULIPS offer very little commission compared to traditional products, agents always try to push traditional policies. Generally the agents are from some reference and people could not say no to them and buy these policies.
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•      They enforce a saving habit in the policyholder : These policies are generally for very long duration (20-30 years) and the agent keep on reminding (although more for their own commissions) to pay , Further people take it as a responsibility towards their families and afraid of losing money due to lapsation they keep it alive.
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•     Time value of money: Generally people don't realise that the huge maturity amount being projected may mean little after 25-30 years.  The Payouts in these polices are not given as lump sum but are spread across the years, which reduces the net return significantly.

4. SO WHAT SHOULD WE DO??

Well as mentioned above it is better to keep insurance and investments separately. Normally we should have insurance of ten times of our annual income (though it may vary based on future responsibilities and expenses). Term insurance can be a better option which gives a large coverage in small premium. The remaining amount can be invested base on a person’s risk appetite and requirements. For example if he needs to save more for tax saving under section 80C then for risk averse investors PPF, NSC or SSY are right options and for those who are willing to take risks NPS and ELSS are right products.

For general investments other than tax savings, mutual funds could be a good choice where a person can invest in Debt funds, Balanced funds and Equity based funds based on a persons need and risk appetite.

Every person should have insurance however the insurances should be brought for the main purpose of insuring the family towards some unexpected events not for tax savings or investment purposes.

What we should not do in tax planning !!

Last quarter of the financial year is known for tax planning. Salaried employees get the notices from their HR and deadlines to submit the proof of tax saving and we all rush to invest in tax saving instruments. In this urgency, sometime we just focus on tax saving without understanding the long term implications of that particular investments. Tax planning is very important as it helps to pay less income tax. Something everyone wants. But smart tax planning will help you boost your portfolio. The actual tax strategy will have a different meaning and emphasis depending upon an individual's personal circumstances.

1) Have a holistic picture not in isolation

Generally we think tax planning in isolation and not from an investment point of view. Hence the approach is often to grab up investments that will give them the tax break, irrespective of whether or not it will help them reach their financial goals or fit into an overall investment strategy.

Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals.

Most investors in a crazy dash to meet their Section 80C requirement will opt for unit linked insurance plans, or ULIPs, and endowment plans and often end up with products that do not suit their need.

Life insurance should never be bought with the intention of saving tax. Tax saving is just one of the benefits that come along with it. The main benefit is the provision of finances in the case of death of the policy holder.

Approach tax saving with a holistic mindset. For instance, if your portfolio is heavily tilted towards debt, it would not be wise to opt for an investment in National Savings Certificate, or NSC. Instead, think of an equity linked savings scheme, or ELSS.

2) Tax saving is not just by fixed-return instruments.

Individuals tend to look at the Senior Citizen Savings Scheme, or SCSS (current interest rate 8.5%), 5-year deposits, National Savings Certificate (NSC) and Public Provident (PPF) (current interest rate 8%) as the tax-saving investment avenues. Looking at the current interest rate scenario where the interest rates are expected to fall further fix interest rates offering options are going to become further unattractive and investor should look at other options which can offer better yields.

Under section 80C we can also invest in an equity linked savings scheme, or ELSS. These are diversified equity mutual funds that offer a tax benefit under Section 80C. They have the lowest lock-in period of just three years. As of January, 2017, the ELSS category average delivered an annualised 3-year return of 18.5%.  Scheme wise the highest return was 27% while the lowest was 12%.

However we should keep in mind that these are equity funds which means, the return is not guaranteed. So select a good fund that has shown consistent performance and stick with it over the long haul. Don’t be in a tearing hurry to sell the investments just because it has completed the mandatory three years. Exit from the fund when the market is rallying or you actually need the money so you walk away with a profit. If this means hanging on for a few more years, do so.

3) Its not just 80 C, Don’t ignore the big picture.

Tax saving is more than just investments and goes beyond Section 80C.

If you have made a donation to a charity that offers a tax deduction under section 80G, avail of it. If you are paying premium on a medical insurance policy for yourself and dependents, be sure to claim the deduction under section 80D.

Also, if you are servicing a home loan or an education loan, you are eligible for income tax deductions. Under Section 80C, you can even show the expenses of your child’s education to avail of a deduction under section 80E and interest on home loans can get exemption under section 24E.

When deciding how much to invest to max your deduction under Section 80C, take into account children’s tuition fees, principal repayment on home loan, contribution to employees provident fund (EPF), and any life insurance premium you are paying and then decide the remaining amount to be invested and plan it accordingly.

Finally

As an investor/tax payer, by smart investment planning we can convert the tax savings compulsions to wealth creation opportunities. For that we have to just go beyond the traditional option and look at all the options with the clear objective in mind.

Are you at 40s and still thinking ??

There are very different kind of challenges when we are at our early 40s, and approaching the mid-point of our career. We would have already worked for about fifteen-twenty years, and may have about 15-20 years left for the retirement. This stage of our life is very important both from a career and financial planning perspective for the following reasons:-

i.     This is the stage of life, when we are more likely to be settled both from a career and family point of view. The lifestyle, we are living in our forties, is most likely what we want to have for the rest of the life. We might aspire for more improvement in our life, but a cutback in lifestyle is usually very difficult for us.

ii.     By the time we are in early 40s, most likely we may be in middle management or senior management role. Therefore our income is likely to be much higher than the earlier stages of the career. With higher disposable incomes we are better placed to save more.

iii.  Early 40s is the stage of life, when important goals of life like children’s college education, marriage and own retirement starts approaching. We would be comfortable enough if we have been saving for these goals since beginning of our career. However, if we have not saved adequately then this would be a very challenging time to manage various major expenses and also for future requirements.

iv.   This is the time, when the first warning signs come up on the health front. Now days health risks in the 40s are much higher than what it use to be one or two generations back. This is mainly due to environment pollution and lifestyle related issues. A serious illness can cause severe financial stress to the family and we must guard ourselves against health related financial risks.

v.   Now people have much more mobility in their careers as compared to what we generally had a generation back. However still the increasing age of the family does impose constraints on mobility. By this time the family is settled at a particular place and our children may be in the middle or high school, which makes relocating to new city for work, undesirable. BY this time we may have invested in property and that also restricts geographical mobility. Unless we get a very attractive career option we may not like to move and if we don’t get better opportunities in same place it puts constraints on career growth. Inability to find career growth opportunities may also led us to think for early retirement. Which need to be factored in for financial planning.

These are the reasons which makes it imperative that, we should have some proper financial planning when we reach the mid-point of our career at this age. In this post we will discuss 6 important mid-career financial planning to-dos.

1.      Health cover for difficulat times

Health is the most important aspect of life and at this age it is most critical for maintaining it. So proper health cover is very important at this age of life. We should have comprehensive health insurance cover for entire family and if we are responsible for the healthcare needs of your senior citizen parents, then I should also be properly covered. Even the government promotes it and gives up to Rs. 55,000 (30000 for senior citizen parents and 25000 for self and family) tax benefits for health insurance policy u/s 80 D for family and parents.

If our employer is providing health insurance benefit then it should be  checked for its benefits like sum insured, co-pay terms and exclusions  so as to evaluate whether it provides comprehensive coverage as required. Even if the employers insurance provides everything its better to take separate mediclaim for family so for any reason if we have to leave the organisation and could not find a suitable opportunity immediately; in that time also our family is properly covered for any unfortunate serious illness during that time.

2.    Take adequate Insurance for eventualities not just to save tax

We should have adequate life insurance cover which is able to meet the income needs of our family in the event of an untimely death. It should also be able to meet the future aspirations of your family, like children’s education and marriage.

We should not take life insurance as a savings scheme for children’s future or retirement with the expectation of certain maturity amount as promised but it should suffice the basic purpose of covering the risk of untimely death. Treating life insurance primarily as a Section 80C tax saving investment is a basic mistake, which many of us make.

Main purpose of life insurance is for risk protection. If we take life insurance policies as savings or investment schemes, It causes us to be under-insured and gives us sub-optimal returns on investment. The early 40s is a good time to review your life insurance needs. As discussed earlier in the post, this is the stage of life, when you are more settled from a lifestyle perspective. A life insurance cover bought when you were younger and had lower income, may not be sufficient to sustain the current lifestyle needs of your family.

If we find out that we need additional cover to meet our family’s lifestyle needs, buy additional term life cover. Also, if you made some of the other life insurance mistakes discussed here, we can correct it. by surrendering the policies, buy term life insurance and invest the savings in premium in suitable investment options to meet your financial goals. At this time, we can consider buying a critical illness and personal accident covers. Critical illnesses and severe accidents, can result in very high medical expenses, which may not able to get reimbursed through your general mediclaim policy. Further, critical illnesses and temporary or permanent disability caused by accidents can impair our ability to work, resulting in a loss of income for the family over a protracted period of time. Critical illness and personal accident covers, protects against such serious financial risks.

3.    Children’s Higher Education: A major Expense

Historically Inflation rates are highest in the education and healthcare sectors. Every parent’s dream that their children get best of the education however it is becoming expensive day by day. Therefore is it very important to start saving early for this major financial goal.

If for whatever reason, we have not saved till now for your children’s education and marriage, we should now start planning for these important objectives. How much we need to save and where to invest, will depend on personal situation i.e age of children, family’s aspirations, our income and savings and assets & liabilities, etc. We should consult with a financial planner to build a suitable financial action plan in this regard.

For this purpose we may be required to invest in those asset class which can beat inflation over a longer period of time; equities and equity mutual funds are best placed in the current scenario where the interest rates are falling down.

4.   Retirement Planning : Had we considered yet??

Generally we get involved so much to our short term goals that we forget that after certain age we would stop working and in our country we do not have any social security available for the old peoples. The cost of living goes up due to inflation and if we do not plan our retirement needs in advance it would be very difficult to manage the expenses at that time. As we go through various stages of life, the goal post of retirement planning may keep shifting. By the time we are in 40s, we have more clarity about long term aspirations, than in our 20s or 30s. The important factors to consider at this stage are, what would be lifestyle related expenses, how much income is required to sustain inflation adjusted lifestyle expenses, can we think of  some alternate source of income after retirement or do we wish to retire early etc. Accordingly we need to develop a suitable retirement plan so as to meet these requirements.

The earlier we start planning for our retirement, the easier it will be to achieve the required target. If we are unable to save and invest for our retirement till now, or even if did some saving but is not sufficiently large then this is time when we must have a retirement plan in place.

The 40s is not just middle of our work life but also of our entire life (generally our average life expectancy is around 80) and it is very important from a personal and professional perspective. At this age we are quite mature and independent. This period in life is prime of our working careers as well as extremely important from a financial planning perspective. At this age, we have more clarity into our aspirations, needs for self & family  and challenges we have to face. So it’s very important to take right financial steps at this critical stage of life which can make or break our financial health.