Moneycontrol
Aug 28, 2017 11:51 AM IST | Source: Moneycontrol.com

Want to death-proof your SIP? Here is a TIP

SIPing before TIPing – why is this one of the biggest mistakes an investor can make.

Want to death-proof your SIP? Here is a TIP

Just a few days back, Sapna had forwarded an interesting article to her husband Gaurav that talked about how to be a crorepati by starting out with just Rs 5,000 monthly systematic investment plan (SIP) in mutual funds. It is that easy to get Rs 1 crore, Sapna concluded as she quickly dreamt up a world of riches. Gaurav, the more sensible among the two, was not too convinced. Being a smart individual, he quickly realized that a plan about investing Rs 5,000 per month for 20 years requires a 20-year old continuous working life and similar savings trend. "What if one of us dies earlier," Gaurav asked. Yes, without regular savings, it will be impossible to reach the magical Rs 1-crore figure. That's the day when Gaurav researched online, looked at advice from top financial experts who told him the before making any investment, you must take a TIP or Term Insurance Plan. As you can see, a TIP made their financial plan actually death-proof, and allowed them to do SIPs for wealth creation.

Regular insurance before regular investment

Regular investment is a great habit. Not only does regular investment give good returns over the long-term, but it also makes the whole process of building a corpus for important goals. But ask yourself this --- Without you, who will save for your son’s medical education? If you die early, will your wife and family be able to lead a comfortable life? Can your daughter get the wedding she deserves even if her father is no more? Your life is the cornerstone of your financial plan. Without you, that plan can crumble in seconds.

Investing Rs 2000 a month for 15% annual return can get Rs 30 lakh in 20 years. But we must remember that investments come from a salary or income. Naturally, 'regular' investments have to come from 'regular' salary and regular income. So if there is no income after one year, fresh investment is zero. If the investor dies, there will be no income. This shows having an investment plan involving mutual fund SIPs doesn't guarantee success. You will still need to earn money, and then invest it regularly.

All your family’s most important financial goals will still have to be funded, whether or not you are alive. When working parents die prematurely, most children suffer. And when parents don’t plan when they still have time, the suffering increases for the family. Your children should get not have to run from pillar to post for their higher education. Your daughter should not be waiting to get married due to lack of financial resources. So, it is extremely important to make your financial plan death-proof as early as possible. This is where a TIP plays a huge role.

It’s never too early to buy a term insurance plan, but purchasing one at a younger age is cheaper. A 30-year old needs to pay Rs 700-900 a month to get a Rs 1 crore term insurance cover. By purchasing a TIP, you are buying the surety of your family receiving Rs 1 crore if you die tomorrow. In case you survive, you will have regularly invested money in SIP and also reached that Rs 1 crore figure. This shows a TIP along with an SIP makes financial planning for future goals foolproof.

How much should you 'TIP'

Since we have agreed that you need a term insurance plan even if you SIP through mutual funds, the next thing to decide is what should be the amount of term cover you will buy. Traditionally, it’s suggested that one should buy a cover that is 10-12 times their annual income. Find out exactly how much term insurance cover do you need by using the calculator below:

If you can invest Rs 5,000 a month in a mutual fund SIP, then you must invest 10% of the SIP amount or Rs 500 on a TIP whose premium can also be paid monthly. Just think about it for a second. Rs 500 a month is less than your DTH bill or even your child's pocket-money. You can easily afford to invest Rs 500 a month to secure your family's financial future if you are no longer around to take care.

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In case you are big saver and you put Rs 20,000 a month in SIP, then invest 10% or Rs 2,000 in a term cover monthly premium. So, depending on your economic status and savings power, you should allocate a portion to term insurance plan or TIP every month. This approach will help you increase your term cover as your income and savings grow. Consequently, your life will be fully covered at all points of time and your family's future and important financial goals will be protected.

Conclusion: Our primary goal in life is to ensure our family is secure and happy at all times. Our presence provides them with security. Don't let your absence mean anything less. Buy a term insurance plan (TIP) along with a mutual fund SIP. Buying a TIP enables you to avail tax benefits on your premiums under Section 80C, Section 80D for term insurance that covers 34 critical illnesses, and on death claim proceeds under section 10(10D).

Just like a SIP can be bought directly from a mutual fund company's website, a TIP can also be purchased online from the life insurer's website without going through any intermediaries. Online purchases are cheaper, easier and more comfortable. Do the TIP before a SIP.

Also read:

Why term insurance is a must-have cover for all parents 

Term Insurance Vs Car Insurance: A financial decision you may regret 

Can you afford to save your own life?
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