Feb 06, 2012,13.31 IST
Look at assured sum when choosing life insurance products
Lovaii Navlakhi, managing director and chief financial planner at International Money Matters answered investor queries on personal finance on CNBC-TV18.
Below is the edited transcript of his answers. Also watch the accompanying video.
Caller: I have been investing in HDFC's Unit Linked Endowment Policy since 2007 and my total investment so far stands at Rs 52,500. The sum assured is about Rs 2 lakh and policy term is 20 years. How is this policy and should I continue holding on to this or switch to another one?
A: Whenever we respond to a question relating to life insurance, the first question that comes to mind is what is the assured sum and in this case the investor mentioned Rs 2 lakh. He first needs to verify whether that sum is adequate or not. The policy is actually very good but it is a unit-linked policy. So you need to continuously pay the premiums over the entire period of 20 years to get the benefit. The policy is good in terms of fund performance, lower mortality charges and is good with lower fund management expenses. To that extent it is good. I presume he needs to continue, but he needs to evaluate whether this sum assured is adequate or not.
Q: Is this the way to go with life insurance- Would you recommend that people take a term policy and look for investments in some other product? Is a joint product a good idea?
A: I think the conceptual answer to this question is no, it is better to have a separate-term policy and make your investments in the best investment products. But by nature and by the way the products are constructed in India, there is a temptation to combine the two. It is not that all the products are terrible and they are bad, but the problem that happens is that you compromise on the sum assured. The reason why you are buying insurance is that you want to ensure that your family is not economically worse off in your absence in case you were to die. If you are the earning member of the family you need to calculate what is the contribution you are making to the family or how much is the family dependant on you, and based on that, you have to get the sum assured right.
Caller: I can invest Rs 4000-5000 per month. Where can I put my money? I have income also from Provident Fund and Army group insurance, apart from postal scheme. I want to earn Rs 30 lakh in 18 years.
A: When there is temptation for people to invest over a long period of time, the first thing they look for is safety. Therefore he has mentioned the post office monthly income scheme which earns you 8%. Now if investor continues to put money in this alone, a product like this which is earning you 8% per annum, Rs 4000-5000 a month at the end of 18 years will turn out to be between Rs 19-24 lakh, and we are assuming that there is no tax implication on this. If there is a tax implication then this comes down.
So if he requires Rs 30 lakh in 18 years, he needs to ensure that if he is putting Rs 5000 a month he earns 10% p.a. Now 10% p.a. post tax will not happen alone in a fixed income or a safe product. So he will have to have some element of equity and since he is doing it on a monthly basis, systematic investment is a very good way. It would be a good idea to create some portfolio, a balance between equity and fixed income.
Q: Any equity funds you would recommend?
A: Since the amount is only Rs 4000-5000 and since I am saying that he needs to take a mix of between equity and fixed income, I think Rs 2000-3000 can go in to a large cap equity fund. Some good names are Franklin India Blue-chip Fund or DSP Blackrock Top 100 or ICICI Focused blue-chip are good. But it needs to be continuously monitored and tracked.
Principal Financial Planner
Optima Money Managers