Insurance is key in financial planning
Ms Shah, a 35-year-old general manager with a leading MNC, has recently separated. A single parent of two kids, she wants to ensure adequate financial protection for her children and also plan for her future.
Ms Bora — a spinster in her mid 30s — wants to retire in another 10 years and wants to pursue her own chart away from the corporate race.
Now both are single women with responsibilities, but of a different nature. One plan fits all — not the way out. The needs are different, the goals are different and at the same time, achievement of financial independence for fulfilling the respective goals is the key.
Cases such as these are not uncommon in the present day context and need to be planned. How do we go forward ?
Planned approach
Before we go any further, we need to consider the following:
n Insurance cover required for protection (ideally a term plan).
n Health cover for self and family.
n Around six to eight months of anticipated monthly expenses to be set aside as emergency funds in a liquid debt mutual fund.
n Liquidity requirements.
n Corpus to be invested for attaining the financial goals
n Assessment of risk profile to identify the financial products for investing
For a spinster, I would also recommend to consider a personal accident cover, instead of a life cover, as any instance of disability may reduce the earning capacity of the individual.
Designing the plan
Ms Shah should take a floating health cover for self and children of between Rs five to 10 lakhs. With the increased life expectancy and ever-increasing medical bills, it is wise to take a health cover, independent of the cover provided by the organisation.
To ensure the protection of the family, in the event of an unfortunate event, Ms Shah should take a term cover of six to eight times of her net annual income. This is a thumb rule.
Ideally, one should take the cover, considering the future value of financial goals, value of monthly expenses, to ensure that the dependents continue to maintain the same standard of living in the future.
Based on the risk appetite, Ms Shah should invest regularly via SIP into mutual funds for attaining the financial goals of the children and self. Ascertaining the risk appetite (besides the financial goals) is very important, the structure on which all further investments are being made.
Ms Bora should take an individual health cover of Rs 5 lakh, coupled with a personal accident policy between Rs 35-40 lakhs (based on her income levels). Life cover is optional as she does not have any dependents.
However, investments should be again based on the risk appetite. As she wants to retire in 10 years, active fund management is called for. A healthy mixture of debt and equity mutual funds through the SIP route is advocated .
Financial planning needs are varied for different individuals and one should plan and invest based on one’s need and requirements. One plan does not fit all.
(Brijesh Damodaran is the founder of WealthWays Private Wealth Management).
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