Tag: savings

How to save on premium in life policies

Personal Finance

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The recent pandemic has shed light on the importance of life insurance. While the awareness for life insurance has increased, you may be able to save on it if you know about key factors that influence life insurance premiums.

Age

The age of the life assured plays a critical role in determining the premium. The mortality rate, i.e. probability of death, increases with age. Therefore, a person with a higher age shall be required to pay higher premium than a younger person. Based on the IALM (Indian Assured Lives Mortality) 2014-16 table, the mortality rate at age 50 is 380 per cent higher than the mortality rate at the age of 20. Additionally, as per the mortality tables worldwide and experience, women are likely to have 30-35 per cent lower mortality than a man of similar age. Therefore, women are likely to be charged lower premiums than men.

Lifestyle matters

Health parameters and lifestyle choices also play an essential role in determining life insurance premiums. Higher BMI (body mass index) indicates overweight or obesity leading to many medical complications including diabetes and cardiovascular problems. The mortality rate for an obese person is likely to be higher, and the company may charge an extra premium to cover the additional risk. Moreover, underwriters view excess weight or obesity as one of the major risks to life. One needs to make lifestyle changes to reduce the weight and thereby lower the BMI. Adopting a healthy lifestyle, controlling the intake of calories, and regular workouts will be beneficial. This will help reduce any extra premium loading, which may go up to 50-200 per cent over standard mortality on a case to case basis or may even be declined.

Similarly, smokers tend to have a higher mortality as compared to non-smokers. Therefore, smokers are required to pay higher premium than non-smokers of the same age. The premium for a smoker may be close to 50-60 per cent higher than the premium for a non-smoker.

The same is the case for the consumption of alcohol. Excessive drinking harms one’s health, and the underwriter may load an extra mortality premium of 50-200 per cent or even decline cover for an addicted heavy drinker.

Besides, a history of medical conditions, family history of illnesses (hereditary diseases) could factor into your life insurance premium and increase the cost of your coverage.

Work matters

Hobbies or jobs like skydiving, racing cars which are high risk in nature, could lead to higher premiums by the underwriting philosophy of the insurer. Certain hazardous occupations which expose a person to toxic chemicals or require one to perform dangerous duties may require a higher premium.

That said, for an individual, when it comes to life insurance, a term life cover should be of top priority. While the above are the critical reasons for premium variation, it is easier and cost-effective if a term cover is purchased early for lifelong coverage.

The writer is Chief Actuary and Chief Risk officer, Kotak Life Insurance

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Here is a beginner’s guide to ‘FIRE’

Personal Finance

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‘Freedom to retire early’ — the biggest aspiration of the BL Portfolio Survey respondents — strikes a chord with the ‘FIRE’ or ‘Financial Independence, Retire Early’ movement in the US.

At its core, ‘FIRE’ is all about building a nest egg and hanging up your boots much before the traditional retirement age. We take a closer look at this trend.

What is it

The origin of FIRE is vaguely traced to the 1992 book ‘Your Money or Your Life’ by Vicki Robin and Joe Dominguez. The book encourages one to reassess one’s relationship with money, pointing out that ‘we are sacrificing our lives for money, but it is happening so slowly that we barely notice’. Salary/money is something that an individual earns for time spent. Having a clear understanding of relationship with money would ensure an optimum trade-off between time and money (implying, money earned which in turn gets spent or saved).

The FIRE movement, which started gaining traction soon after the global financial crisis of 2007, requires following a disciplined approach of saving aggressively and starting to invest from a young age in a prudential manner.

Proponents recommend even saving as high as 75 per cent of one’s income to retire very early. The objective is to reach a level of savings that will yield sufficient returns in the form of dividends, interest income or rental income with which one can meet living expenses comfortably. At this point, one has the freedom to choose whether one wants to work, or take up only gigs that give one happiness or are in sync with one’s passion.

Some withdrawal from the capital ie the principal amount can also be factored to meet living expenses. This, however, comes with risks in today’s world where average life span is getting extended, and one should not run the risk of falling short of financial resources at a later stage in life, when one might not be able to work.

Ideal corpus

Based on current living standards and investment return prospects in the US, those in the FIRE bandwagon there follow something known as the ‘4 per cent rule’. One’s total yearly living expenses is multiplied by 25; if it is possible to earn a 4 per cent annual yield on that from investments, then one can quit their job, according to their mantra. A yield below 4 per cent with rest withdrawn from principal also might be fine, according to some proponents, since some of the corpus might appreciate over time, but this comes with risks.

When it comes to planning for a similar objective for a FIRE aspirant in India, two important factors imply the multiple applied to yearly living expenses may need to be higher than 25 — high inflation and low yields.

India has historically had much higher inflation than the US, which means one’s savings erode faster over a period of time. India goes through periods of negative real interest rates (inflation higher than interest rate) like in the last year, denting the real income of retirees preferring safe investment options. Hence, a yield of higher than 4 per cent may be needed on savings.

Besides, rental yields and dividend yields in India are much lower than that in developed markets (Nifty 50 dividend yield at 1 per cent versus Dow Jones Index dividend yield at near 2 per cent). Hence, focussing entirely on capital appreciation and withdrawing from principal to make up for the lower yield presents a risky proposition, warranting a higher multiple to yearly expenses.

Hence, other factors such as frugal living and wise investing may be required to get this dream of early retirement closer to reality.

Takeaways

Finally, if you want to be on the FIRE bandwagon, here are three things that you can do, which also form the core of the FIRE movement:

One, spending only on what is essential — not indulging in excessive consumerism and thereby devaluing your own effort. It was your effort that earned you the money and spending that money without much thought devalues the effort. Tempering down on consumerism also comes with positive consequences for the environment which appears be a cause important to millennials.

Two, saving wisely — investing in a prudential and judicious manner that can grow your corpus optimally and also give you comfort, confidence, and peace of mind .

Three, valuing the time that you spend at work — when one realises that money is a by-product of how one spends his/her time, then one gets more conscious of making use of that time more productively. Following the first two principles would help you choose a job you may like. At the same time, when you realise that your savings and spends which will help you reach your goal is a function of your time at work, you will also begin utilising that time more effectively.

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Three smart money moves you can make this financial year

Personal Finance

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A new financial year is upon us. Yet, 2021-22 gives that deja vu feeling. The Covid pandemic refuses to go, financial markets remain volatile, and hopes remain high that the good ol’ times will be back. The new fiscal requires you to be smart and have a handle on savings, investment, taxes, expenses and much more. Here is a blue-print on the key moves you need to take so that money matters are always under control.

Be investment wise

A new financial year requires a fresh assessment to check whether your investments are on track to meet your long-term goals. You must check if there is a need to change or rebalance the asset-allocation mix for optimal results, in the light of developments on the personal front.

Also, a new financial year is a good time to do a check on the health of your portfolio. Financial markets, especially stocks, have done very well in the last one year or so. If even in this situation, some market-linked investments have not well, find out for reasons. If you find a pattern of continued poor performance, weed out under-performers.

Be a regular: If you are in the old tax regime and among those who struggle to meet the deadline for tax-saving investments every financial year, now is the time to get smart. Instead of doing tax-saving investments at the end of February/March 2022, start them from April 2021 for ELSS, NPS, PPF, etc.

Just like your EMIs, you have the option to spread out your investments regularly over the next 12 months in most of these products. This will work well if sometimes, you don’t have enough funds to do the investments at one go.

Besides, delaying the investment process to the end of the year will make you prone to mistakes in the form of choosing the wrong products. Also, if you do equity-linked investments through SIPs, you can average your costs better and avoid risk of timing your investment.

Use tactical opportunities: Instead of frittering away the annual bonus , ex gratia or other one time payments that some employers give during this time, this new financial year offers you the chance to stock up on small-saving schemes and voluntary provident fund. If the circular on the new small savings rates issued on March 31 (withdrawn later) is any indication, interest rates may go down further, before moving up.

Hence, for conservative investors to whom the sovereign guarantee offered by the small-saving schemes is important, schemes such as NSC is a good bet (offers 6.8 per cent) compared to similar tenure bank deposits.

As per the new PF rules, interest on cumulative annual employee contributions above ₹2.5 lakh shall attract income tax at the applicable tax slab, wherever employer is also contributing. Nevertheless, despite the tax, the returns on the VPF continue to be attractive when compared to the interest rates being offered on other debt instruments and it will be a smart move to use this window to your advantage in the new financial year.

Contributions to both the NSC as well as the VPF is eligible for deduction up to to ₹1.5 lakh under Section 80C.

Prep for taxes

The end of FY2020-21 and the start of FY2021-22 have different implications from tax filing point of view.

To do tax return filing for the previous fiscal, you will be required to collect all the necessary documents including details of any foreign asset/income.

Though one may argue the tax filing deadline is some months away, it will not hurt to check Form 26AS online to check whether tax deductions for FY2021 are properly credited. Remember to cross check the Form 16 that will be sent by your employer soon. Start collecting capital gains statements for investments and account statements for bank accounts. Dividends are taxable so keep a note on them too.

For the new financial year, there is a tax-related task you can do right away.

Submit a pragmatic investment declaration, basis on which your employer will deduct taxes each month. Avoid a casual approach towards submission of investment declaration such as mentioning maximum contribution for Section 80C, Section 80D when you very well know you can’t invest so much.

While it may lead to a higher take-home salary now due to lower tax deduction, what matters is actually doing those investments at the end of year. Failure to submit investment proofs to your employer could lead to substantial tax outgo in the last 2-3 months of the year and pinch your disposable cash.

Rainy day plans

A new financial year is also a good time to do a check on your emergency funds and insurance cover.

The Covid pandemic has shown the need to have a contingency fund. With salaries cut and expenses rising, many had to break their piggybank to survive last year. This underlines the need to stash away money in the savings pool so that 6-12 months of zero/low income does not impact household finances.

Also, take a re-look at life as well as health insurance needs at the beginning of the financial year. Over time, the needs and lifestyle of your family change. Hence, your insurance cover should also change accordingly. Significant life-changing events such as marriage, the birth of a child, home loans, income change etc. increase your responsibilities. Raise your life coverage amount when renewal comes up this fiscal.

Similarly, medical costs for elderly parents, newborn children and hospitalisation can pinch your pocket. To tide over inflation in medical costs, widen your health cover if necessary.

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Financial planning for a family of 4

Personal Finance

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Sankaran (42) and his wife Revathi (39), parents of 2 children, work in the IT industry. They want a financial plan to achieve their goals in future. They had prioritised their key goals as follows.

1. Education fund for kids, aged 9 and 4.

2. House at the earliest, preferably a 3-BHK in Chennai at a cost of ₹1.2 crore

3. Investing for retirement

4. New car at an additional cost of ₹8 lakh in 2022

5. Protection of family from unfortunate events

The family’s cash flow and assets are as follows:

 

All the investments in real estate were made based on third party compulsion in the last 4 to 5 years. They had not seen their assets appreciate considerably. They had sought unit-linked insurance policies on the assumption that they were investing in mutual funds. They had started to invest in mutual funds two to three years ago. With home loan interest rates at attractive levels and surplus cash available in hand, the couple wanted to buy a house.

Sankaran did not exhibit confidence of getting any substantial increase in his salary in the coming years. Revathi was comfortable continuing with her employment.

 

We reviewed their investments and recommended the following.

a) Build up ₹ 6 lakh towards an emergency fund

b) Set up protection by buying term insurance for Sankaran for a sum assured of ₹1 crore and Revathi for ₹1 crore without riders.

c) Buying health insurance for the family for a sum insured of ₹10 lakh. Though the family is covered for medical emergencies through employer-provided group insurance, these covers had many restrictions along with low sum insured. The health cover was also insufficient considering their life style

d) Keep track of spending for the next one year to ascertain their actual monthly expenses. The expenses may have come down because of the Covid lockdown and that they could go back to their old spending habits once life returned to normal.

e) Restructure their holdings in unit-linked insurance plans within the next one year, mainly to reduce the annual commitment. This would reduce the premium commitments from ₹ 6 lakh per annum to ₹1 lakh per annum

f) Sell two of their plots of land to partially fund the house purchase, so that their leverage could be restricted and an unproductive asset monetised. This would help them to buy a house for ₹1.2 crore while also restricting the loan component to ₹60-70 lakh.

With adequate contingency measures in place, reduced premium commitments and surplus available as cash, they were better placed to service the housing loan without additional financial burden. They were also advised to reduce expenses wherever possible to foreclose the loan in the next 8 to 10 years.

Education goal

Towards elder son’s education, they would require about ₹35 lakh in the next nine years. They would also require ₹57 lakh for the younger son’s education. (Current cost for education is presumed at ₹15 lakh with inflation assumed at 10 per cent).

At 11 per cent expected return, they would need to invest ₹14,000 and ₹16,000 per month in large-cap mutual funds to fund these two education goals.

Retirement goal

We recommended that they invest ₹25,000 in large-cap mutual funds towards their retirement corpus. With an expected return of 11 per cent over the next 20 years, they would be able to achieve a corpus of ₹2.16 crore. Along with regular PF and NPS accumulations that they were making, they should be able to reach a sizeable corpus towards retirement.

Other facets

To become successful investors, we encouraged them to keep an ‘Investing Behaviour Journal’ to keep a record of their emotions as and when there were wild swings in the markets either up or down.

The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

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RBI puts Rs 1,000 withdrawal cap on Deccan Urban Co-op Bank; fresh loans, deposits restricted, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank on Friday said it has barred Karnataka-based Deccan Urban Co-operative Bank Ltd from granting fresh loans or accepting deposits and customers cannot withdraw more than Rs 1,000 from their savings account for a period of six months. The lender has also been asked not to make fresh investments or incur any liability without its prior permission.

The RBI said it issued the directions to chief executive officer of the bank on Thursday (February 18).

It has also asked the lender to desist from disbursing any payment whether in discharge of its liabilities or otherwise, or dispose of any of its assets except as notified in the RBI direction.

“Considering the bank’s present liquidity position, a sum not exceeding Rs 1000 only of the total balance across all savings bank or current accounts or any other account of a depositor, may be allowed to be withdrawn,” RBI said in a release on Friday.

It said customers can set off their loans against deposits subject to conditions.

“However, 99.58 per cent of the depositors are fully covered by the DICGC insurance scheme,” said the regulator.

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of RBI, provides insurance cover on bank deposits.

The RBI further said putting the bank under restrictions should not be construed as cancellation of its banking license.

The bank will continue to undertake banking business with restrictions till its financial position improves.

The Reserve Bank may consider modifications of the directions depending upon circumstances.

The directions are set to remain in force for six months from the close of business on February 19, 2021 and are subject to review, it added.



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