Investment and Insurance Plan-Why you should invest in Ulips now

The Insurance Regulatory and Development Authority (Irda) clamped down in 2010, capping the annualised charges of Ulips at 2.25% for the first 10 years of holding. The charges were fixed at this rate because it was the average cost charged by competing products such as mutual funds. With no incentive left for distributors, Ulip sales plunged.

In recent months, insurance companies have sweetened the deal for investors by reducing the charges even further. The Bajaj Allianz Future Gain plan does not levy premium allocation charges if the annual financial investment planning in Delhi  is Rs 2 lakh and above. The Edelweiss Tokio Wealth Accumulation Plan doesn't have policy administration charges. Some Ulips, such as Aviva i-Growth and ICICI Prudential Elite Life II, don't have lower charges but compensate long-term investors with 'loyalty additions'.

But the Click2Invest plan from HDFC Life is a game changer. The only charge it levies is an annual fund management fee of 1.35% of the corpus value. There is also a mortality charge but that is for the life cover offered to the policyholder. The low charges make the Click2invest plan cheaper than even the direct plan of a diversified equity fund. For instance, the direct plan of the largest equity scheme, HDFC Equity Fund, charges an expense ratio of 1.5% per year.

Some readers may pooh-pooh the idea of saving a sliver on costs. After all, a 0.15% saving on costs makes a difference of only `150 on an investment of Rs 1 lakh. While this may seem small, the difference in the cost can balloon into substantial savings in the long term.

Investment and Insurance Plan-Why you should invest in Ulips now

Recently launched Ulips have very low charges. Find out why you should buy these insurance-cum-investment plans now

They were once the most bought financial product. Then Ulips became the most reviled investment, forcing a string of reformatory measures. Now these investment-cum-insurance plans have changed once again to become a low-cost investment option. In fact, some of the Ulips introduced in recent months are cheaper than the direct plans of mutual funds.

We won't be surprised if this evokes an angry response from readers. Ulip became a four-letter word due to the high charges levied by insurance companies and rampant mis-selling by distributors. In some cases, the charges were as high as 80% of the first year's premium. Distributors lured gullible investors by not revealing the high charges and showcasing only the returns offered by the market-linked product.

Financial Planning - How disciplined savings can help Chandras meet their financial goals

amount of Rs 6,576 from their existing mutual fund investment. Similarly, for Meghana's marriage in 13 years, they will need a sum of Rs 40.79 lakh. For this too, they can allocate an existing SIP amount of Rs 7,042 a month to arrive at the desired corpus. If, however, they decide to use the existing gold fund SIP of Rs 3,000, they will have to allocate an SIP of Rs 4,042 in an equity fund to meet the goal.

Next, the Chandras require a sum of Rs 9.4 crore in 16 years to fund their retirement. It is not advisable for Ramesh to retire at the age of 56 years if he wants to build a corpus comfortably, but he can consider the decision later when he approaches the goal. To build this corpus, he will have to deploy several of his existing resources, including the EPF/PPF funds, stocks, mutual funds as well as property. Together, these will amount to Rs 2.67 crore, and to make up for the shortfall, he will have to start an SIP of Rs 50,089 in an equity fund. He can do this once he has built the emergency corpus in five months.

Finally, Ramesh wants a corpus of Rs 10 lakh for his parents' medical needs. To achieve this objective, he is advised to allocate his existing recurring deposit, mutual funds and the value of his surrendered insurance policies. These funds should be parked in a liquid option that is easily accessible.

(Financial planning by Fincart)

Financial Planning - How disciplined savings can help Chandras meet their financial goals

As for his health insurance, Ramesh currently has a cover of Rs 3 lakh and a company cover of Rs 2.5 lakh. Fincart suggests boosting this with a super top-up cover of Rs 12 lakh, with a deductible of Rs 3 lakh Financial Planning. It will cost only Rs 4,326 a month and will be eligible for a tax rebate under Section 80D. There will be no additional premium cost for Ramesh since his expense will reduce from Rs 2.35 lakh a year to Rs 75,068 after surrendering the policies. The amount thus saved can be used to invest for other goals.

Before the Chandras start planning for their goals, they need to have an emergency corpus of Rs 4.23 lakh in place, which is equal to six months' expenses. To achieve this, they can allocate their cash holding of Rs 1.5 lakh and debt fund value of Rs 9,953. To make up for the remaining amount, they should invest a sum of Rs 51,605 in an equity fund for five months to meet the goal.

http://fincart.blogspot.in/2014/10/financial-planning-how-disciplined_16.html

Besides this, Ramesh gets a salary of Rs 1.3 lakh, which brings their monthly income to Rs 1.44 lakh.

s for their financial outgo, the Chandras spend Rs 35,000 on household expenses and Rs 14,500 on house rent, while Rs 16,500 goes as home loan EMI, Rs 20,080 as insurance premium and Rs 4,500 for Meghana's education Financial Planning. They invest Rs 49,000 in various avenues and are left with a surplus of Rs 4,420 a month.

The current goals of Chandras include building funds for Meghana's education and marriage, their own retirement, creating a contingency corpus and having a buffer for Ramesh's parents' medical needs. Fincart suggests a realignment of investments and a revamp of insurance portfolio to be able to meet all the goals.

Insurance coverage

Though Ramesh has a seemingly impressive collection of insurance policies, these are all costly, traditional plans which will be unable to beat inflation and offer a low cover at a high premium of Rs 2.35 lakh a year. While he does have a term plan, it is expensive. Ramesh needs a cover of Rs 2.5 crore given his income, expenses and home loan, and the Fincart team suggests buying an online cover of this amount, which will cost him Rs 38,742 a year. Since Meenakshi is not working, she doesn't require any life insurance.

Financial Planning - How disciplined savings can help Chandras meet their financial goals

Despite a high net worth of Rs 96 lakh, he has 75% of his portfolio in real estate, has bought expensive, traditional insurance policies with a low risk coverage, and has an unmanageable equity portfolio of 14 funds and 11 stocks. More importantly, he is not sure he will be able to fulfill his important goals. To find out, the financial planning team at Fincart analyses Chandras' portfolio and helps them realise their objectives.

Existing financial status

Ramesh is a software professional, who is married to 38-year-old Meenakshi, a homemaker, and the couple has a 10-yearold daughter, Meghana. They stay in a rented house in Hyderabad, but own two houses worth Rs 80 lakh, which helps them earn a rental income of Rs 14,000 a month

Financial Planning - How disciplined savings can help Chandras meet their financial goals

The ability to see the big picture is critical for the success of any strategy. This is also true of financial planning. Most investors find their best-laid plans going awry because they are focusing on parts instead of the whole. This is the reason they binge on one asset at the expense of others, or have a bloated portfolio without considering if the investments will help them achieve their goals. This is why financial planners insist on aligning one's investments with the financial goals. Forty-year-old Ramesh Chandra has taken the right step in approaching a financial planner at this stage because he needs to streamline his finances as he approaches retirement.