Financial Plan for a real life

Dear Sk, as I promised ur Financial plan is ready & given below.

Mr. X (SK), an Ex Indian Navy man, is currently working as an Electrical Engineer in a pvt. Shipping co. belongs to a small city in South India. Family consists of his wife Mrs. Y, & a Daughter Baby Z. On his request, a detailed analysis of his present financial condition was done. The result of analysis & corrective action recommended are given below.

The Present Condition:-

At present, Kumars are residing in a rented accommodation & they have planned to live there for at least next 7-8 years till their dream of constructing their own home is over. At present their investments in Debt (PF, PPF, FDs etc) & in Investment oriented Life Ins. Policies represents a major chunk of their investments. On assets sides there are two Residential plots out of which one ‘ll be used to construct house. To make future calculations, Income of only Mr. SK has been considered.

The inflation rate has been taken as 7%, Increase in living standard as 2% every year & Income rise is taken as 10% per annum. Life expectancy of both (Mr. & Mrs. SK) has been taken 85 years.

What are they saving for:-

At present Kumars are saving for following goals in chronological order.

1. A house current construction cost 35L Rs. as early as in 2017.
2. Financial provisioning for education, career & marriage expenses of Z
3. New Vehicle in 2018 for current cost 6L Rs.
4. Retirement after above goals r over & sufficient provisioning is there to live a comfortable retirement life.
5. Apart from above goals, a one time dream vacation of current cost 2L Rs. possibly in 2011.

The Cash Flow :-

The current monthly income is 113000 Rs. (it includes Salary + Pension + Interest).

Out of which no mandatory deductions are there.

So the Net monthly take home income (NMI) is 113000 Rs.

The living expenses are appx. 21.5% of NMI. A very good sign & indicates that almost 78-80% of ur NMI u r saving.

Currently No Loan is there hence EMI value is zero.

Ins. Prem. (Gen. + Life) is about 30.9% of NMI.

MF SIPs/RDs mly investments are around 22% of NMI

Net Monthly Cash Surplus is appx. 25.6% of NMI, A very healthy sign.

Current Assets & Investments:- Current assets includes gold valued 5.25L Rs. in the form of jewelry of Mrs. SK, Bank/Co. FDs 8.9L Rs., NSC 10K & RD 11K form the Debt part of the portfolio. Direct Eq. (Shares) are around 20K Rs. & Eq. MF 3.5L Rs. which together form the Eq. part of portfolio. Apart from this there is Insurance fund value of appx. 23.5L Rs. out of which 20.5L Rs. in Eq. linked ULIPs & 3L Rs. in debt based traditional plan. So adding the Ins. Fund value in other investments, the changed Assets & Investments situation is like this –

Plz. Note in the above calculation, for real estate, only the investment oriented 1800 Sq. feet plot value has been considered as u r going to use the bigger plot (6400 Sq. Ft.) for self consumption & it 'll remain that way. .

Combined current valuation of all assets & investments is appx. 46.5L Rs.

Protection:- Currently Mr. SK is covered for 72L Rs. Out of which 16L cover is from Aviva life long, which is to be dropped finally. So the net cover as on date ‘ll be around 56L Rs. Neither Medical ins. nor accidental insurance for self or family is there.

Liabilities:- No loan is running so loan related liabilities r nil as of now. Future financial liabilities in the form of children’s Edu., Career & marriage Exp. are there. Mr. SK intends to construct a house of valuation 40L, in future from his own money (as per his own estimate in 2017).

Path to be taken:-

Here is the future journey path of their financial nirvana.

First of all please keep amount equal to 3 months’ expenses (Living, Ins. Prem., MF SIPs) appx. 80000*3 = 240000 in your bank account for immediate liquidity in case of emergency. Try to put this amount in ur saving bank account where u have SWEEPING FD facility. Apart from it keep another 3 months’ expenses amount in Liquid plus funds for emergency.

1. Protection:- On detailed checking of lifestyle, future goals & future loan liabilities, the current Lifecover (all thru investment oriented policies) is not a good thing & the same is falling short of actual need. First of all I'm discussing for current policies.

Bajaj Unit Gain – Although policy is in wife's name but u r paying the prem. Action taken by u already as advised in mail.

Aviva Life Long – surrender this policy

HDFC traditional Endowment plan – Surrender this plan as the current surrender value is just around ur break even point

Birla Children plan – Opt for prem. Holiday. After surrendering all these policies. Ur new Sum assured from all these plans 'll be like this 40L from HDFC Y'star Ulip & 6.44L from Birla children Plan. Total around 46L.

Future requirement of Life insurance is as below.

1. In case of Home Loan, take a term Plan equal to loan amount in future as & when u r constructing the house thru home loan. The details on home loan r discussed in the Home topic.

2. Use HDFC Young Star ULIP's Sum assured for expenses of child Education & career. So keep on paying prem. Year after year with out fail.

3. Total 40L Term Plan for marriage expenses of Z. 25L term cover for age 57, to be taken from IPru Pure Protect Elite. 15L term cover from Aviva – Life Shield Plus for age 52.

4. To cover living expenses of ur family adequately in ur absence, Take 50L term cover for age 60 from Aegon Religare's I-Term. & another 50L Term cover from Kotak Preferred Term Plan. Take these plans immediately.

Please note, While selecting Term plans, importance is given to have the cheapest term cover or next to cheapest cover & over all to have a mix of covers from different Ins. Cos. You may discuss (if u feel that the idea is not at all comfortable with u) in detail.

Purchase a Family Floater mediclaim policy for ur family's medical expenses of at least 5L cover. The prem. paid by you for this policy is eligible for Tax benefit under section 80-D for max. limit of 15000 Rs.

As & when u purchase ur house, Insure it with a House Holder (HH) policy from IFFCO Tokio General Insurance Co. with detailed covers of building for earth quake, lightening, floods & terrorists activities for current market valuation of ur property, fixtures & furniture, electrical equipments & appliances for theft & break down, Jewelry for upto 50K in house against theft & loss in traveling. With this HH policy, plz. take accidental insurance of 10L for urself & 5L for ur wife. While Taking this policy, try to take 7-8 sections to get maximum discount on prem. Plz. take this policy for an year only & renew the same for market value of ur property year after year. Plz. keep the purchase documents of ur jewelry, electrical & other equipments safely as these ‘ll be required at the time of claim if it happens. Apart from 50K valuation, keep remaining jewelry in bank lockers.

I’m advising for specific cover of 50K for jewelry as beyond this amount the Ins. Co. ‘ll ask u to provide purchase & valuation details of the jewelry, which ‘ll be quite problematic to u, as I think a major part of this is received as marriage gift by Mrs. Karthika.

2 Home:- As of now u are planning to purchase another plot as an investment, Plz. Don't do that. The reason is ur current financial condition as well as future liabilities r not allowing u to do it. Also ur family is still living in a rented accommodation. So ur first priority should be to construct a house on ur plot. There is more logic in doing so immediately, say after 2-3 years from now onwards, something happens to u, & ur family is still living in rented house, then how ‘ll they live like that continuously in ur absence & how ‘ll ur wife, construct the house?

For construction of house, start the work immediately. Use 5-6L Rs. From ur Fds for ur own contribution & for balance amount go for a home loan of 24-25L Rs. Based on ur income level, any bank 'll finance u easily. My preference 'll be SBI & within SBI the specific product 'll be Max Gain home loan. For details on SBI Max. Gain home loan, u may discuss in detail after going thru the plan. Go for a 20Y loan term as of now. The appx. EMI 'll be around 21K Rs. As of now which is very much within the limit of ur mly cash surplus amount.

Don’t forget to insure ur house property at the time of completion of construction for its fair market value & renew the same every year.

P. S. As u r liquidating a part of ur FDs for construction of ur house, ur Interest income ‘ll come down & so do ur total mly income (Salary + Pension + Interest ). The reduction ‘ll depend upon how much money u r pulling out from ur FDs. & also what Interest rate FDs u r redeeming.

3 Child:- From ur own reply, u r planning to save 5L Rs. in today’s value for career related expenses of Z. So the obvious thing is u r planning to shoulder the responsibility of normal education of Z from ur own pocket. Keeping in view the spiraling cost of education, ur future expenses on this ‘ll increase in a big way. So I’m calculating that a education funding corpus is created which ‘ll cover all these education related expenses.

Back of the envelope calculation shows that a one time investment of around 24L Rs. growing @ 15% growth rate can easily cover education expenses from nursery class to professional education. The calculation also indicates that the current HDFC Y’star ULIP of 2L yly prem. can sufficiently do all this thing. So u need not to worry for education & career related expenses of Z.

For Z's marriage & as a back up for edu. & Career expenses of Z in case there is a short fall from HDFC Y'g Star ULIP. Start investing 10K Rs. monthly in Eq. MFs & balanced funds. Increase this amount by 2000 Rs. Every year. U 'll wonder from where this amount 'll arrive, My dear friend, the prem. Saved from surrendered policies is the answer. The saved prem. Amount is almost 2.5L Rs. Yly. So after investing 1.2L Rs. yly for Z’s marriage & Education back up, u r still left with 1.3L Rs. spare cash yly.

Keeping in view the current gold holding u have, no separate provisioning is advised to accumulate gold for Z’s marriage. I’m open for discussion on this if u want to.

4 Vehicle:- Invest 11K Rs. (from remaining Prem. saved amount) Mly in MFs, primarily in balanced funds to save for ur dream vehicle. @ a conservative growth rate of 12%, within next 4 years i.e. around 2014, u ‘ll have enough cash in ur pocket to purchase ur dream vehicle with ur own money.

5 Retirement:- For post retirement life, life expectancy is assumed up to age 85 both U & Mrs. Y. Inflation rate of 7% is taken as basis for calculating post retirement life expenses. An increase in ur life style @ 2% per annum is also considered from current level for calculation of retirement corpus.

Ur current mly expenses are around 25000 Rs. out of which 4K Rs. is the house rent, which ‘ll not be there as & when ur own house is completed. So the net living expenses r around 21000 Rs. only. After retirement, there ‘ll be reduction of appx. 35% in this figure so ur post retirement life, mly exp. ‘ll be around 13650 Rs. in current value.

The Corpus required for your retirement is appx. 3.9Crore Rs. Out of which your current investments in Fds (less withdraw for House construction), Policy surrender amount & current Shares & Mfs investments (total 12L) as well as the 1800 Sq. Ft. plot (current valuation taken as 5L Rs.) are considered as starting capital. The growth rate for these 17L Rs. from now onwards is taken @ 8.5%.

The monthly amount to be invested for creating retirement funds is 1.55L Rs. Mly if u opt to retire @ age 50 @ 15% growth rate for this new investment from now onwards year after year.

That’s the reason enough to show u that u can’t think of retiring @ age 50.

The monthly investment requirement for retirement funds is 25K Rs. Mly if u opt to retire @ age 60 @ 15% growth rate for this new investment from now onwards year after year. U r already investing almost the same amount in MFs/RDs as of now. So the question remains only to go for the correct choice of MFs.

Till your age 50 the major portion of retirement funds ‘ll be in Pure Eq. MFs. From then onwards divert ur fresh investments in balanced funds & also bring down your pure Eq. holdings to 40% till u reach age 55 in favor of balanced funds. At the time of retirement have a mix of Pure Eq. MFs, Balanced, MIPs, Fixed Income instruments. No morecomment as of now for exact % of individual instrument at the time of retirement.

5 Vacation:- As of now plz. Skip ur vacation plan for at least the construction of ur house is over within next 18-24 months. We ‘ll revisit in between to provide funding within ur overall cash flow to go for a vacation.

Note:-

List of MFs‘ll be provided after getting your review on above financial plan.

All the above analysis, planning & advises there on, are based on ur current salary structure.

Please feel free to ask whatever doubts, questions you have.

I wish for best of your future life. Happy Investing.

Please take good care of yourself & your family.

Thanks

Ashal Jauhari.

ULIP v/s Term + PPF combo

Dear Friends, I tried to generate a BI on LIC website for their Money Plus - I plan for the following data but I'm unable to generate the same.

Age 30
Male
Policy term 25Y
Prem. amount 50K yly
Sum assured 15L

For the same person, I generated a quote from LIC Anmol Jeevan Term plan, the prem. in this case comes 5732. Now instead of investing the remaining prem. of 44268 Rs. in a MF, I opted to invest in PPF, one of the most secured investment vehicle. At the end of the term of 25Y, the maturity amount in PPF is 34.95L Rs. i.e. almost 35L Rs. without riding any risk of Eq. market for a common person who don't understand all the financial nitty gritty.

Remember Money Plus -I is a Type 1 Ulip, so the family 'll receive only the higher of Sum assured or the fund value. But in this case for the combo of Term plan +PPF, the family 'll receive Sum assured of full 15L Rs. from the term plan & of course the fund value in PPF.

Now to equalize fully with type - 1 ulip, I opted for a split term cover like this, to save on mortality charges.

5L cover for term 25Y - prem amt. - 1911
5L term 20Y - 1614
5L term 15Y - 1406

In initial years the total prem. outgo is 3525 Rs. per annum, amt invested in PPF is 45069.

After completion of 9years the PPF corpus is already more than 6L Rs. so from 10th year, I stopped paying prem. for 15Y policy & diverted to PPF itself.

So the changed equation from 10th year is Term plan prem. outgo 3525 & PPF contribution 46475.

Again after 14 year the value of PPF is 11.87L Rs. so I stopped paying prem for 20Y policy & diverted this prem. too to PPF.

So the changed equation from 15th year is Term plan prem. outgo 1911 & PPF contribution 48089.

Finally after 17 years as the PPF value is 16.64L Rs. I stopped paying for 25Y policy & full money is going to PPF.

At the end of 25Y term, the PPF value is 36.55L Rs.

Plz. post ur comments.

thanks

Ashal

Health Saver Plan - New Plan from ICICI Prudential Life Insurance Company

Hi, There is a new plan "ICICI Pru Health Saver" in market. This is being called as ULIP and which boast of availing tax benefits u/s 80D for the entire amount invested. Being a ULIP, Because of benefits u/s 80D It looks attractive. Please analyze this plan and give your expert opinion about it. Many Thanks for your time. Regds Vivek Answer -  Dear Vivek, earlier the combo of Health Plan & ULIP was available from LIC as well as Reliance but in both these policies, the 80D benefit was not available on investment part. So ICICI Prudential Life Ins. cos. has moved with this cleverly drafted policy. Here the investment part of ur prem. or in other words fund value can only be redeemed against medical treatment/expenses. This policy is a combo of usual mediclaim policy & ULIP. Just dig deep into the skin of this policy & u `l come to know the real truth. First understand what this policy offers? apart from a normal mediclaim benefit, due to investment component from 3rd policy years onwards u can claim more than ur standard Sum assured with a ceiling set by company. Say ur original SA is 3L Rs, after completing 3 policy years u can claim a normal claim of 3L rs. under mediclaim benefit & another 20% of ur accumulated fund value. In other words u can redeem ur fund upto 20% value of fund. This fund value ceiling `ll increase with the years pass & after 10 policy years u can claim 100% of fund value. As per the product brochure of this plan, This policy can be taken as individual plan as well as family floater plan. For individual Plan - Min. entry age is 25 years completed & max. age is 55 years. For family floater Plan - Min. entry age is 90 days & max. age is 55 years. In each of the above policy the maturity age is common i.e. 75 years. Here r the negative aspects of this plan. 1. High Prem. allocation charges - 20% for 1st year, 2 & 3 year 9%, 4-10 years 2% & Nil from 11 year onwards. 2. In case of family floater option, in case of death of primary insured (the eldest member of family), the policy `ll be terminated immediately. 3. Regular prem. pmt. is compulsory for first 5 years for cover continuance option i.e if u don`t want to pay prem. in future to keep policy in force u `ll have to pay prem. for first 5 years. 4. No surrender of policy is allowed except the first 15 day free look period window. 5. Ins. charges for general mediclaim policy as well as policy admin charges `ll be recovered by cancellation of UNITs which `ll impact u severely in prolong bearish phases like the current one. 6. For individual plan option the mly. policy admin charge is 60 Rs. where as for family floater option the same is 90 Rs. 7. A long list of exclusion, which i can`t post here in this limited space of MMB. 8. Actually the health saving option of this policy is similar to our general practice of dipping into our savings to sat off the medical bills. 9. Plz. note the prem. for general mediclaim benefit (known as Hospital insurance benefit in this policy) `ll be charged on ur actual age every month by cancellation of ur UNITs. this is not the case in normal mediclaim policies of Gen. ins. cos. where u pay prem. as per age band of say 31-35, 36-40...... Again this monthly cancellation of UNITs `l impact more in case of bear phases as more UNITs `ll be cancelled to pay insurance prem. per month. In my view - The same effect of mediclaim & saving can be achieved by purchasing a cheaper mediclaim policy as well as investing the surplus amount as per our comfort level in Eq. or Debt funds or anywhere else. So this policy should be avoided. Thanks Ashal

Charges in ULIPs & Mutual Funds

My insurance agent told me that There are many internal charges in MF which are charged by MF companies but these charges are not visible to Normal investor.

He suggested : In case of ULIP, there are 2 things :

- charges are completely transparent then MFs
- And in long Term (10-15 yrs), ULIPs are cheaper than MFs in terms of charges.

Please suggest and draw some clear picture about charges.

-vivek

Dear vivek, there is totally opposite picture what ur Insurance agent had advised u. Let me explain.
In case of MFs there r only 3 types of charges applicable -
1. Entry Load - It can be avoided if u invest directly to ur MF bypassing ur MF agent.
2. Exit Load - It can also be avoided by remaining invested for certain time period in that particular plan.
3. Fund Management Charge - It`s charged as a %age of total assets under the plan. Normally it varies from 0.25% to 2.5% depending upon type of funds (Debt to Eq.) as well as expertise of fund co. for a same set of MF plans, lower FMC Plan is always advisable for investment.

In case of ULIP following 4 types of charges r applicable.
1. Prem. allocation Charge - It may vary from as low as 1% to as high as 65-70% of ur first year prem. & reduced year after year or may remain same at a constant level say 4% or 5%.
2. Mortality Charges = It`s the basic cost of insurance & again it varies among Ins. cos.
3. Policy admin charges - Some ULIPs charge as low as 20 Rs. per month where as some charge as high as 200-300 Rs. per month. Again not constant among Ins. cos.
4. Fund Management charges - From 0.5% to 2.5% depending upon the type of Fund (debt to Equity).

From the above list u can judge urself that in case of MFs there is only 1 charge FMC, which u `ll have to pay but in case of ULIPs there r several charges & no common benchmark is there to see the impact of these charges. I do hope the message is clear to u.

Thanks

Ashal...

Tax on withdrawals from ULIP for NRI

Dear Ashal,Thanks for the reply.Some hope.Details are as follows.Would like to know best path forward.Policy: ICICI LIFETIME. Started on 24th Aug-2004,premium 20000 per month. Sum assured to begin with was 1 lakh. 100% in maximiser fund.Within a year, of the policy the insuranse coverage was increased to 11 Lakh. In Nov 2007, I shifted the whole amount to PROTECTOR fund, (Approx. 13.20 Lakhs). However monthly premiums were continued to go into maximiser fund.As on date,Maximiser fund: Units= 3431.26 @ NAV of 51.11 & Protector fund: Units= 83015.91@ NAV of 16.46.I'm NRI, premiums paid thr NRE A/C. Request tax and insurance experts to suggest best path forward. I want to withdraw the amount and have written to stop further premiums.Best regards,Prahlad.

Dear Pralhad, For ur monthly prem. of 20K (annual prem. of 2.4L) the minimum sum assured should be 12L Rs. as i mentioned earlier. Now as u have stopped ur future prem. it `ll be nice on ur part if u increase ur cover from 11L to 12L. If it is not possible, don`t worry. Here is ur calculation,
A. Sum assured = 11L (as u increased it in the 1st year itself)
B. annual prem. @ 20% of A = 2.2L
C. Excess prem. paid = 20K
D. Total annual prem. paid = 2.4L
E. %age excess prem. of annual prem. = 20/240*100 = 8.33%F. Total fund value as on date (arrived from the data posted by u) = 15.42L appx.
G. Taxable surrender value = 8.33% of F = 128450 appx.
H. Hence Tax free surrender value = F-G = 1413550 appx.In the current year, if ur resident indian income from all other sources is almost nil, u may even sat off ur taxable surrender value against basic exemption limit of 1.5L for under 65 age male tax payee. I hope above info `ll be useful to u. Feel free to ask if u need more help.

Thanks

Ashal...

How to get a TAX FREE Pension

Now a days a lot of young males & females are investing in Pension Plans offerd by almost all Insurance Cos. in India with a target to save enough for their sunset years. Once they are retired from their jobs, the accumulated corpus 'll provide the handsome pension, as the TV commercials of these Insurance cos. showcase.

If life is so simple, then there should not be any problem on earth. The basic problem with all such pension plans & investors who are investing in these plans, neither the plan providers (read Ins. cos.) are giving full details nor the customers (investors) are aware regarding their future - 1. What 'll be the accumulated corpus?

2. what 'll be the appx. returns (read pension)?

3. What is tax treatment of pension?

4. till how much time, the pension 'll be given?.........

Not many people give serious thought on these aspects. The most cruicial part of retirement planning thru these pension plans is - people are not aware, How the income tax liability/applicability 'll impact their over all pension.

1. Premature Withdraw - If due to any reason, the person, wants to premature withdraw of this pension plan, the surrender amount 'll be added to the taxable income from all other sources in the Financial Year of Receipt of such surrender value.

2. Start of Pension - At the time of start of pension (also known as vesting age in Insurance Cos.), The investor may withdraw a max. 1/3rd amount of her/his accumulated corpus till date as Tax free Cash commutation. Balance 'll be used for pension generation. As per IRDA guidelines, the investor has option to put remaining amount with any Ins. co. which is offering max. pension on this corpus.

Normally people prefer to start pension @ age of 60 years. Now comes the most interesting part of taxation on pension plans. Whatever amount received as pension 'll be added to the income from all other sources in the relevent financial year & taxed accordingly. At the same time, the cash commuted part (if opted for) 'll also be invested in safe avenues like SCSS, Bank FDs, PO schemes, Etc. The interest earned from such investment as already taxable. Hence the total pension generated from accumulated corpus as well as interest income from CASH COMMUTED part is taxable.

Now comes the question - How we can manage to avoid such income tax on our pension?

If an Investor, wants to invest in UNIT Linked Pension Plans (ULPP) to receive pension, it is better to invest in whole life ULIP or at least age 75 ULIPs. The investor should note here that money received from Life Insurance policies are tax free under section 10 (10) (D) as per current indian tax law. So once the investor reaches the age of 60 (the noraml retirement age) s/he may start withdrwaing tax free pension from ULIP in the form of partial withdraw.

As already mentioned these withdrawls 'll be tax free. the added advantage in case of ULIPs as replacement of ULPP is, one can plan her/his withdraw according to need whereas in case of ULPP, a fixed sum 'll be given no matter, ur actual requirement is less or more than it.

While selecting ULIP as pension plan, always try to invest in the ULIPs which offers lowest cover multiple say 5X or 10X of ur annual prem. & the same time plz. don't overlook the other aspects of ULIPs. Fund management charges, policy admin charges, Prem. allocation charges etc.
Hence make a wise call & if u r really interested to invest for ur pension, invest in a whole life or age 75 ULIP to get a "TAX FREE PENSION."