Dear Friends,
We all know that there is a huge difference between insurance & investments.
But then too at the time of taking insurance we look at the product as an investment i.e. what is that this product will give me at the end of the term.
So how can we stop ourselves doing the same mistake – The answer to this problem is very simple.
One has to look at golden rule of GBI i.e. goal based investing. Whenever you look at a goal and then invest the chances of making mistake is reduced to minimal. Let us take an example to understand this better:
CASE STUDY on Insurance:
Situation: Sachin is a 26 year old and working in XYZ co. He has mother, father and one younger brother in his family. His mother is a house wife, father is retired and younger brother is doing his MBA. Sachin is the only earning member in his family. His annual salary is 20,000 pm. sachin will retire at age 60. He is worried about who will take care of his family in case if he dies.
Telecaller: One fine day he get a telcall about the insurance product the telecaller explains him about the product and its guaranteed returns he agrees and he make investment of Rs 10000 into that product which will give him Rs 11,000 at the end of 1 year.
Analysis: When we analyze the situation we find that although sachin has made the investment he has not made the right investment. Before making any investment we have to find out the need of the investment and look towards the goal (I don`t understand why does people want to waste the money just like that).
Why did sachin made mistake:
Because he neglected his goal. Sachin needed a term insurance which can replace his income up till retirement.(a term insurance is an insurance which covers your risk for a limited period it provides you higher cover for lower premium)
How can Sachin reach his goal of providing security to his family:
Sachin can invest in a term insurance of any insurance company (e.g. – LIC Amulya Jeevan 1, SA – Rs 30 lakh, term – 35 years) which could have cost him around Rs 5000 p.a. (half the cost of guaranteed product) so in case if he dies by an unfortunate death his family will get Rs 30lakh which can be deposited in banks which gives at least Rs 20,000 p.m. as interest. This could have actually helped sachin & his family.
but unfortunately sachin invested in a scheme which will give him a guaranteed return of 11,000 after a year. This Rs 11,000 will not help sachin’s family to survive in case if he dies.
Note:
In the above case study we have used Thumb Rule’s Income Multiple method to calculate the total S.A required for sachin.
The details are mentioned below:
- Rules of Thumb is divided into 2 parts
a. Income Multiple Rule
b. Premiums as percentage of income
c. Income Multiple Rule: According to this rule, you should buy life insurance cover for a sum which is equal to a certain multiple of your annual net income. The multiples are mentioned below in the table. Income here refers to net income, which means, the residue of your salary after paying for your personal expenditures. This method is one of the simples of ascertaining your need for life insurance and therefore I have used this method in the case study.
| Age | Minimum Multiple | Maximum Multiple |
| Below 35 years | 12 | 15 |
| 35-50 | 10 | 12 |
| 50 years & above | 8 | 10 |
Explaination w.r.t Case Study:
Sachin is aged 26 years and his monthly salary is Rs 20000 i.e. Rs 240000. His personal Expense is Rs 2000/m i.e. Rs 24000 in a year. Therefore his net income comes to Rs 240000-24000= Rs 216000. Now we multiply the net income by a thumb rule multiple which will help us to estimate the life insurance need of Sachin (Range 12-15). i.e. 216000*14 around Rs 30 lakh
| Sachin | Income | Personal Expense | Net Income | Insurance Required (Using Thumb Rule) |
| 240000 | 24000 | 216000 | 3024000 |
Mantra from the case study:
The reason why Sachin and all of us fail while making investment is because we do not answer 3 basic questions of investment
Before you invest in any XYZ product (e.g.: MF policy, Insurance product, Taking a home loan or any other investment for saving tax) just asks yourself 3 basic questions:
Q1. Do I need this product? If yes,then how much I need to invest and why? Q2. Do I understand this product? Q3. Can I become financially wealthy with this investment?
If you can answer all these questions then you can go ahead and invest but, if you cannot find an answer then I would be more than happy to help you to find the right answer along with the investment.
Khushal N.Devera is a certified financial planner at VNL Financial Planners and can be reached at khushal.devera@anantape.com
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