Insurance and Investments

This is a term normally reminded by the Insurance Agents just before the tax declaration time for many of the people. But come to think of it, even I have done pretty much the same. I have normally ended up investing in ULIP's thinking of returns rather than insurance per se. Looking back today, I dont think that I am covered enough.
So whats the best way to cover one self from Insurance perspective.

Well, lets keep things simple and understand a couple of basic points.

1. Insurance is meant for keeping a backup incase of any eventuality that happens to you and you dont want your dependent's to suffer
2. Investment's are meant to create more financial stability for you and your family  so that down the years you can enjoy, especially with the rising cost and for the years you stop earning, or for planning for expenses down the road(House,children's weddings, Children's education)

With time , we have seen that both of these were sold together as a single plan. Either as ULIP's or equivalent one's. At the same time I dont completely blame the insurance companies. As that was the time markets were booming and people could see some stable income coming in and also get some insurance and finally and most importantly SAVE TAX.

Today, all I would say is, for Insurance, buy a simple Term Plan. Cover your self, say 7-10 times your current annual income. There are a lot of companies giving insurance at a very low cost. It is indeed cheap.

For Investment, divide your investment into FD's Mutual Funds, Stocks, Bonds etc. Don't invest in one type of instrument. Most important, keep discipline while investing. Do it every month fixed amount. Use SIP's(Systematic Investment Plans) wherever applicable. Thats the best way to do it. 

Dont make investment complicated. Invest what you can and that doesnt mean spend everything and say you dont have any money left. Keep some target every month. And If possible increase that over a period of time.You will be surprised the amount you will accumulate at the end of an year.

Keep Investing and creating wealth.

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Insuring your home

Was reading through the economic times , the ET wealth section and didnt find anything great. But came across this nice article on home insurance. Though I have taken a home insurance, I hardly took into account any of the points mentioned in this article. Its a good article and I suggest you to read it.

The link of the same is as follows
http://economictimes.indiatimes.com/personal-finance/insurance/analysis/why-you-should-take-a-cover-for-your-home/articleshow/7472214.cms

You work hard and save money to buy a house and household appliances. You take utmost care to secure your dream house, yet there is the risk of a natural or man-made catastrophe. If you cannot prevent it, transfer the risk. Consider buying a householders- or home . insurance policy. 

Scope of cover 

A package householders policy provides cover to the structure of the building as well as the contents of the house, that belong to the proposer and his family permanently residing with him or her. In case you are living in a rented house or in an apartment where the building is insured by your society, you can buy a customised plan which covers only your household articles and not the building. Some common risks covered under the policy are fire, earthquake, flood, burglary, bursting and overflowing of water tanks, breakdown of domestic appliances and loss or damage of jewellery and valuables by accident or misfortune. Sum insured for certain items under contents, such as works of art, jewellery or other valuables, may be subject to a limit. A householder policy also provides cover against the insured’s legal liability for bodily injury or damage to property of third party. Some policies also cover rent for alternative accommodation during reconstruction of a building that has been damaged by fire or other disasters. Risks covered in the policy and premium may vary slightly from one insurer to another. 

Guide to choose the sum insured 

The purpose of insuring the building is that, in case the building is damaged due to any disaster like fire, earthquake or flood you should get financial support to reinstate it. So the sum insured for the building should neither be the cost of acquisition nor the current market value of the house but the current construction cost because market value of the building includes cost of land on which the house is built. Don’t include the cost of land in the sum insured but don’t forget to add costs for removal of debris. On the other hand, for the insurance of household items sum insured should be the market value of these items i.e. the value for which these used items could be bought or sold in the market. 

If you want to insure the breakdown of domestic appliances, then the sum insured should represent the current replacement value of a similar item. For instance, if you want to insure your two-year-old, 42-inch Sony LCD TV, the sum insured should be equivalent to the current cost price of a new 42-inch Sony LCD TV. However, the claim amount payable would be the amount required to bring the damaged item to the same condition as it was prior to the damage subject to the adequacy of the sum insured. 

Points to remember 

Unlike a life insurance policy, householder insurance policies are contracts of indemnity, which means it is a cover that only restores the insured to his original financial position but the insured cannot gain from the policy. It is very important that the sum insured is adequate because if you are under-insured, claim payments will be reduced by applying the average clause where your claim will be reduced in proportion to the level of under-insurance. For instance, if your property is worth `1 crore but it is insured for `75 lakh and the loss is `50 lakh, claim will be settled to the extent of 75% of `50 lakh i.e. `37.5 lakh and you will have to bear the balance. You must ensure that your house is adequately insured at all times taking into account the renovation, enhancement made to your house or some addition to your household items. Do not just send the renewal cheque when it is due; take the time to review your cover. Read your policy carefully. Some risks are not covered in certain conditions like if the house is left unoccupied for more than a specified period of time. It does not make sense to leave any scope to lose what you have invested in your home. After all, homes are not built every day. 

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Why one shouldnt invest blindly in stocks

Read this article to learn more
http://economictimes.indiatimes.com/articleshow/7390140.cms

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Short term Capital Gains Tax for Property

Another great article from Economic times as to why you shouldn't sell your property in the short term
http://economictimes.indiatimes.com/articleshow/7390819.cms

The complete article as mentioned below

The profit made from the sale of a house is never a simple calculation involving the subtraction of purchase price from sale price. A number of income-tax caveats kick in. If you buy an apartment for Rs 50 lakh and sell it two years later for Rs 1 crore, your profit from the sale will not be Rs 50 lakh. It will be much lesser. Here is how the maths works: 

If you sell within three years of buying: 

The first thing to take into account is tax liability. If you sell a flat within 36 months of buying it, the profit is added to your income for that year, and taxed accordingly. If you fall in the highest income tax bracket, the tax rate will be 30.9%, which comes to Rs 15.45 lakh. 

If you have taken a home loan: 

You will also have to take into account what you actually paid for the property in the first place. For instance, if you had taken a home loan of Rs 40 lakh for buying the apartment, you would have been paying an interest of 9.5% for the past 24 months. Your equated monthly instalment (EMI) would work out to Rs 37,285. Now, under Section 80C of the Income Tax Act, the principal of the home loan can be claimed as a tax deduction. But if the property is sold within five years of buying, the tax deductions are reversed. 

During the early years of a loan tenure, a major part of the repayment is tagged under ‘interest repayment’. In your case, of the nearly Rs 9 lakh repaid over two years, only Rs 1.78 lakh is the principal repayment. The principal component will be added to your income for the current year and taxed at 30.9%. This means another Rs 55,000 skimmed from your profit. 

Also, for two years you paid an interest of Rs 7.17 lakh on the home loan. This will be deducted from your capital gain, which comes down to Rs 26.83 lakh (Rs 34 lakh — Rs 7.17 lakh). 

Of your remaining home loan principal, Rs 38.22 lakh (Rs 40 lakh — Rs 1.78 lakh repaid as principal), the bank will levy a prepayment charge of 2.25%, which works out to around Rs 86,000. 

After these deductions, the actual profit on the sale is only Rs 25.97 lakh, nearly half of what you had dreamt of. 
Most investors look at short-term real estate investments the same way and get carried away by stories of friends or colleagues who made lakhs within a year. However, before you are inspired to do the same, do your calculations, or better still, stick to your investment for the long term. 

Tax facts to note while selling property 

A short-term capital gain/loss is treated and taxed in the same manner as any other income or loss. 

Tax on long-term capital gains can be avoided if the sale proceeds are reinvested in another residential property within one year before or two years after the sale (Section 54 F). 

Long-term capital gains can also be saved if only the capital gain (and not the total sale proceeds) is invested for a period of three years in National Highways Authority of India or Rural Electrification Corporation Limited bonds (Section 54 EC). 

The determination of sale proceeds of a property is based on the valuation adopted by the State Stamp Duty and Registration Authorities and not the amount mentioned in the Deed of Conveyance (Section 50C). This is intended to cover the cases where a part of the sale price is received by the seller as unaccounted cash. 

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Avoid Last Minute Tax Planning

Came across this nice link in Economic times.
http://economictimes.indiatimes.com/articleshow/7389665.cms

I found this article very good. In simple words one shouldn't wait for the last minute to invest or rather to plan your investments. Do it regularly and plan it will. Use the power of averaging and stagger your investments over a period of time. They help you not only from losses but also give you great returns. Systematic planning is the best way to invest, unless you are full time into this investments.

Here's the article mentioned above in the link

Aamir Humayun looks forward to holidays because they help him unwind and let him spend time with his children. But the public holiday for Mahavir Jayanti in 2007 put the Delhi-based businessman in a quandary. It was 31 March and Humayun had not finished his tax planning. “All banks and post offices were closed. There was just no way I could save tax,” he says.

So his chartered accountant stepped to help. One call to an insurance agent and a few signatures later, Humayun’s tax planning for the year was done. He and his wife had been sold two unit-linked insurance plans with an annual premium of Rs 1 lakh. “I was told that I would have to invest only for three years and that my investment would grow to about Rs 48 lakh in 20 years,” says Humayun.

The agent, who was incidentally the chartered accountant’s wife, conveniently glossed over the fact that these were only projections and based on the ridiculous assumption that stock markets would rise 18-20% every year in the next two decades. When the markets crashed in 2008, the value of Humayun’s investment plummeted. He has paid premiums for four years and the fund value is barely in the green. “Now these insurance premiums have become millstones around my neck,” he says in disgust.

The only cold comfort for Humayun, if at all, is that he is not alone. Millions of taxpayers across the country compress their entire year’s tax planning into one month. For salaried taxpayers, the tax-saving season kicks off when they get a note from the accounts division on how much they need to invest. With it comes the warning: give proof of investments or get ready for a hefty tax deduction at source (TDS). “That’s the time when undisciplined investors start running around like headless chicken,” says a financial planner.

In the rush to invest before the deadline, taxpayers often make fundamental investing mistakes, which they rue for years to come. Gurgaon-based software professional Ashwin Arora knows the perils of just-in-time tax planning. Three years ago, he was working with a large global consulting firm that gave him less than two weeks to show proof of his investments. “My company asked for proof by the end of the calendar year and I had only my provident fund contribution to show,” he says. So, Arora promptly invested Rs 33,000 in three tax-planning mutual funds at one go. This was just a few days before the markets went into a tailspin in 2008. “The three funds are good performers but my investments are still in the red,” he says glumly. Small investors should not put large amounts as a lump sum in equities. It’s best to stagger the investment in monthly SIPs. 

More importantly, experts say tax planning should be a part of the individual’s overall financial plan. In other words, the investment choices should not be governed by the potential returns they offer but by their ability to fit into the asset allocation of the individual. “One should choose the option depending on one’s risk appetite and asset allocation,” says Pankaaj Maalde, a financial planner working with Mumbai-based Sykes & Ray Financial Planners. Invest in the Public Provident Fund (PPF) if you need long-term debt in your portfolio. Go for NSCs, fixed deposits and infrastructure bonds if you want medium-term debt. Buy ELSS funds if you want equity exposure. And take an insurance policy if you require life cover. 

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About your Insurance Policies

Well, this is not something easy. Yes, we all invest into Insurance policies, for various types of coverages. Right from Life cover to Illness Cover to that of Home and Vehicle. In this article I am primarily focussing on the Life Cover.
A life cover is taken so that , in the case of an eventuality, your dependents are taken care of with the money that one was insured against. Normally the bread winner of the family would invest into such plans. Earlier, or to be specific, LIC agents, would keep a note of all their customers and keep in touch with them. Incase they found that one of their clients have passed away, they would themselves take up the matter and get the money to their dependent.
But those days are gone, when the agents would be loyal to the customers. Today, they keep changing companies, places and even their clients. So basically, you, ie the person who is taking an insurance should keep his/her dependents updated of the Insurance plans taken. So that after an eventuality they know that they have been covered. Having said this, its not easy to tell this directly. I would advice the following, whichever suits you well or all of them.

[1] Tell your main dependent that a particular Insurance has been taken. Direct Approach.
[2] Tell your close friend about all the plans that you have taken. Maybe an office colleague whom you are very close with and normally do all your investment plans together.
[3] Keep all your insurance documents in one place in the house and keep others updated that ALL the insurance documents are in a given file. You need not tell them the details of the investments. They will find out when its needed. This is what I follow.
[4] Send an email to your Dependents and close friend on the policy that you have taken with the policy details and Insurance Company name.

Whichever approach you find easier to follow and practical, please follow the same. If there is any other way you do, then nothing stopping you. But the important part is that, your dependent's should know of all the insurance taken. As thats the only thing that will take care of them in your absence.

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Retirement Planning

In this article, I am not going to talk about what one should do towards retirement planning, but rather why one should  go for one and what risks one carries.

Gone are the days, that post retirement, the government will pay you all your life. This is the age of private companies and the pay scales are apparently much higher. But unless you dont save up your own money for retirement, trust me, you are going to have a tough time down the line.

If you are working in a private company, the only two places where the company invests for you normally would be in the Provident fund and the Gratuity. Gratuity is given to you, only if you spend more than 5 years in the company. While provident is given to irrespective of the amount of your stint in the company.

What I have observed in today's life is that, with every change or a job hop, one withdraws the PF which had been accrued by the company and ofcourse there are many ways one can spend it. But the problem here is that, this money which was meant for your retirement is no longer available. In simple words, the money which was supposed to be supporting you when you are not working, is consumed during the period where you are earning.

So what should we do ?
Well the answer is simple. Plan for your retirement properly. Investment in various options which are available for retirement planning.
Don't withdraw your PF fund. Just get it transferred from your old company to your new one.  Also note that, if your PF is withdrawn, then there is a tax which is charged on the same.

If you are close to 5 years in the company, then make sure you complete 5 years and claim the gratuity and put it into a good investment instrument which gives a good return.

On what instruments to invest for retirement planning, I will come back on that in my subsequent articles.

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