Insurance Myths: Busted

A gentleman I know has been thinking of buying insurance for quite some time; however, having other important matters to handle on priority, this was conveniently put on the back burner. Now that time of the year has come when most people scramble for investments in tax saving instruments at the end of the financial year and insurance comes at the top of the list; this gentleman too wants to buy an insurance policy urgently. He called and said “I want to buy insurance and pay 10000/-; which plan should I go for?” “Buy term insurance” I told him since I knew he was awfully under insured. “No, the money goes down the drain if I outlive the plan and I know I’m going to live long”, he said. There is no dearth of people like him but I sincerely hope that some day good sense would prevail. Insurance is an integral part of a sound financial plan. However, it’s highly misunderstood and often bought and sold for all the wrong reasons under the Sun. Let’s have a look at some myths associated with insurance.

Myth 1: Insurance is a tax saving instrument.

Section 80C tax benefit is only an added advantage and it should not be the main reason for buying insurance. The primary objective of insurance should be to provide protection to your family. Do not confuse premiums paid under sec 80C with adequate life cover. If possible, consult a qualified financial planner who can tell you how much insurance you need by looking at your profile and understanding your future aspirations. Your insurance requirement will change according to events in your family like birth of a child, new liabilities etc. For example if you have taken a home loan, the policy should definitely cover that.

Myth 2: Term insurance is a waste as I am just paying premium and not getting anything in return.

No, it's not. In fact it's one of the best insurance products ever -- simple, inexpensive and serves `its purpose. Each insurance product has this at its core and the cost is a part of the premium you pay. It gives you peace of mind through the years as you know that you are protected. That's exactly what insurance is supposed to do.

Myth 3: My Company’s group insurance cover is enough.

Your group insurance may be enough at the moment but what if you lose your job or change your job with a gap in between. You will suddenly be left without cover. If you just rely on group insurance and say you leave your job and start a business at age 40+, getting insurance becomes expensive due to age and health conditions. It's always advisable to keep a term insurance/health insurance policy running along with the group plan. You will realize the benefits when you stop working.

Myth 4: My credit card has given me free insurance. Why do I need more?

It's even riskier than your group insurance. In this case there is a big layer between you and the insurance company. A policy is a legal contract between the insurance company and you and that's how it should remain. Have you heard of anyone who has got insurance money from a credit card company? These should be seen as more of extra offerings for marketing purpose.

Myth 5: I should buy policy in my wife or child’s name.

No. Insurance should always be bought by the person who is supporting dependents. It should never be the other way around. Ask yourself a basic question: what will happen if something happens to me; the earning member of the family? Who will take care of dependents; the non-earning members; like your wife, kids, parents? The answer is insurance. It's a very simple concept -- don't complicate it. You should take a policy to insure yourself; not your dependants.

Myth 6: I don’t need insurance. I’m single without dependents.

Well in that case you really don't need life insurance but think of medical emergency or

health disorders. It can simply wipe out all your savings. It will make a lot of sense to take a health policy and some retirement planning product. If you start early you may retire rich. Health policy should be bought by every individual as it cushions your savings against unforeseen emergencies. More on this, later. Till then stay insured; Stay Blessed!!

Seven Mistakes You must Avoid While Writing a Will

This is in continuation to my earlier post and I strongly feel writing a will is the first step in succession planning; the peace of mind is guaranteed knowing that we have settled our affairs and taken care of our loved ones. However, all the efforts could go waste if the will has discrepancies. So below are some of the mistakes one must look to avoid....

1. IMPROPER EXECUTION

Your will needs to be properly executed or it can be a useless piece of paper. Proper execution involves two major steps. First, the person who is making the will needs to sign it. This is a crucial step, as a will can be written on any piece of paper and only the signature gives it authenticity. This needs to be followed by its attestation by two or more witnesses. Your will shall be considered properly attested only if the witnesses sign it in your presence. However, it is not necessary that both the witnesses sign the will at the same time. Also, the witness should have seen you sign the will or you must at least acknowledge in his presence that you have signed it. The Indian Succession Act does not specify any particular form of attestation. However, in most cases, if the will is not executed properly, it may stand null and void.

2. GIFTING PROPERTY TO ATTESTING WITNESS

If you gift property to an attesting witness in the will, the document will remain valid, but the witness will not be able to inherit the property. For instance, if you want to leave a house to your daughter, she or her husband should not attest as witnesses. If they do so, your daughter will not inherit the house. The property will instead pass on to the residuary legatee. The will may identify the person, who in the event any residue property for any reason whatsoever is left, would receive that property. The person identified in such a case is called the residuary beneficiary, or residuary legatee. If no such person is present, the residuary estate will pass to the testator's natural heirs. Of course, the residuary legatee also cannot be the witness.

3. USING NICKNAMES OR INCOMPLETE NAMES

You may love to refer to your son by his nickname, but do not refer this name in your will. Remember, you will not be there to provide explanations when your will comes into effect. So you must be specific regarding names. Suppose your nephew (your sister's son) is to inherit certain funds. You must clearly state your nephew's name as the son of that particular sister. This will help rule out ambiguity, which may arise if you have another nephew by the same name, or if you have two sisters, both having sons.

If you have written incomplete names, the court will use extrinsic evidence to understand what you may have meant. If you have passed on property to a niece named Rani, and you have two such nieces, the court may either divide the property between the two or will try to understand which one you may have referred to. In case of ambiguity, how your will is interpreted will depend on the court.

4. IMPROPER DESCRIPTION OF PROPERTY

You must clearly describe the property to be bequeathed. Where it is quantifiable, specify it. If you want to give Rs 50,000 in cash to your son, mention this amount clearly. A vague sentence like, "I wish to give cash to ...." may be considered ambiguous and, hence, void.

5. PASSING ON PROPERTY TO UNBORN PEOPLE

Unlike trusts, wills have no place for unborn people. Any property bequeathed to a person yet to be born will be considered invalid. However, this does not mean that the property you leave will necessary lapse. Though the person may not exist when the will is drawn, the validity depends on whether he exists when the will becomes operational.

6. NOT UPDATING YOUR WILL

This is one of the most common mistakes people make. They forget to update a will if they acquire a new property or a new member is added to the family. A will is revocable. In fact, even if you state that your will is irrevocable, it remains revocable. This feature enables you to keep updating it. All you need to do to revoke the will is to physically destroy it or create a fresh one. The old document is automatically revoked. The only time that the earlier will is not considered revoked is if its replacement is deemed invalid.

7. NO PROBATE

Probate is the process of certifying a copy of the will by a competent court. It establishes the legal capacity of the person making the will. In Mumbai, Kolkata and Chennai, it is mandatory to have a probate, though in other places, it is not necessary. In cases of immovable property, a probate is required. Even when it comes to bank accounts or other investments, financial institutions usually insist on a probate. So, it is advisable to have one.

Keep reading!! Stay Blessed!!

How to Write Your Will

Remember Parveen Babi; the gorgeous actor of yester years; died a tragic death and her so called relatives fought among themselves for who should get the claim of the dead body from the police to perform the last rites (and subsequently should get the property as well). Well the cremation did happen but the property matter is still pending in the court. The point I want to put across is; most of us have the same primary goal in our lives – to build wealth. But what will happen to this wealth in case you are not around to ensure it goes to your loved ones? All the hard work done by you in your life so far can be wiped clean in an instant, in case of your unfortunate demise if you have not left a will behind. There have been numerous instances of assets being seized by the Government or going into dispute for years, even decades, in the absence of a clear and binding will. This is where estate planning comes into the picture.

Estate planning in simple terms refers to the passing down of assets from one generation to another. Most of us are under the impression that estate planning is only for the very wealthy.  No it’s not. On the contrary the estate planning is essential for all; regardless the size of their portfolio; and it should be done from the very first day you have an asset to bequeath (for example – your very first investment into a mutual fund). This prevents the addition of financial and legal grief to the emotional grief your loved ones will already be facing in case of your absence.

Here are some advantages of estate planning:

Ø  You decide who receives what,

Ø  You decide how and when your beneficiaries will receive their inheritance,

Ø  You decide who will manage your estate in your absence and

Ø  Estate planning saves your family and loved ones from going through the additional burden of reverting to the law to distribute the assets to the legal heirs in case of an intestate (dying without a legal will) demise.

One of the most important points within estate planning is making a will. Your will must be legal and valid within India, and fortunately it is much easier to make a legal, valid will in India than in some other countries. 

Ten points to remember while writing a will:

1. You need to be at least 21 years old to write a will. Do use the title ‘Last Will and Testament Of (state your name here)’ to make it clear that the document is your will.

2. State your full name, current address, and state that you are of sound mental state and under   no duress from anyone to make the will. Also name an executor, a person who will carry through the tenets of the will. If you are nominating an outside person to be the executor of your will, you must ask his permission first. If you have minor children, you must also indicate a guardian for them in your absence.

3. Your will should be simple, precise and clear. Otherwise there may be problems for the legal heirs. It is always advisable to consult a trusted advocate when writing your will.

4. A will must always be dated. If more than one wills exist, then the one having the latest date will nullify all other wills.

5. It is better to make a will at a younger age. As and when events or changes in the family necessitate changes the will can be changed.

6. A will can be hand-written or typed out. No stamp paper is necessary. You can write a will on a simple A4 piece of paper, sign and date it with witnesses and keep it in a secure location. It is often recommended to write your will in your own handwriting as this can be verified later if there are any doubts raised by relatives.

7. Each page of the will should be serially numbered and signed by the Testator (that is you) and the Witnesses. This is to prevent the Will being substituted, replaced, or pages being inserted by people intending to commit fraud. At the end of the will you (the Testator) should indicate the total number of pages in the will. Corrections if any should be countersigned.

8. If there are too many changes in the will, it is better to prepare an entirely new will rather than making modifications to an old will.

9. It is not compulsory for one to register a will with the Registering Authority, but in case any property or asset is given to any charitable organization, then registration should be done.

10. A will becomes operative only after the demise of the person making the will i.e. the testator. There is no restriction in the way you can deal with any assets even after making a will.

Remember, this is one of the most important documents you will ever create – detailing the distribution of the wealth you have worked so hard to build – to your loved ones. It is important to ensure that it is done correctly –take qualified professional assistance as required from a trusted advocate, as with all your financial planning decisions. More on estate planning to follow soon. Till then keep reading. Stay Blessed!!

Plan Your Retirement

While all of us have loved Amitabh Bachchan in Baghban, we wouldn’t wish something like that should happen to anybody in real life. There was time when 60 was the optimum age for retirement. Now the tables have turned and 60 is the new 40. The life expectancy rate of an average individual has increased by 20 years. And with this, the standard of living, earnings, opportunities and whole social and psychological system has improved and increased. 

The question is whether the increased life expectancy rate will bring about a paradigm shift and if yes, how? And, to live a long fruitful life, is health the only imperative or financial security has as much meaning too? Let's compute the retirement age, which is 60 and average life expectancy, which is 75 in urban areas for males and 80 years for females, a good part of life is left to live  doing what you always wanted to do. But is it possible to have a dream life with no money, and when does one start planning to have that kind of a life?

There are many products catering to this need (pensions, fixed deposits, mutual funds, medical insurance, etc) but how to choose what is the best for you since options are many; and all these options should comply with your needs, dreams and goals. If only a few steps are drawn and monitored, this process becomes relatively lucid and effortless.

Start building a retirement corpus

According to experts, you will require at least 70% to 80% of your last drawn salary on an yearly basis to live comfortably for 25-30 years to come after retirement. Agreed, your loans may be paid off, you would be paying lesser income tax and there would not be any expenses for raising a family or any work related expenses either, but cost of living would go up thanks to inflation and having more hours of leisure at your disposal would also require more money to be spent. After retirement your income inflow would stop, however out flow would go up. For example if you spend Rs 25000/ per month for your household expenses, after 15 yrs you would need Rs 79305/- for the same expenses at 8% inflation. Not many would want to compromise on the standard of living hence start building a retirement corpus at the earliest.

If it's worth thinking about, it's worth writing about

Sit with a pen and paper and decide upon what you need in life. It could be a house you want to have at sea face or a farm house with a swanky car and beautiful library at your home. It could be anything. Practice 'to each his own' and jot down things you need and deserve in life. Also, set the time in which you want to achieve your goals. Thinking what you will do in the latter half of your life and actually doing it are two different things. It has to be crystal clear as to how much money you will need each month for day to day use. This might seem a little too early to contemplate but when it comes to life, you can never be too prepared.

Be informed, be powerful

Information is power. Know what is happening in the market. What all schemes are promising and how returns can be capitalized in full capacity. Sit with your financial planner and dedicate time for the life you are going to live one day. 

Monitor the planned graph

This is the critical part. Deciding on how will you achieve that goal or dream of yours. What you need to do to achieve those goals? What kind of investment will help and how much savings is required? A financial planner will be of definite help since he knows the best. A lot many options may be available to you depending upon your financial condition and other factors, to achieve your goals. So what are these options? These questions are to be answered in all sincerity.

Uncertainty - inevitable

No matter how depressing it sounds, always be prepared for the worst. Know that things always don't work according to plan. Have an emergency plan, one that is not drafted when emergency strikes but one that is put through practice in time of need. Chalk out the ways as to how to reduce risks, what measures need to be taken up while being under strenuous and tricky situations and how to cope up with them.

Also, one needs to draw up a plan to seamless transfer your assets to your children or any other beneficiaries once you are not around. Truth is, the old age is a boon in many a ways, only if you are a little prepared and planned monetarily. Happy retirement planning. Stay Blessed!!

Investment in Gold

It’s been a tradition to buy gold in India for centuries; it’s a way of life. The amount of gold people buy would vary as per the financial condition. But gold we all have in some form or the other; traditionally it’s been jewelry and ornaments or coins and bars from the point of saving for a rainy day; in times of need it could be pledged and a loan can be availed against it; but mostly it’s passed on from one generation to the next with lot of sentiments attached. It’s not an uncommon sight to see a young bride wearing ornaments belonging to her grand mother on her wedding day. Gold in India has traditionally been a form of ‘Stree Dhan’ a security; a woman gets from her parents and passes on to her daughters. Over the years gold has emerged as an important asset class which has been providing for capital appreciation apart from providing needs of individuals in form of jewelry and ornaments. Let’s explore the various avenues for investing in the yellow metal.

                  

Physical Gold

This is the traditional way to buy gold in form of ornaments and it has emotional angle attached; and also a matter of great pride and satisfaction along with its visual appeal. Apart from ornaments, coins and bars can be purchased from reputed financial institutions. The disadvantage is the degree of its purity and safety.

Sale of physical gold is taxed at slab rate as short term capital gain if sold within three years and long term capital gain,if sold after three years, taxed  at 20.6% with indexation. Investment in physical gold is liable to wealth tax if total assets are in excess of  Rs.30 lacs.

     

Gold ETF

ETF is exchange traded fund which is an investment fund traded on stock exchanges. One needs to have a demat account. Buying Gold ETF is quite simple like buying equity stocks and can be done with your online trading account. There is no upper limit however; the smallest quantity that one can buy is 1 unit of the gold ETF which is equivalent to 1 gm or ½ gm gold as the case may be. The advantage is there are no hassles of bank lockers and safety and one can liquidate ETF like any other equity stock; and at the same time no loss of making charges or purity issues.

Sale of gold ETF is taxed at slab rate as short term capital gain if sold within a year and long term capital gain if sold after one year, at 10.3% without indexation or 20.6% with indexation.

E-GOLD

E-Gold is a new incarnation of gold, innovated by National Spot Exchange (NSEL), which enables investors to invest their funds into gold in smaller denomination and hold it in demat form. It is available on the pan India electronic trading platform set-up by National Spot Exchange, which can be accessed through members of NSEL or their franchises. It provided a unique opportunity to buy, accumulate, hold and liquidate "Electronic Gold (E-Gold)" as well as to convert the same into physical gold coin/ bar in a seamless manner. In this mechanism investors own the gold which is reflected through the demat account while equivalent physical gold is maintained in the exchange designated vault; and the investors have the option to take physical delivery.  E-gold can be converted into physical gold for quantities as small as 8 gm, while gold ETFs offer the option of physical delivery but only for a denomination of over a kilogram. E-gold wins hands down against gold ETF. In India, the rural community and the middle-to low-income group have a tendency to flock to gold. For the typical Indian investor, e-gold is more suitable as it provides the option of delivering the yellow metal and, hence, bridges the gap between using it for investment and the traditional, auspicious reasons for buying it. Accumulating such a huge amount of gold is not feasible for small investors.

Sale of E-gold units would be taxed as physical gold and investment in E-Gold would also be liable to wealth tax if in excess of Rs. 30 lacs. More on this would follow later. Till then happy investing. Stay Blessed!!

Money Matters for Children

I believe that understanding the importance of finances and its future planning, is a lesson that parents should start early in life. Because when it comes to understanding your dreams and fulfilling them, there is no time like the present. However, there are many people known to me who still believe that that their kids are too young to learn about money. On the other hand many avoid this topic not because they don't want to talk to their teenage children about a serious aspect like money; but they find themselves unsure of what to tell them and how it can help them in that stage of their life. There are different ways to inculcate these values and it would depend whether the apple of your eye is a teenager or in pre-teens.

Money matters for the young

Parents don’t have to be finance whizzes to impart financial education. Idea is not here to create junior MBAs. Small little things go a long way. Kids can even learn from little things like turning off the lights in rooms they are not using. The lesson happens on the spot when children ask why the lights need to be turned off. A parent who responds by explaining that electricity costs money teaches the consequences of leaving lights on.

It’s not possible to have everything

As a parent you might want to give everything your child desires. Yet, in his interest it would be best if you do not always give in to his wants. Make your child understand that any product or service is bought with money, which is a limited resource. Making your child responsible for his/her spending is one of the best ways to teach money management.

Teenagers

The teenage years of our lives are usually the most crucial ones. This stage is the stepping stone for what we choose to do in our lives. This is the stage where start to form opinions, ideas, dreams, thoughts, goals we want to fulfill. Then how can we as parents ignore one of the most important lessons in life?  The money matters. With the changing times, it has become not only crucial to teach teenagers the importance of financial planning, but also a necessity. Understanding the world of finance and wealth will lead them to the path of attaining financial freedom. And this can be done in a very simple manner.

Financial responsibility and living on a budget

 Every teenager must be made financially responsible at a young age. Holding them accountable for the way they treat money not only creates respect for wealth but also teaches them how to manage the money they have. One way to create a sense of responsibility is to give them their pocket money for the month which they should spend judiciously. Another way to create a sense of responsibility which actually has come from the west; and I’m not sure whether my Indian friends would agree with me on that; is to make them earn their pocket money by doing chores around the house.

Teenagers do not believe in the idea of living on a budget. They come to the parents whenever they need money and parents give it to them, irrespective of the amount. Instead of handing it out to them, teach them to live on a budget.  I recall this particular incident of a relative who used to give her teenage daughter a certain amount of money every month. And if she ever wanted more, she would have to 'apply' for a 'loan' to her mother, who would then make her daughter pay it back in 'monthly installments'. This not only helped her understand how the banking system works, but also taught her the way to make the best of what she has.

Talk about the credit
At some point of their life, your teenage child will be introduced to credit cards. Instead of barring him forever from owning a credit card, explain to him how the credit system works and that he is accountable to every purchase he makes on the same.

Involve them in financial discussion
 Do involve children in the financial discussions and decisions and give due importance to their opinion and try to treat them as equals or adults. They will automatically be more willing to do what you say. Once you have introduced your child to personal finance take him with you when you go to meet your financial planner. In fact, you can also request your planner to spend 10 minutes with the child talking to him how to manage his allowance. Financial planning at every stage is crucial. It helps build a bridge that would allow you to move to your goals without any speed bumps. More on this would continue. Till then Stay Blessed!!

         

Some Financial Resolutions for 2012

‘I’ll go to the gym everyday’, ‘no red meat for me’, ‘no sweets’… The list is endless.  Sounds familiar.  Right? Comes the new year and along come many resolutions; most of them health related. It’s good to be health conscious. Health is wealth after all. But how about making some resolutions for your financial health for a change this time around?

     1.     Review and Analyse

I know you have clearly chalked out your short term, medium term and long term goals and they are the writing on the wall. But your short term goals may change due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status and that can interfere with your medium and long term goals. It’s very important to revisit and revise your financial plans so that you stay on the track with your long term goals.

      2.     Mind your credit card usage

Credit card these days is synonymous for convenience but convenience comes with a price attached to it. You have a period of 45 to 50 days which is a zero interest period; there after the charges are approximately 3% per month or 43% per annum because it is compounded, not to forget the service charges. Horrendously expensive!  So if you succumb to the pleasures of using a credit card often, it’s time now to start using it judiciously.

      3.     Planning for the Unplanned

Do cut down on the red meat and the sweets and start going to the gym every day, but do have a proper health insurance plan in place if you don’t have any. If you already have one then please ensure that the sum assured is adequate and you pay the premium on time. Same goes for your life insurance and home insurance. I’ll not go into motor insurance details here because it is compulsoryJ.  Apart from insurance another most important thing is to have a contingency fund which is equal to your six months expenses for any unforeseen problems.

     4.     Financial Education for your Children

A little bit of financial education from the very beginning goes a long way in churning out future Warren Buffets. Do not hesitate to discuss financial matters in front of children (teenagers). In fact do involve them in making financial decisions. Explain them the daily budget of the household and how it affects the family. This will create a better comprehension of not only how the household works but also provide awareness for what to do in future.

More on this would follow later.  Do keep reading my blog. Happy New Year!! Stay Blessed!!