PERSONAL FINANCIAL PLANNING AND LIFE INSURANCE
Introduction
“Thodi si tu lift karade Bangla motor car dila de Ek nahin do char dila de ”
What is financial planning ?Making funds available from one’s current
resources to meet future needsEntire gamut of FP explained by
RETIReSR……. RiskE……. EstateT……..TaxI………InvestmentRe……RetirementS………Savings
Core of FP “If you want to know what God thinks of
money, just look at the people he gave it to ”
Dorothy Parker
No sane man would like loose out his money
People like to derive maximum utility from use of money
When it comes to savings & investment, we want our money to give us best returns
Contd……FP is an attempt to maximise returns
keeping in view liquidity and safety of funds.
Good financial planning will not protect one against crises arising out of unforeseen circumstances.
It cannot avert the circumstances, but can provide necessary financial support
FP can be of short/long duration Plan for shorter duration ensures
proximity to reality
FACTORS DETERMINING FP Country’s economic environment ( tax
changes) Change in job market
Inflation
Changes in pattern of savings instruments and savings habits.
Need for awarenessLiving beyond one’s means spells doomFinancial problems come uninvited
without noticeFinancial problems create tensionRequires foresight, time & patience to
prepare planNo one in family can be ignored as
each needs moneyFP provides a direction, builds
motivation , support.
UNDERSTANDING FPLife insurance alone is the instrument
available to take care of all aspects of FP.Saving , investing & spending are 3 important
terms of FPSaving = Asset accumulation A short & long - term perspectiveInvesting = Asset creation Making money out of money, focus on capital
growth, a long-term perspective , creation of physical/ financial assets, investing depends on level of risk tolerance
Contd…….Spending = Asset protection Spending is protecting our LIFESTYLES , lives
& assets.We may spend more & save less , taking care
of all expenses ( most cases) – financial failureSave more, spend less, not considering
unexpected expenses. Not feasible when huge expenses occur & savings are depleted – financial dependency
Save, invest, spend – savings ( unexpected expenses) & investments (long-term goals accompany each other) - financial independence
BUT WHAT HAPPENS WHEN 3 Ds STRIKE ?
HOW TO ENSURE PROTECTION & YET GET BENEFITS OF S-I-S ?
MAY LEAD TO F FAILURE
FP & LIFE INSURANCEImportant to understand person’s objective in
a long-term financial instrument like LIValue -creation main objective Spiritual value – peace of mind Emotional value - love for family Financial value - tax saving, capital creation LI instrument – takes care of s-i-s , leads to
asset accumulation, creation & protection LI offers a complete financial solution
Contd……Asset creation - opportunity to earn in
ULIPSAsset protection – cover against 3DsAsset accumulation – account grows with
scope to reinvest further by recycling accumulated account.
HENCE LI IS AN INTEGRATED FINANCIAL PLAN THAT WORKS IF SOMETHING HAPPENS & ALSO IF NOTHING HAPPENS.
GUARANTEES LIFETIME INCOME TO FAMILY IF ONE DIES & LIFETIME INCOME TO ONE IF HE LIVES.
APPROACHES TO FPDepends on individual - may be conservative
(safety), enterprising ( take some risks), speculative ( take high risks for high returns ).Approaches vary due to given factors – Age/family – affects ability to take risks Responsibilities Financial strength Tax savings Temperament Specialised knowledge Insurance status
BASIS OF FP - LIFE CYCLE NEEDSNeed for FP persists throughout lifeMost people have at least one
unsatisfied need at any time.Most people will have both financial
protection and investment needs simultaneously throughout life
Priorities of financial needs change with age.
To appreciate how these changes come about financial planners use the Life Cycle Needs Guide.
LIFE CYCLE OF INDIVIDUALChildhood stage - LearnerYoung Unmarried stage – EarnerYoung Married stage - PartnerYoung Married with Children stage - ParentMarried with older Children stage - ProviderPost –family/ Pre-retirement stage – Empty
NesterRetirement stage – Enjoyer 3 phases of one’s life - birth & education
(22 ) Earning years(38) & retirement (20-30)
Learner - costs of education High cost of private education plus
inflationTo achieve success, parents use life
insurance as a FP tool.In case of demise of a parent, LI
looks after education
Earner stage Young , healthy, carefree, easy access to
money, single young adults.Many may possess extensive funds but
no specific savings/FP plan for emergency.
Need for protecting new-found status & earning capacity
Priorities list need to be topped by disability insurance to protect loss of income.
May have o/s loans, high credit card balances
Earner Generally in age group 25-30Youth is chewing gum ….it never endsWhy forget the future while enjoying
today , is the mantra.Could go for policies which mature at
55-60If no dependants, need not have LI, only
risk cover/accident cover.
Advantages of starting an early security programProvision for a guaranteed, immediate
financial security ensured. Lower premiums charged at young age.
Qualify for lifelong protection while insurable , regardless of later hazards that may be ventured through chosen life-style vocation or occupation.
Start building cash reserves for emergencies.
Final rewards are high due to compound interest schemes prevalent in LI plans
Option to change policy-type with flexibility
contd…..In case of early death, funds available
can pay off debts & honour any bequests as per will.
If policy commences at early age, higher pension values obtained
Get satisfaction & peace of mindLife insurance needs low- should
accumulate growth assets( home/stocks/mutual funds) aggressively due to high risk-taking ability now.
Partner / ParentNuclear family –breakdown of joint family. When children arrive & there is single earning
spouse, require emergency fund for survivors through LI.
In case of dual income, families buy less LI. View second income as insurance against first. Complacency rules.
Need LI for both partners to maintain standard.Have young children.Has taken home loan.Starts
investing in earnest. Should have adequate LI, asset protection & continue asset creation.Current needs minus existing assets – difference is LI
Partner/ParentAge group 31-40 yearsNeeds are many – rent, school fees,
vacations….Now there are dependantsIf non-working spouse, buy term plans
till 60 years -for protection, not investment
If businessman, then your risk & growth comes from investing in own business.
In asset-building, home buying is top priority
Invest in children’s insurance plans
ProviderThe middle years. People constantly
making commitments, acquiring assets, incurring additional debts to fulfill dreams
Higher education goal of children approaching, home loan nearly repaid, income peaking, investible surpluses high, financial protection for family, sufficient income against disability, emergency fund to meet exigencies.
LI needs low as asset base builds up.Take term plans to cover shortfall in existing assets.
ProviderThe maturing years - 41 to 50 yearsPersons could switch over from being employee
to entrepreneurAt this age risk cover important ( protection )You begin to get real about the possibility of
being where your father is today ….70 plus enjoying golf & gardening
LI needs to continue as long as dependents exist.
If entrepreneur, your assets are your business - can sell assets in future if required after working
Empty NesterThe retirement countdown begins – 51 to 60
yearsNeeds are to ensure healthcare, ensure
additional income during retirementChildren are independent, home loan repaid, no
other debt, investible surpluses peak.Divert new surpluses to build retirement
corpus, reduce portfolio risk. Maintain life cover as long as earning, increase
health cover since premia increase with ageSave as much as possible during these years.
Empty nesterDisposable income is high, rebalance investment
portfolio and tone down aggressive investmentInvest in pension plans if not done earlierJUST BEFORE RETIREMENT - Top up health insurance Clear off all debts prior to retirement Try to live in a smaller city/town Do not be covered by life insurance after 60 . Develop skills for engagement/income ( if
reqd)
Enjoyer The final phase -60 plus. Security & comfort top priority for all. Different people perceive retirement differently. Some look forward, some dread. Obstacles that prevent people from planning for
their retirement are – Lack self-discipline to save sufficiently during
earning years Investment & reinvestment a formidable challenge
to most Few people posses expertise to provide constant
liquidity that lasts till one lasts.
Contd…..Health expenses replace work-related
expenses.Creating cash flows & beating inflation
top priority.Create adequate cash flows from safe
investments & invest surpluses in instruments that comfortably beat inflation to prevent erosion of retirement capital.
No life cover needed. Retirement corpus should fund needs.
RECAPBasic objective of FP is to allow you
to lead the life you want during old age comfortably without compromising on basic values
Goal should be financial security to take care of all financial needs post-retirement
How much money one needs for these goals that could be 2 /20/40 years away can be arrived at by FP so as to maintain same standard of living.
LI is excellent instrument in case of RP
THANK YOU !
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