Personal Finance

Insurance is pointless without dependents

Suresh Parthasarathy | Updated on July 16, 2011 Published on July 16, 2011

I am working in a private company in Goa. I am 36 years old and do not have dependents. There is no plan of marriage on the cards. My annual income is approximately Rs 350,000 comprising salary income and income from other sources. My annual expenses are approximately Rs 170, 000. I have Rs 50,000 in savings bank account and Rs 80,000 in shares. I intend to buy a flat within five to seven years (in Margao, a flat costs around Rs 30 lakh) . My life expectancy is 75 years. If I am left with any savings I may leave it as estate for my brother's family.

My investment: I have started five SIPs last year and my total investment is Rs 54,000: Religare Contra Fund (Rs 500 a month), Reliance Pharma (Rs 1,000), Reliance Equity Opportunities (Rs 1,000), SBI Magnum FMCG (Rs 1,000) and Birla Sunlife Mid Cap (Rs 1,000).

In April 2010 I subscribed to IDBI Fortis Wealthsurance Foundation Plan for 20 years tenure. Quarterly contribution is Rs 5,000. The sum assured is Rs 200,000 (unit linked).

In April 2010 I started LICMF-ULIS for 15 years. Monthly contribution is Rs 1,000.

In April 2008 I got SBI Life-Horizon II-Fixed Term 18-years Pension Option policy. Monthly contribution is Rs 1,000. The sum assured is Rs 60,000 (unit linked).

In 2007 I had taken New Bima Gold money back policy (term 16 years) from LIC with sum assured of Rs 50,000 with yearly premium being Rs 3,027.

In 2006 I got a Jeevan Tarang policy for 20 years from LIC with sum assured of Rs 150,000. My quarterly premium is Rs 1,931.

What steps should I take to achieve my desired goals? I am open to any changes in the portfolio.

G.B. Bhosale

Solutions: Investments should be tailor-made and one size does not fit all. Life insurance is just a cover used to replace the income of breadwinner on account of his death. As you don't have dependents, it is prudent not to have life insurance in your portfolio.

Having said that, a bachelor or spinster requires protection against ailments or has to provide for increased longevity.

In general, an insurance policy that gives guaranteed returns or life cover will deliver lower return compared to a pension plan without risk cover.

In all your insurance policies, you have taken risk cover for Rs 4.5 lakh, which is unproductive. It is better to close life insurance policies after evaluating the surrender charges.

Even Jeevan Tarang, which pays a survival benefits at 5.5 per cent of the sum assured after chosen accumulation period, will be of no great advantage for your pension needs because the sum assured is only payable on survival to age of 100 or on earlier death.

House: Considering your longer life expectancy, it makes sense to buy a house early. Unlike life insurance, if you create wealth by buying a house it can be useful after retirement. If your monthly income falls short of your requirement, by reverse mortgaging (pledging) the property you can have a stream of income for the rest of your life.

Based on your current income, servicing the loan (present value of Rs 25 lakh or a little over 80 per cent of Rs 30 lakh) will be difficult. But if you postpone your decision of buying the house by seven years, the present value of Rs 30 lakh if inflated at 8 per cent will become Rs 51 lakh.

Assuming that you are taking a home loan for 80 per cent of the value at 10 per cent interest for 15 years, your equated monthly instalments works out to be Rs 38,000 or annual outgo of Rs 4.56 lakh. If your salary grows at the rate of 2 per cent higher than the property appreciation rate for the next seven years, you would still need to shell out 67 per cent of your gross income. This is not recommended.

If possible, try and buy a house with a loan value of Rs 20 lakh for a tenure of 20 years now rather than postponing the buy for seven years. If you do so, your outgo will be 46 per cent of your income. But if you still prefer to buy in the same area, consider buying a under-construction flat that is likely to be ready within the next couple of years and avail a home loan with a step-up repayment facility.

However, the only concern with this strategy is that your current savings are inadequate. In case you have any break in employment, you will find it difficult to service the loan.

If you avail a home loan, it is difficult to maintain your current savings. You can restart your savings once the monthly inflows increase.

General Insurance: As you have not mentioned about the health insurance, we presume you are covered by your employer. If you are not covered, buy health cover for Rs 3 lakh. However, if you buy a house your liability will increase. Hence it's better to buy a hospital cash benefit policy.

This kind of policy helps you in recovering some of the cost of hospitalisation that is not reimbursed under the health policy. You also need to buy personal accident cover to meet financial commitments in case your ailment prevents you from earning.

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