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 !