We are always hoping to lead a productive and long life, but the hope must never be the ground, based on which you will be planning your life. The most important question to address while creating a financial plan is that if something untoward was to happen to an earning member of the family, then what happens to the goals and aspirations of the person who takes care of the liabilities? Can an individual create a safety net in that situation for his or her near and dear ones? The answer lies in buying an insurance cover.
Very often one gets to hear a debate on whether one should buy mutual funds or whether to opt for insurance policies. In my opinion, it is not an either-or option, both the products are required to create a comprehensive financial plan including other asset classes like gold, real estate and creating a will. Mutual funds are investment vehicles whereas insurance products cover risk and have to be used accordingly.
We look at some of the factors to consider while arriving at the appropriate insurance cover.
Now when we are talking about the insurance amount, one needs to deduct the corpus that one has in the form of investments and savings following the way of mutual funds and bank fixed deposits.
Though we look like a complex mathematical problem to solve but thankfully thumb rules come in handy here as well. In the developed economies, one needs to have an insurance cover equivalent of seven to ten times of annual income. Experts believe that in a developing economy like India where inflation could be higher than the developed economies, it is better to have a cover equivalent of 10 to 15 times the annual income plus the outstanding liabilities. For example, if a person has an annual income of Rs 5,00,000 then the adequate insurance cover would be somewhere between Rs 50 lack to Rs 75 lack with liabilities if any. Obviously, the insurance premium has to be paid every year and hence it is important to give weightage to one’s ability to pay the premium year, while deciding on the extent of insurance cover.
Thumb rules are just guiding principles, and it is advisable to have a good advisor or financial planner who can customize the financial plan based on your goals, aspirations, and circumstances. It is advisable to keep investing in mutual funds for financial goals but never forgets to buy adequate insurance as well.
The author is the CEO of PGIM India Mutual Fund