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While advisors are busy creating financial plans for clients,
they should ensure that they do not neglect their own personal finances.
Mumbai-based financial planner Melvin Joseph recounts this true story.
 Ram Joshi
(name changed) was an investment advisor. He sold insurance, mutual funds and
small savings instruments as per the client’s requirements. Tragedy struck when
he was 38. Ram did not survive an accident even though he battled for life for
a week.
He
left behind a wife (35) and two sons aged 11 years and 8 years. They were
staying in a rented house.
Ram was
a self-made man. He was born in a village near Pune, but moved to Mumbai for
better prospects. He was a graduate and was planning to send both his sons for
professional courses. He was investing his entire savings in SIPs for creating
money for these needs. His children were studying in a good school.
Since
Ram was dealing in insurance, all were under the impression that he would have
taken sufficient life insurance and health insurance for himself. But he had
insurance cover of only Rs 5 lakh, an endowment policy with Rs 25,000 annual
premium. There was no health insurance at all.
His
untimely death shook the entire family and his wife was in the doldrums,
without knowing what to do. His friends and neighbours helped in mobilizing the
hospital bill of around Rs 1 lakh. The only option in front of her was to go
back to her village and live with support from her parents.
What could Ram have done differently?
While
the motive of saving for his son’s education was a good objective, Ram missed
another important thing in life. Being the only earning member of the family,
he should have insured his life for a decent amount. The exact amount can be
calculated either by way of Human Life Value (HLV) or income replacement
method.
He
was spending around Rs 25,000 per month on household expenses including rent.
He was planning to spend Rs 10 lakh each for higher education and marriage of
both his children when they reached the age of 17 and 25 respectively. As per
the expense replacement method of calculation, he should have insured his life
for around Rs 1.30 crore. He was earning around Rs 5 lakh in a year from all
sources.
Though
Ram could not have afforded such a cover under endowment type policies, he
could have opted for term insurance policies, where the premium is very low.
Online term policies also quote low premium rates. For example, he could have
insured his life for Rs 1 crore by paying yearly premium of around Rs 12,000.
Health Insurance
His
friends paid the bill of around Rs 1 lakh for the 15-day stay in hospital. He
could have taken a family floater policy of Rs 4 lakh to cover all members in
the family. The annual premium for this would be around Rs 12,000 again.
Ram
could have gone in for these covers before starting his SIPs, to ensure that
his family would continue to live with the same standard of living even in his
absence. He could have added a critical illness policy and a personal accident
policy to supplement it.
The message for IFAs
Once
the basic insurance policy is in place, advisors can plan for their children’s
education, marriage or home purchase. This can be planned through a mix of
equity, debt and small savings. But retirement planning is the most important
for IFAs in the absence of PF or pension. Children’s education can be partly
funded by an educational loan which will help in saving tax also.
If
you are aged 40 now and want to retire at age 65, and want to provide a monthly
income of Rs 30,000 in today’s cost, you should create a corpus of around Rs 2 crore
assuming a longevity of 80 years and inflation of 6%. Assuming a CAGR of 12%
from equity mutual funds, you can create this by a monthly SIP of around Rs 12,000.
You cannot
afford to miss your own personal financial goals, when you are busy selling
financial products to your customers.
(The author is
Founder and Chief Financial Planner, Finvin Financial Planners)
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