Term plans best form of life insurance

Avinash Patil (38) is a self-made man. Born in a small tribal village, his childhood was a struggle. When he got married to Asavari (now 38), the couple did not have even a roof over their heads. It was the local school teacher who rented a room to them. Today, Avinash is a successful insurance agent and motivational speaker. The couple has two children Hitarth (14) and Vedhasi (9) and they live with Avinash's parents.

What are they saving for?

The couple would require Rs 10 lakh for their children's education after five and 12 years. They want to create a corpus of Rs 8 lakh for their children's marriages after 15 years. They also wish to support Avinash's parents financially. The couple requires a corpus that can generate Rs 6 lakh financially for their retirement after about 25 years. They also wish to go on a foreign trip after two years.

The above costs will be revised based on inflation.

Where are they today?

Cash flow: The couple's gross annual inflow from all sources is Rs 21 lakh. Their annual outflow is Rs 18.17 lakh. The monthly expenses include EMIs on loan, insurance premiums and other routine household expenses. Annual debt payments come to around 19% of total earnings.

Net worth: The market value of the couple's entire assets is Rs 3.30 crore. These include personal assets worth Rs 1.20 crore comprising a house, a car and jewellery. There is an outstanding liability of Rs 31.80 lakh in the form of a loan.

Contingency fund: Against the mandatory monthly expenses of Rs 1.13 lakh, the couple's balance in savings bank and as cash in hand amount to Rs 1.70 lakh. This is equal to about 1.5 months' reserve.

Health & life insurance: The family has a health cover of Rs 12 lakh. The life insurance of Avinash and Asavari is Rs 1.08 crore and Rs 22 lakh, respectively. This is mainly by way of term plans and a few investment-oriented policies.

Savings and investments: In addition to the Rs 1.70 lakh in cash and as bank balance, the couple's real estate holdings, other than the house they live in, is worth about Rs 2.08 crore. Other assets are worth Rs 1 lakh. The couple's total invested assets are 70% of their total net worth.

Fiscal analysis

The couple has a decent fund inflow. Their savings rate is reasonably good, but contingency fund is insufficient, considering there is an outstanding home loan. Their health insurance is currently sufficient but will need enhancement as the children grow. Having life covers by way of term plans is good - this confirms the belief that term plans are the best, and even preferred by successful life insurance agents. Overall, the couple's assets are skewed in favour of illiquid real estate, which needs to be rectified by acquiring more liquid assets over a period of time.

The way ahead

Contingency fund: The couple must keep aside funds equivalent to three months of mandatory expenses. They should maintain a contingency reserve of Rs 3.40 lakh, out of which Rs 25,000 can be held as cash in hand and the balance in an FD linked to savings bank account.

Health and life cover: Over a period of time, the couple should increase health cover to Rs 5 lakh for each member of the family and also top-up the floating policy by another Rs 20 lakh. Avinash should enhance his life cover as he is the sole earning member of the family and the children are young, and his earning is only due to his skills.

Planning for financial goals

Children's education: The couple can invest Rs 15,000 each month in a large-cap equity fund to provide for their children's higher education.

Children's marriages: They can start another SIP of Rs 2,500 each in both equity and gold funds to meet marriage-related expenses.

Retirement: The couple can start contributing to PPF regularly. Once the financial goals of education and marriages are achieved, they can continue with an amount equivalent to those SIPs in equity funds to accumulate a retirement corpus. Also, at the time of retirement, they can consider liquidating the real estate holdings.

Foreign travel: The couple should consider this goal only in the years when it can be funded from routine income.