Love your Family? Have a Life Insurance

I am associated with financial sector for more than 12 years now. Often I see, when it comes to financial planning, people tend to focus on tax planning, investment and wealth creation. But as a result of this, they miss out on equally important aspect of it, which is Wealth Protection.

Risk Management is very important aspect of financial planning which can be done by having proper insurance, asset allocation, contingency planning etc.

We all know that we have different risks in our lives at different life stages. For example, while learning to ride the cycle we are at risk to fall. We avoid this risk by having side wheels to our cycle. By having an invertor we mitigate the risk of power failures. So in our day to day life we mitigate various risks by having an alternate or back up plan. We need to have same strategy when it comes to personal finance. Only when we witness events like Covid, natural disaster or any such unfortunate event, we get its seriousness.

To fulfill our dreams, we not only depend on the current earning but also on the potential earning. If you are planning to build a corpus for your child’s education, you would need to save/invest for another 10 years. So, the plans/dreams/goals are dependent on the bread winner. Every earning member of the family has a Human Life Value (HLV) which is the present value of all the future income you could expect him/her to earn for the family.

With the earning the breadwinner has for the family, he/she is able to help his/her family live life at certain lifestyle level (as shown in the figure below).

 

 

Now unfortunately if something happens to him/her, the family will have emotional and financial losses. Emotional loss is something which cannot be recovered by any means but if there are ways by which the financial losses can be made up. Life insurance is the best way to address these financial losses. In case of lack of life insurance, the family may have to compromise on their lifestyle as well as dreams (as shown below).

 

 

Life insurance actually helps to replace the HLV of the breadwinner to provide a financial platform to the family. This helps them to keep the same lifestyle as well as to fulfill the dreams they have seen (as shown below)

 

 

When it comes to life Insurance, Term Insurance is the purest form of life insurance.

Taking life insurance is nothing but a transfer of risk to insurance company which pays to recover the financial loss in case of unfortunate event like Death. There are thousands and lakhs of people who pay premium to insurance company. They are not at loss even if they have to pay one death claim as other people will pay the premium. But imagine the situation of family who have lost the breadwinner, they are 100% at loss.

Recommendation

Every individual should have these three polices from Risk Planning perspective.

1) Term insurance which cover risk of death

2) Health Insurance which covers the hospitalization and medical expenses

3) Personal Accident policy which covers the disability or loss of income due to an accident.

Market (Time) Corrections a boon for Wealth Creation

We say that a market correction has happened when there is a decline of 10% or more in the price of individual shares/equities, currency markets and indices. Such corrections are believed to be curse by the investors who are new to the investment in market but someone who has spent good time in the market think the other way round.

When such correction happens, there is certain period of time (let’s call it Time Correction) for which the market movements leave investors in confused state where no one knows where it is heading towards. As a result of this, they take wrong decisions which hurt them for life time.

Just to explain this concept in detail, I have taken one live example of one mutual fund scheme. Mr. A who starts a SIP of 10,000 per month on 1st Jan 2010. How he goes through different emotions during his investment journey of 12+ Years.

 

10th month – Finally I have made a good decision of starting SIP and I it satisfying to see that my money is growing

25th month – Oh!! Have I made a blunder by starting SIP? After 2 years, the value of my investment is even less than the amount I have invested.

45th month – It’s almost 4 years since I have started my SIP and gain is mere 3%. I was better of with my RD (Recurring Deposit) account. That would have given me much more than what I am getting here. I want to stop this SIP but Vishal is requesting me to be patient for some more time. Let’s see..

62nd month – Wow!!! What a wise decision I have taken by continuing my SIP. Gains of 140% which was 3% just a year and half back.

85th month – The gains from last 2 years are just about the same. Should I book the profit now? Btw, when I discussed this with Vishal, he asked if I have any goals for which I want to withdraw. And my answer to it is no. As per him such time corrections would happen multiple times during this investment journey. What we have to do is sit tight and keep increasing the base by adding more in such periods.

97th month – Oh Ho!!! My total gain stands at 282% 😊. Vishal was so right while asking me not to call it quits.

116th month – I know this is time correction and I want to continue with my investment. 😉

145th month – I cannot believe that the magic of compounding, rupee cost averaging and time corrections have helped me get to almost 400% gain.

151st month – The time correction is here again. This time I am going to top up my investment to make most of such correction😊.

All the period highlighted in red oval blocks are the time corrections which is a test of investor patience. But it definitely pays off if no wrong decision taken in such times. We have to remember that after every such red block, there was a green block which helped us for Wealth Creation. Obviously, it is not possible to predict the duration of such corrections but once who understood this will never make blunder of quitting market because of such corrections.

I strongly believe that Market Corrections are boon in our Wealth Creation journey and not curse.

Investment Lessons from Mahabharata

1️⃣ Be focused on your investment goals like Arjuna (during the archery training, he saw only the eye of the bird on the tree).
Make disciplined investments.

2️⃣ Do not be a Yudhisthir, who bet his family in a game with Kauravas because of his emotions.
Emotions can lead to poor investment decisions.

3️⃣ Avoid Abhimanyu’s mistake of not having an exit strategy. While he successfully entered the Chakravyuh, he lost his life in it.
Invest steadily but plan your exit.

4️⃣ Do not be complacent like Duryodhan about having stalwarts like Dronacharya, Karna, Bhishma on your side.
Overconfidence stemming from past performance can be harmful.

5️⃣ Recall what was rewarded better? Size of the army or the wisdom & advice of the leader Krishna?
Portfolios without a strategy and advisor are doomed to fail.