This is further to my post on Insurance v/s Investments
A friend pointed me to this question posed at BimaWorld: Should one mix up insurance with investment? why yes and why no”. If I have INR 1,00,000 per year for investment, insurance and other savings how should I balance my investment and insurance.
Insurance and Investments are two different things. Insurance depends on your economic value to your family. Investments depend on your surplus income and your financial goals. So, to my mind, mixing up the two is misleading.
But in India, this mix up is common place. So even though the question asked may be misleading, it really begs for an answer!
So if I have Rs 100000/- with me, I would first figure out the amount of cover that I require. I will take my annual income, multiply it with 8*, add liabilities and reduce assets to arrive at the figure.
Let’s take an example: Annual Income: Rs 5 lacs, Assets: Rs 10 lacs, Liabilities:Rs 5 lacs. So my approximate cover would be 5*8+5-10 = Rs 35 lacs.
*There are a lot of variations in calculation of the insurance cover by the Insurance companies. Multiplying the annual income is the most debated one. I use 8 years because I feel that this is enough for my family to start generating income on their own after a gap of 8 years.
Some Insurance Companies recommend multiplying the annual income by 18-20 times! There would be a real hazard of doing away with the spouse!!
Now for an Insurance cover of Rs 35 lacs, there would be a range of products that could cost you from approx. Rs 10-15000/- to over Rs 1 lac.
I would recommend taking a term insurance cover for Rs 35 lacs paying a term premium of Rs 10-15000/- and invest the balance in low cost Mutual Funds/ETFs.
But I would also recommend checking out your risk profile and learning the relevant asset allocation rules before you go on to invest your money.
Welcome back! Join me on this journey to improving our financial IQ and sharing what we know. Updates at RSS feed or Email. And spread the word please Thank You!
