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60-Year-Old With Insurance Coverage: Surrender Traditional Policies?

Ramalingam

Ramalingam Kalirajan  |6568 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 27, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Visu Question by Visu on Aug 27, 2024Hindi
Money

I am a 60-year-young, disciplined bachelor with insurance coverage of Rs. 1 crore, which includes both a term plan and traditional plans. I am self-dependent, and no one is financially dependent on me. Since I don't have a need to create a legacy, I'm considering surrendering all my traditional policies, keeping only the term plan. I understand that surrendering these policies will incur charges, but it will also provide me with immediate access to my savings for my own use or invest in mutual fund. Could you please provide some guidance on whether surrendering these traditional policies would be a wise decision? --

Ans: You are in a unique and advantageous position. At 60 years of age, being self-dependent and having no financial dependents, you have a considerable amount of freedom in managing your finances. The Rs. 1 crore insurance coverage, which includes both a term plan and traditional policies, provides a significant safety net. However, given your current life stage and financial independence, the need for certain insurance products, especially traditional plans, may no longer align with your financial goals.

Understanding Traditional Insurance Policies
Traditional Plans: These typically include endowment plans, money-back policies, and other such insurance products that offer a combination of insurance and savings. While they provide a guaranteed return and life cover, the returns are often lower compared to other investment avenues.

Limitations: Traditional policies often come with low returns, inflexibility in terms of withdrawals, and a lack of transparency. The returns from these policies usually range between 4% to 6% per annum, which is often below inflation rates, leading to the erosion of purchasing power over time.

Why Surrendering Traditional Policies Makes Sense
Immediate Access to Funds: By surrendering your traditional policies, you can unlock a lump sum of your accumulated savings. This can provide you with immediate liquidity, which can be strategically reinvested for potentially higher returns.

Higher Potential Returns with Mutual Funds: Mutual funds, particularly equity-oriented ones, have historically provided returns in the range of 10% to 15% per annum over the long term. Even conservative debt mutual funds typically offer better returns than traditional insurance products.

Flexibility and Control: Mutual funds offer greater flexibility in terms of investment choices, withdrawal options, and tax efficiency. You can choose from a wide array of funds depending on your risk tolerance, investment horizon, and financial goals.

No Need for Legacy Creation: Since you have no financial dependents and no need to create a legacy, the primary benefit of traditional policies, which is to provide a guaranteed sum to beneficiaries, becomes redundant. A term plan suffices to cover any unforeseen circumstances.

Evaluating the Costs of Surrendering
Surrender Charges: It’s true that surrendering traditional policies incurs charges. However, these are usually a one-time cost and should be weighed against the potential gains from reinvesting the surrendered amount into more lucrative avenues like mutual funds.

Opportunity Cost: Continuing with low-return traditional policies means missing out on the opportunity to earn higher returns elsewhere. The longer you stay invested in these low-yielding products, the greater the opportunity cost.

Tax Implications: While there might be some tax implications upon surrendering the policies, these can often be managed or minimized with the help of a Certified Financial Planner. Moreover, the potential higher returns from mutual funds can offset these costs over time.

Reinvestment Strategy: Mutual Funds
Equity Mutual Funds: If you have a moderate to high-risk tolerance, equity mutual funds can offer significant growth potential. They are ideal for long-term wealth creation. You can consider large-cap funds for stability, mid-cap funds for growth, or multi-cap funds for a balanced approach.

Debt Mutual Funds: For a more conservative approach, debt funds are a good option. They provide regular income and are less volatile than equity funds. This might be suitable if you prefer a steady and relatively safe return.

Balanced or Hybrid Funds: These funds invest in both equity and debt instruments. They offer a balance between risk and return, making them a suitable option for someone looking to invest for moderate growth while maintaining some level of safety.

Systematic Withdrawal Plan (SWP): By investing in mutual funds, you can opt for an SWP, which allows you to withdraw a fixed amount regularly, similar to a pension. This can provide you with a steady income stream while your remaining investment continues to grow.

Managing Risk and Diversification
Risk Assessment: Since you are financially independent and do not have any dependents, you might be in a position to take on higher risk for potentially higher returns. However, it’s important to assess your risk tolerance and ensure that you are comfortable with the volatility that comes with equity investments.

Diversification: One of the key advantages of mutual funds is the ability to diversify across different asset classes, sectors, and geographies. This reduces risk and enhances the potential for stable returns.

Tax Efficiency with Mutual Funds
Equity-Linked Savings Schemes (ELSS): If tax savings are a priority, you can consider investing in ELSS funds, which offer tax benefits under Section 80C of the Income Tax Act. ELSS funds have a lock-in period of three years but can provide significant returns over the long term.

Consulting a Certified Financial Planner
Tailored Advice: While the decision to surrender traditional policies and reinvest in mutual funds appears sound, it’s crucial to consult a Certified Financial Planner. They can provide personalized advice based on your financial situation, goals, and risk tolerance.

Long-Term Financial Plan: A planner can help you create a comprehensive financial plan that aligns with your retirement goals, ensuring that your investments are structured to provide both growth and security.

Final Insights
Surrendering Traditional Policies: Given your situation, surrendering traditional insurance policies and keeping only the term plan is a wise move. It frees up your funds, allowing you to invest in higher-yielding instruments.

Reinvesting in Mutual Funds: Reinvesting the surrendered amount in mutual funds offers you the potential for better returns, flexibility, and tax efficiency. It aligns better with your current life stage and financial goals.

Maximizing Your Financial Freedom: With no dependents and no need to create a legacy, your focus should be on maximizing your financial freedom. Mutual funds provide you with the tools to achieve this, ensuring that your hard-earned money works for you in the most effective way.

Stay Disciplined: Just as you’ve been disciplined in managing your insurance, continue this discipline in your investment journey. Regular reviews and adjustments will keep your portfolio aligned with your goals and risk tolerance.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
Asked on - Aug 27, 2024 | Answered on Aug 28, 2024
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Thank you Ji. But for most of the policies, PPT (premium payment term) is over.. and getting annual survival benefits @ 5.5% pa of SA.
Ans: Given that most of your policies have completed their premium payment term and are now providing annual survival benefits at 5.5% per annum of the Sum Assured, it's worth considering surrendering these policies. Although the survival benefit provides a steady income, the returns are relatively low compared to what you could potentially earn by reinvesting the surrender value in mutual funds.

Mutual funds, especially equity-oriented ones, typically offer higher returns over the long term, which could significantly outpace the 5.5% you're currently receiving. By reallocating these funds into a well-diversified mutual fund portfolio, you could enhance your overall returns, align better with your financial goals, and achieve a more robust growth trajectory for your investments.

So, even with the annual survival benefits, surrendering the policies and reinvesting in mutual funds is likely a better financial strategy.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |6568 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 15, 2024

Money
Having taken term plan for a higher sum assured say 2 crore should we surrender all traditional insurance policy irrespective of its performance
Ans: Traditional insurance policies are those plans which combine insurance coverage with an investment component. They typically include endowment plans, money-back policies, and whole life policies. These plans are designed to provide a maturity benefit along with life coverage. The premiums paid are divided between providing life cover and creating a savings corpus, which grows over time and is paid out either on maturity or death.

However, these traditional policies often come with limitations. The returns from these policies tend to be lower compared to other investment avenues. This is because a significant portion of the premium goes towards providing life cover, administrative costs, and commissions, leaving less for the investment component. Additionally, the lock-in periods can be quite long, reducing flexibility.

Limitations of Traditional Insurance Policies
One major drawback of traditional insurance policies is their limited returns. These policies typically yield around 4-6% per annum, which might not even beat inflation in the long run. This can result in a reduction in purchasing power of the maturity benefit.

Another concern is the lack of transparency. The exact break-up of the premium and the growth of the investment component are often not disclosed clearly. Policyholders are often unaware of how much of their premium is being invested and how it is performing.

Moreover, these policies tend to have high surrender charges if you decide to exit the policy before maturity. This can lead to significant losses if you decide to discontinue the policy early.

Evaluating Your Insurance Needs
If you have already taken a term plan with a higher sum assured, such as Rs. 2 crore, it is essential to reassess your insurance needs. A term plan is a pure protection plan that provides a high sum assured at a relatively low premium. It does not have an investment component, making it a cost-effective way to secure your family's financial future.

In contrast, traditional insurance policies mix investment and insurance, often resulting in suboptimal returns and inadequate coverage. With a robust term plan in place, the primary need for financial protection is already addressed. This allows you to focus on more efficient investment strategies for wealth creation.

The Case for Surrendering Traditional Policies
Given the limitations of traditional insurance policies, it might be prudent to consider surrendering these policies and redirecting the funds into more efficient investment avenues. However, this decision should not be taken lightly and must be based on a thorough evaluation of your financial goals, current portfolio, and the performance of your existing policies.

Benefits of Actively Managed Mutual Funds
Actively managed mutual funds offer several advantages over traditional insurance policies and index funds. These funds are managed by professional fund managers who actively select stocks and securities with the potential to outperform the market.

One of the key benefits of actively managed funds is the potential for higher returns. By carefully selecting investments based on extensive research and market analysis, fund managers can take advantage of market opportunities and mitigate risks. This can result in better performance compared to passively managed funds or traditional insurance policies.

Additionally, actively managed funds provide a high level of diversification. By investing in a mix of assets, these funds can spread risk across different sectors and geographies, reducing the impact of any single underperforming investment.

Moreover, actively managed funds offer flexibility. Investors can choose from a wide range of funds based on their risk tolerance, investment horizon, and financial goals. This allows for a more tailored investment strategy compared to the rigid structure of traditional insurance policies.

Disadvantages of Index Funds
While index funds are often praised for their low costs and simplicity, they come with their own set of disadvantages. Index funds aim to replicate the performance of a specific market index, such as the Nifty 50 or the Sensex. This means they invest in all the stocks that make up the index, in the same proportion.

One major drawback of index funds is their inability to outperform the market. Since these funds are designed to mirror the index, they can only perform as well as the index itself. During market downturns, index funds can suffer significant losses, as they do not have the flexibility to adjust their holdings.

Another concern is the lack of active management. Index funds do not benefit from the expertise of a fund manager who can make strategic decisions based on market conditions. This can limit the potential for higher returns and risk management.

Disadvantages of Direct Funds
Investing in direct mutual funds might seem appealing due to the absence of distributor commissions, but it has its pitfalls. One significant drawback is the lack of guidance. Without a Certified Financial Planner (CFP) to help navigate the complex investment landscape, investors might make uninformed decisions.

Direct funds also require a higher level of financial literacy and market understanding. Many investors may not have the time or expertise to effectively manage their portfolios. This can lead to suboptimal asset allocation and increased risk.

Furthermore, regular plans through Mutual Fund Distributors (MFDs) with CFP credentials offer ongoing advice and portfolio review. This continuous support can help in adjusting the investment strategy based on market conditions and changing financial goals.

Reinvesting Surrendered Policy Funds
If you decide to surrender your traditional insurance policies, it is crucial to reinvest the proceeds wisely. Here are some investment options that can offer better returns and align with your financial goals:

Actively Managed Equity Mutual Funds: These funds invest in a diversified portfolio of stocks, offering the potential for high returns. They are managed by experienced fund managers who aim to outperform the market.

Debt Mutual Funds: For those with a lower risk tolerance, debt mutual funds can be a good option. These funds invest in fixed-income securities like government bonds, corporate bonds, and money market instruments, providing stable returns with lower risk.

Systematic Investment Plans (SIPs): SIPs allow you to invest a fixed amount regularly in mutual funds. This disciplined approach can help in averaging out the cost of investments and reducing the impact of market volatility.

Balanced or Hybrid Funds: These funds invest in a mix of equity and debt instruments, providing a balance between risk and return. They can be a suitable option for investors looking for moderate risk and steady returns.

The Importance of Diversification
Diversification is a key principle in investment. By spreading investments across different asset classes, sectors, and geographies, you can reduce risk and improve the potential for returns. A well-diversified portfolio can help in mitigating the impact of any single underperforming investment.

Regular Portfolio Review
Regularly reviewing your investment portfolio is crucial. This helps in ensuring that your investments are aligned with your financial goals and risk tolerance. It also allows you to make necessary adjustments based on market conditions and changing life circumstances.

Understanding Your Financial Journey
Understanding your financial journey is crucial. Everyone has unique financial goals, risk tolerance, and investment horizons. It's essential to have a strategy tailored to your specific needs. Reassessing your portfolio periodically and making informed decisions is key to achieving financial success.

Your Financial Planning Efforts
Taking a term plan with a high sum assured shows your commitment to securing your family's financial future. It's a wise decision that demonstrates foresight and responsibility. Now, enhancing your investment strategy can further strengthen your financial position.

Final Insights
In summary, while traditional insurance policies provide a blend of insurance and investment, their limitations often outweigh the benefits. With a robust term plan in place, it makes sense to reassess and potentially surrender these policies. Redirecting the funds into more efficient investment avenues like actively managed mutual funds can offer higher returns and better align with your financial goals. It's essential to diversify your investments, regularly review your portfolio, and seek professional guidance to navigate the complexities of the investment landscape.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |6568 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 28, 2024

Money
I am a 60-year-young, disciplined bachelor with insurance coverage of Rs. 1 crore, which includes both a term plan and traditional plans. I am self-dependent, and no one is financially dependent on me. Since I don't have a need to create a legacy,. Having decided to surrender my traditional policies (having understood the surrender charges) out of the total insurance coverage of 1 Cr. which includes, Term plan. I narrate the policy terms & benefits, so that you can suggest me the better: 1) PPT (Premium Payment) for the policy is over, I have no premium commitment now. 2) Annual Survival Benefit: Currently receiving 5.5% of the Sum Assured annually. (which is almost equal to the return from FDR or Debt fund) 3) Bonus: at the end of the policy term there will be bonus in the policy which also I got it which is approx 80% of the premiums paid. 3) Life Cover: Coverage until 100 years of age, with annual survival benefit @ 5.5% of Sum assured, and death benfit - the Sum Assured plus accumulated bonuses will be paid to the nominee 4) Maturity Benefit: On survival until 100 years, the entire Sum Assured plus accumulated bonuses will be given to the assured.. I have planned at the time of siginging for the policy agreement, with 12 policies to get every month 5.5% of SA, like pension (passive income). Now, ji, please suggest me, Do you I need to surrender the policy considering 80% of premuium paid is received and getting 5.5% pa every month. with no premium commitment and coverage upto 100 years.
Ans: You have a well-structured insurance portfolio with Rs. 1 crore coverage. This includes term and traditional plans. The plan you mentioned provides a 5.5% annual survival benefit, life cover until age 100, and a maturity benefit. The idea of using these policies as a form of pension by receiving 5.5% of the sum assured monthly is thoughtful.

Given your current situation—no dependents and no need to create a legacy—your focus shifts from protection to optimizing returns. With the premium payment term over, you face no further financial commitments. Your plan is now a source of regular income, and at the end of the term, you will receive a bonus amounting to 80% of the premiums paid.

Evaluating the Need to Continue or Surrender the Policies
Benefits of Continuing with the Policy
Regular Income: The 5.5% survival benefit provides a steady income stream. This is particularly useful if you require a predictable cash flow.

Life Cover Until Age 100: While you may not need life cover, this ensures a safety net is in place. Should anything happen, your nominee receives a substantial amount.

Maturity Benefit: The policy promises the sum assured plus accumulated bonuses at age 100. This is a significant amount that adds to your financial security in your later years.

No Further Commitments: With the premium payment term over, you don’t need to invest any more money into this policy. You are just reaping the benefits now.

Drawbacks of Continuing with the Policy
Low Returns: The 5.5% return is modest, akin to the returns from fixed deposits or debt funds. Over time, inflation might erode the purchasing power of this income.

Opportunity Cost: If you surrender the policy, you could potentially invest the surrender value in higher-yielding investments. This could provide better returns over time.

Limited Flexibility: Insurance policies like this one are rigid. You can't easily adjust your investment based on changing market conditions.

Should You Surrender the Policy?
Factors Favoring Surrender
Unlocking Higher Returns: By surrendering the policy, you can reinvest the surrender value in more lucrative options. Actively managed mutual funds, for instance, offer potential for higher returns.

No Need for Life Cover: With no dependents, the life cover aspect may not be essential. The focus should be on maximizing your financial returns rather than providing a death benefit.

Maximizing Financial Freedom: Reinvesting the surrender value gives you more control over your finances. You can tailor your investments to suit your risk tolerance and financial goals.

Factors Against Surrender
Guaranteed Income: If you value the certainty of the 5.5% survival benefit, continuing the policy is advantageous. This is especially true if you prefer a low-risk, predictable income stream.

Bonus Payout: At the end of the term, you receive a bonus equivalent to 80% of the premiums paid. Surrendering the policy means forfeiting this benefit.

Emotional Comfort: Sometimes, the comfort of having a guaranteed income, regardless of the returns, can outweigh the potential for higher returns elsewhere.

Exploring Alternative Investment Options
Actively Managed Mutual Funds
Higher Returns Potential: Actively managed funds often outperform passive options like index funds. Experienced fund managers can navigate market fluctuations to maximize returns.

Professional Guidance: Investing through a Certified Financial Planner ensures that your investments are aligned with your goals. This helps in optimizing returns while managing risk.

Reinvestment Flexibility: You have the flexibility to reinvest dividends or capital gains, allowing for compounding growth.

Avoiding Direct Funds
Lack of Professional Management: Direct funds require a hands-on approach. Without professional guidance, you might miss out on potential gains or take on unnecessary risks.

Complexity: Direct funds demand more time and knowledge. Unless you’re an expert, this can lead to suboptimal decisions.

Benefits of Regular Funds: By investing through a Certified Financial Planner, you gain access to regular funds. These offer the expertise of a fund manager who can help you navigate market conditions and maximize returns.

Insurance Strategy: Term Plan vs. Traditional Plans
Advantages of Term Plans
Cost-Effective: Term plans provide high coverage at a low cost. This frees up more funds for other investments.

Focus on Wealth Building: With no dependents, you can focus on wealth accumulation rather than protection. The money saved from term insurance premiums can be invested in high-return avenues.

Disadvantages of Traditional Plans
Low Returns: Traditional plans often provide lower returns compared to other investment options. They are primarily designed for protection, not wealth creation.

Lack of Flexibility: Traditional plans are rigid. Once you’re locked in, it’s difficult to adapt to changing financial needs or market conditions.

Should You Retain Your Term Plan?
Minimal Cost: If your term plan premium is low, retaining it might be a good idea. It provides peace of mind at a negligible cost.

Focus on Other Investments: With your primary protection in place, you can focus on building your wealth through other investment options.

Final Insights
In your situation, maximizing your financial returns is key. The traditional policy provides a steady income but may not offer the best returns long-term. Surrendering the policy and reinvesting in actively managed mutual funds could yield better results. This strategy allows you to tailor your investments to your financial goals and risk tolerance.

With no dependents, your primary focus should be on wealth accumulation and enjoying your financial independence. A Certified Financial Planner can guide you through this process, ensuring that your investments are optimized for growth while managing risk.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner,

www.holisticinvestment.in

..Read more

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Milind

Milind Vadjikar  |387 Answers  |Ask -

Insurance, Stocks, MF, PF Expert - Answered on Oct 13, 2024

Asked by Anonymous - Oct 12, 2024Hindi
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Hi, age 40 years, monthly net salary Rs 85k, married , 1 kid. Recently have constructed new house. Ground floor commercial shops, and 1st floor residential 2bhk flat were we stay. Home loan 1.05 cr with monthly EMI of 85k for next 30 years & All current savings exhausted due to new construction. Commercial shops have potential for monthly rental income of 60k to 70k.please guide on below for strategy: 1) how to close home loan in next 10 years 2) considering 60 as retirement age, need corpus of 8 cr to fund kid education, marriage and for rest of livelihood.
Ans: Hello;

1. Immediately let out the commercial shops on long lease with yearly rent hikes. This is crucial to fund your loan EMI.

Assuming this to yield rental income of 70 K per month.

You will still need to shell out 15 K for the EMI amount from your income.

2. So after deducting EMI cut from your monthly pay we are left with
70 K.
Earmarking 30 K for your regular expenses, I suggest you start a monthly SIP of 40 K in a pure equity mutual fund with yearly top-up of 11% minimum.

This may grow into a corpus of 1.47 Cr after 10 years part of which you may utilise to settle off the overdue loan amount.

3. The balance corpus left after settling the loan is expected to be around 54 L. At this stage you will need enhance monthly sip to 1.5 L with 13 % yearly top-up for the next 10 years.

4. The corpus from SIP after the next 10 years may be 6.3 Cr. The balance corpus of 54 L may grow into a sum of 1.83 Cr. Both added will give you a comprehensive corpus of 8.13 Cr, as desired. ( A modest return of 13% from pure equity mutual funds is considered).

Happy Investing!!

*Investments in mutual funds are subject to market risks. Please read all scheme related documents carefully before investing.

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Nayagam P P  |3811 Answers  |Ask -

Career Counsellor - Answered on Oct 13, 2024

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Sir the median package at ssnce for cse core is less than rvce ise .So does it make more viable option considering placement in mind .I have a dream of becoming software engineer from my childhood. But my seniors are advising for rvce ise.what to do should I follow my dream or placement.I am a Bangalore resident and Tamil is my mother tongue.
Ans: Ashwin, my son, graduated from RVCE in 2023 and secured employment through campus placement with a reputable software company. Despite being among the highest achievers in COMEDK, he opted for ECE instead of the more accessible CSE. We did not compel him to join CSE. Following his second year, he progressively shown an interest in software and obtained several certifications through NPTEL, Internshala, and similar platforms. Regarding his experience, while ISE is commendable, CSE is the superior option. Simply enter 'RV placement statistics 2024'. Select the initial result to get the Placement Statistics of RV directly. The top placements are for Computer Science Engineering, followed by Electronics and Communication Engineering, and then Information Science Engineering. The recommendations of your seniors, your personal interests, and the branch with the highest placement statistics are distinct considerations. Kindly review the Course Curriculum for both CSE and ISE and make a decision. Kindly review one of my detailed responses below, in which I have explicitly outlined the stages, recommendations, and methods that a first-year engineering student should adhere to till their fourth year for campus placement. All the BEST for Your Prosperous Future.

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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