Hi, I need to check whether it is good to buy a term plan for Rs.75 Lakhs or for 1 Cr. My Monthly EMI: 27000 K, my Rd @ 11000 months, SIP @ 5000 & rest expenses. My CTC is 16 Lacs.
Ans: Buying a term plan is a crucial decision. With your CTC of Rs 16 lakhs and current expenses, securing your family’s future is essential. Let's assess whether a Rs 75 lakh or Rs 1 crore term plan is best for you.
It's commendable that you’re thinking about your family's future. Your proactive approach to financial planning is admirable.
Evaluating Your Financial Situation
Current Financial Commitments
Your monthly EMI is Rs 27,000. You also invest Rs 11,000 in a Recurring Deposit (RD) and Rs 5,000 in SIPs.
Monthly Income and Expenses
With a CTC of Rs 16 lakhs, your monthly income is around Rs 1.33 lakhs. After your EMI, RD, and SIP, you have around Rs 90,000 left for other expenses.
Importance of a Term Plan
Financial Security
A term plan ensures your family’s financial security in your absence. It helps cover loans, living expenses, and future goals.
Debt Repayment
Your current liabilities, including EMI, need coverage. A term plan ensures your family can repay these debts.
Determining the Right Coverage
Calculating Coverage Needs
Consider your outstanding debts, living expenses, and future goals. These factors help determine the right term plan amount.
Rs 75 Lakhs vs Rs 1 Crore
A Rs 1 crore term plan offers better coverage, considering your liabilities and income. It ensures a comfortable financial future for your family.
Advantages of a Higher Coverage
Better Financial Protection
Higher coverage ensures all debts and expenses are covered. Your family will not face financial hardship.
Inflation Protection
A Rs 1 crore plan provides better protection against inflation. Future expenses will be higher, and this coverage ensures adequacy.
Factors to Consider
Premium Affordability
Check the premium difference between Rs 75 lakhs and Rs 1 crore plans. Ensure the premium fits your budget without straining finances.
Coverage Duration
Choose a term that aligns with your financial goals. Ensure the term plan covers your liabilities and expenses until they're no longer needed.
Managing Your Existing Investments
Recurring Deposit (RD)
Your RD at Rs 11,000 per month is a stable, low-risk investment. It’s a good savings habit and provides guaranteed returns.
Systematic Investment Plan (SIP)
Your SIP of Rs 5,000 per month in mutual funds is excellent. SIPs offer the power of compounding and help build wealth over time.
Mutual Funds: A Deeper Look
Categories of Mutual Funds
Equity Funds: High growth potential, suitable for long-term goals.
Debt Funds: Lower risk, suitable for short-term goals.
Hybrid Funds: Balanced approach, combining equity and debt.
Advantages of Mutual Funds
Diversification: Reduces risk by spreading investments.
Professional Management: Fund managers handle investment decisions.
Liquidity: Easy to buy and sell.
Compounding: Reinvested returns grow over time.
Risks of Mutual Funds
Market Risk: Subject to market fluctuations.
Credit Risk: In debt funds, risk of default by issuers.
Interest Rate Risk: Affects debt funds, especially long-duration funds.
Disadvantages of Direct Funds
Self-Management
Direct funds require you to manage your investments. Without expertise, this can be challenging and risky.
Lack of Guidance
Without a Certified Financial Planner (CFP), you miss out on professional advice. This can affect your investment decisions and returns.
Benefits of Regular Funds through CFP
Professional Advice
CFPs provide tailored advice based on your financial goals and risk tolerance.
Better Returns
With professional management, regular funds can potentially offer better returns.
Power of Compounding
Regular Investments
Investing regularly through SIPs leverages compounding. Over time, this significantly enhances your returns.
Long-Term Benefits
Even small, regular investments grow substantially over the long term. This helps in achieving your financial goals.
Final Insights
Opting for a Rs 1 crore term plan provides better financial security. It ensures all your liabilities and future expenses are covered. Managing your existing investments in RD and SIPs is crucial. Consider the benefits of mutual funds and the importance of professional guidance. With the right strategy, you can secure your family's future and achieve your financial goals.
Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner
www.holisticinvestment.in
