How to choose a financial planner
Today’s young Indians are an optimistic and confident lot ready with a blueprint for their life and goals to achieve. However, very often they are not prepared for the vagaries of fate and how it could throw their as well as lives of their loved ones out of gear in the absence of adequate financial security.
Inflation is the buzzword these days. But rising inflation and planning for insurance cover are usually done in isolation and the learnings don’t necessarily converge for consumers to be able to look at the complete picture. While the rule of thumb says you should look at a life cover of around 12 times your annual income deducting your investment assets plus any liabilities, it is important to consider another mix — your rising income and increasing inflation. Your rising income will have natural impact on your standard of living and rising inflation will have multiple effects on an individual’s
Hence, unless you are purchasing a term life insurance policy for only a few years, inflation should be an important consideration. The future value of money should play an important role in your calculations and hence the need to continuously evaluate your life insurance needs.
If you are interested in a longer term policy — for example, 20 or more years — or if you are obtaining whole life insurance, then the future value of money should play a part in your calculations.
Why is inflation an important consideration for insurance?
Most individuals when they purchase insurance, one consideration that is frequently overlooked is future value of money. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known
The inflation rate in India was last reported at 6.1% in September, 2011. From 1969 until 2010, the average inflation rate in India was 7.99%.
The cost of healthcare and education has also increased rapidly, at times much faster than other areas of the economy. So to plan for the future needs of your family, it is wise to calculate the rate of inflation for education and healthcare independently of regular living expenses. Inflation is a real risk for all ages since the future value of money may not support your current lifestyle.
Time factor of inflation on term life insurance policies
A term life policy is generally paid over a long period of 15, 20 or 30 years. The rate you pay for term life insurance is by definition usually a fixed rate that you pay over this span of time. Therefore, because the rate of inflation is commonly in the range of about 7%-9% annually, the value of the rupee decreases by this percentage each year.
This means that the purchasing power of rupee is reduced and is not able to acquire the same amount of coverage benefit in terms of money as the previous year.
The premium you pay per month for life insurance today will in rupees terms be the same, but will be less money 10 years from now due to inflation. Take this example – anything that could be purchased for Rs 10 lakh in 2011 would cost Rs 45 lakh approximately in 2031 at 8% inflation rate.
Solution — Increasing term insurance policies
An increasing term assurance policy may provide the flexibility to increase the 'sum assured' (the cash amount that you receive upon your death) by 5-10% each year to reflect the rate of inflation. Thus it will hedge against the rising cost of living with an option of increasing sum assured. It brings adequate financial protection at an affordable cost. Most companies also provide this enhanced insurance with appropriate rider options at nominal extra cost and reward for healthy lifestyle habits like non smoking etc, too. Some policies also have a special discount for women.
Who should buy a term plan like this?
If you are concerned about the rise of inflation and you are buying a policy relatively young in life, for example, just after starting a family, this may be a suitable option for you. However, it is worth noting that the cost of your insurance premium is also likely to rise to reflect the increased sum assured, so you would need to be certain that you would be able to support this increase.
While an innovative policy incorporating inflation dynamics is the need of the day, it is also important one selects insurance providers that offer efficient claims processing services.
As you can see inflation does have a direct co-relation with any term life policy you choose, a policy wisely chosen can efficiently help circumvent rising inflation for family, if, faced with any unforeseen circumstances.
The author is CEO & MD, Birla Sun Life Insurance. The views expressed in this article are his own
Today if you ask any one, “From whom do you take investment advice?” Most people will reply, “I seek investment advice from my agent, friends, relatives, newspapers, magazines or some TV shows.” Rarely do you get to hear someone seeking investment advice from a ‘Financial Planner’. Today you have switched from ‘vada pav’ to ‘Mc. Alu Tikki’, ‘laptop’ to ‘tablet/I-pad’. Similarly, since the SEBI, Investment Adviser Regulations, 2013, are in place now, you should soon shift from ‘agent’ to ‘financial planner’. But you don’t know who is a good financial planner? How to choose a good financial planner?
To sum it up in one line — A financial planner puts the client’s interest first before his own interest since he is getting paid for giving financial advice. Consider some of the following points before choosing a financial planner:
Licences, credentials or other certifications
Anyone who charges fee for giving investment advice needs to be registered with the SEBI under Investment Adviser Regulations, 2013. Already, few financial planners have got their registration certificate from SEBI. So, if your financial planner is charging fee, he should be registered as an investment adviser with SEBI. You should also ask if the planner has additional certification like CFP (Certified Financial Planner), or any other similar certification or degree relating to this field.
You should know what kind of services the planner offers. Services can be goal-based financial planning, estate planning, mutual fund distribution, insurance agency and PMS, etc. If the planner provides distribution services, then it is easy for you to implement the financial plan. But, on the other hand, there can be bias in the recommendation given by the planner since he earns commission on the investment/insurance product you implement through him. So the planner must disclose the commission that he will earn if you implement the plan through him.
A financial planner charges fee for preparing a goal-based financial plan for your financial future. Average fee for a financial plan ranges from Rs 15,000 to 25,000. The planner may charge additional fee for estate planning (preparing a will or incorporating Trust). You should also check that the planner does not have differential fee structure if you implement plan with him and if implemented by yourself from a third party. The fee paid usually covers planning and review of the financial plan for a period of one year; so you should also ask about it before entering into a contract with the planner.
Basis of recommendation and research
You should know on what basis the financial planner is recommending particular investment or insurance instrument. You should ask if the planner has a research team or he outsources research. This is important because the planner cannot recommend any investment/insurance without studying or knowing the investment/insurance product. Also, you should ask whether your risk profile would be assessed and considered for recommending investment.
During the initial stage of data gathering and analysing the financial situation, there is a lot of interaction between you and the planner. Apart from that, in the later stage after the plan presentation and implementation; the planner should review your portfolio and your goals periodically. You should ask how often your portfolio and the financial plan would be reviewed. Review is the most important part of the financial planning process.
These are some of the points which you should consider and know about the financial planner before choosing one for you. Some of you may not be aware that what is there in a financial plan and how does it look, so you can ask for a sample financial plan from the planner. Looking at the sample financial plan, you can get an overview and a brief idea of what are the components of a financial plan. Since now all investment advisers are under SEBI’s eye; and thus they are obligated to comply with the regulations.
Now, it’s time to change, plan for your finances and find a good financial planner for yourself.
The author is a research analyst, Apnapaisa. The views expressed in this article are his own
Q. I am a senior citizen of 75 years. As my taxable income for the AY 2013-14 was more than 5 lakh, I had to file my income tax return online as advised by a chartered accountant. Please advise me on the following points:
a. My taxable income for the AY 2014-15 is expected to be below Rs 5 lakh. I feel I am not required to file the return online. Please confirm.
b. My total taxable income also includes Rs 18,000 as consultation charges/fee on labour laws. Please advise if I am required to deposit an advance tax or not. — OP Batra
A. In case your total income is expected to be less than Rs 5 lakh for the Assessment Year 2014-15, you can file the return of income in paper form and you need not file the same electronically.
b. In case your total income is expected to be less than Rs 5 lakh, and such income includes any income from business or profession, you will be liable to pay advance tax on such income. Since your total income would include consultation charges/fee on labour laws, the provisions relating to advance tax would be applicable on you.
Q. I retired from the Punjab Government as Principal (school cadre) and got gratuity, leave encashment, and GPF to the tune of Rs 32 lakh. I gifted Rs 10 lakh by a cheque to my wife. She put that money into a fixed deposit for 555 days in April 2013. Please advise in this case whether tax liability is of my wife or myself. My wife is a housewife. — S. Gupta
A. Section 64 of the I-T Act, 1961, provides that in computing the total income of an individual, there shall be included all such income as arising directly or indirectly to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual other than for adequate consideration or in connection with an agreement to live apart. In view of the above provision, income arising in respect of the amount of Rs 10 lakh gifted to your wife would be included in your income for the purposes of computing your total income. You would be liable to pay tax on so much of interest as is earned on Rs 10 lakh. However, interest earned on the interest amount of fixed deposit would not be includible in your taxable income but would be treated as your wife’s income.