February unleashed a horde of insurance agents who would work the phone and the feet to meet individuals to peddle Tax Savings products. While the allure of the Tax Savings schemes has not dimmed, the number of people offering solutions to such problems has only increased manifold. From LIC, to private insurance players, to mutual funds – the option has multiplied and so has the confusion.
So what shall I do??
First things first.
INSURANCE COVER is a must for everyone who is a primary bread winner. Tax savings or no tax savings: Insurance is a risk cover.
In today’s world where calamity comes in many varied forms, it is always prudent AND RESPONSIBLE to provide for the members who depend on me. Imagine a situation where a certain lifestyle has been achieved and suddenly the provider is no more. Not only is it a terrible personal loss but also a huge financial challenge. So the question of having a tax saving in one’s insurance cover or capital growth is largely redundant, if I am to do justice to my family.
The other issue is how much of an insurance cover does one need?
The ideal amount is 15X the current annual family expenditure. Why 15?? Well, assuming that the insurance amount will not be flimsily invested, it must earn enough for the immediate future to ensure that the risk free earnings will be able to meet expenditure outflow. So, at 7% interest rate (which is very realistic), 15X the amount is perhaps as close to minimum that I must have.
After I have addressed the concern for life cover, the equally important issue of health cover comes into play. I know, I used to think I was superman too till I was very abruptly told I wasn’t and I had to be hospitalized. And the very meagre 2 days there set me back by nearly Rs. 1.5 lacs. I have closely observed spend patterns in health insurance and it’s my opinion that it’s the highest inflationary item in a household – as much as 17% annually. Imagine what a shattering influence its absence will cause to the household. My second observation is “EVERYONE OF US WILL USE IT ONE TIME OR THE OTHER”. If its early on then great but if I go through a couple of decades without needing it, rest assured that the one time I will need it will come with a huge bill. And this bill will be met by all the years of NO CLAIM BONUS that were lodged in the past. And it helps to start out early. With age come diseases and issues that need hospitalization and adds to the cost of premium.
If we can do it early on, so much the better.
For coverage and bonuses and low premia.
Only after these two above has been met should we look into the issue of investing for savings taxes. And the limit for the total amount should not be restricted to what the government provides as the upper limit, inclusive of the additional for medical cover. However, it should be dictated by the requirements of the family. It’s important to understand the basic fact —- the Government provides the Income Tax benefit as an average for everyone, but our needs and requirements do not work on the averages for the population. It works on THE DYNAMICS that we have created for OUR FAMILY. And the best investment option for anyone who wants to create wealth is MUTUAL FUNDS. Use the mutual funds for maximizing future wealth and I am really serious about it, use the SIP route. That way I am committed to the cause and even for my tax savings I am using the one proven sure shot tool for long term wealth creation. AND WHATS MORE, the dividends and the final redemption faces the least taxes so the bulk of what we make is ours to enjoy.