Do you have enough savings to live a comfortable retired life? Can you afford a sabbatical in your professional life and pursue your passion? Can you afford to send your kids abroad for education? If you are afraid to answer these questions, it is time you re-evaluate your financial choices and think about building wealth.
Advancements in the field of medicine and better public health measures are helping humans live longer. According to the State of World Population Report 2019 by the United Nations Population Fund, life expectancy at birth in India has grown from 47 years in 1969 to 69 years in 2019. Longer life spans have obvious appeal, but it also entails that individuals would have to secure themselves financially especially when their regular income stops.
Ask these questions to yourself. Do you have enough savings to live a comfortable retired life? Can you afford a sabbatical in your professional life and pursue your passion? Can you afford to send your kids abroad for education? If you are afraid to answer these questions, it is time you re-evaluate your financial choices and think about building wealth.
Wealth creation is a long-term process and the key is ‘Starting Early’ to derive maximum benefits of ‘Compounding’. Let us take the example of two friends Manas and Shakti, both 30-year old working professionals who want to create a corpus of Rs. 30 lakh over the next 15 years (by Dec 2035) for their children’s higher education. Manas embarks on the journey at 30, whereas Shakti delays his until he is 35 years old. Let us assume a rate of return of 8% per annum. Manas invests approximately Rs. 2 lakh annually for 5 years from Dec 2020 to Dec 2025 i.e. Rs.10 lakh and waits patiently for another 10 years for his corpus to grow to approximately Rs. 30 lakh. Shakti on the other hand has to invest approximately Rs. 3 to 3.25 lakh annually for 5 years from Dec 2025 to Dec 2029 i.e. Rs.15-16 lakh, and wait for another 5 years for his corpus to grow to the same amount as what Manas would receive in the year 2034. Therefore, not only does Shakti end up investing Rs. 5-6 lakh more than what Manas invests because of starting late, his investments only compounds to Rs 14-15 lakh compared to Rs 20 lakh of Manas. This establishes that compounding aids in growing your wealth.
Let us now delve into how traditional life insurance savings products help in achieving financial goals. These plans offer a guaranteed benefit, the quantum of which will be known to the policyholder right at inception. Along with this, these plans offer life cover that provides a financial safety net to the family.
The form in which the guaranteed benefit gets paid to the customer varies from one product to another. Customers can choose a plan based on their specific requirements. For example, some products offer the guaranteed benefit in the form of regular income paid to the customer. These plans are ideal for customers who are looking to fund their child’s future education, which will typically require an annual expenditure to be borne for a certain number of years.
Some plans also offer an option for the income to start as early as the second year itself. It provides the additional cash flow, other than the regular source of income, during the premium paying term. For instance, if Manas opts to invest Rs. 1 lakh annually for the next 10 years, he will start receiving Rs. 20,000 to Rs.25, 000 as early income from the 2nd year onwards every year for 10 years. After the completion of his premium payment term, he can expect to receive a guaranteed income of approximately Rs 1.25 to 1.35 lakh per anum for the next 10 years, which would come in handy during his child’s higher education.
Some plans give the benefit in the form of a Guaranteed Lump-sum. Knowing the maturity corpus makes future financial planning easier. For instance, a 30-year-old customer intending to build a corpus for making the initial down payment towards the dream house can opt for this category of savings products. Assuming the customer chooses a premium payment term of 10 years with the annual premium being Rs. 1 lakh and a policy tenure of 20 years, the customer can expect to receive a lump-sum tax-free maturity corpus of Rs. 22 lakh to Rs. 23 lakh.
Another interesting feature offered by select plans is the option to decide, at the time of purchase, the specific date from which they wish to receive income. This feature can be utilised by customers as a gift to their loved ones on their birthdays, wedding anniversaries, marriage, etc.
In times of economic uncertainty and volatile markets, customers tend to gravitate towards products that offer safety of the capital invested, and guaranteed returns. These products are versatile and customers can have peace of mind as they guarantee income for tomorrow.
By Amit Palta, Chief Distribution Officer, ICICI Prudential Life Insurance Company