While we all would like to spend our money today, it’s important to secure our future with financial products that would keep our finances secure and also allow us to build wealth for the future. A part of your disposable income should compulsorily be used for investment and insurance. You may not be able to make room for all of your investment and insurance needs at once. Therefore, you should prioritise the most basic needs first and then move to the more aspirational ones.
Here are 3 essential financial products you need to have in your portfolio to secure your future:
1. Term Plan
There are several kinds of life insurance products in the market, and one kind is the term plan. A term plan is a pure life cover with no investment benefits. It can be taken by an individual or jointly by a married couple. As a person with dependents, this should be the first insurance product in your financial portfolio.
While buying a term plan, ensure that the sum assured could help replace your income in your death. It should cover your family or dependents’ income needs, cover future money needs like children’s education, and help pay outstanding debt such as a home loan. Remember that the younger you start, the lower the premium you have to pay for a term insurance plan.
2. Health Insurance
Health insurance has become imperative for every household, given the escalating cost of hospitalization and medical expenses in general. We may, however, feel it’s a waste or useful only for tax benefits. This couldn’t be further from the truth. A health insurance plan, like a term plan, can help you in times of adversity so that you do not have to resort to taking a loan or dipping into your savings.
Health insurance will also cost you less if you take it when you are younger. For instance, if a hospitalization costs you Rs 5 lakh today when you are 45, it may cost you Rs 10.4 lakh after 15 years considering inflation at 5% PA. Post retirement you may find it difficult to increase the health cover. Therefore, you must take adequate health cover in advance.
Apart from providing financial support under a medical emergency, health insurance also provides tax benefits to the insurance buyer. The tax benefit may depend on the premium paid on the policy, age of the proposer and eligibility of the insured for getting deduction benefit under Sec 80 (D) of I-T Act.
3. Retirement Fund
There are a number of options for retirement planning, the most common of which is the EPF. However, your EPF alone may not be sufficient for you retirement as you would like to have the same or better lifestyle post-retirement which the EPF fund alone may not be able to provide. Moreover, you may have a lot of leisure time post retirement and would like to spend on things that you normally may not indulge in—like vacations, gifting to children and grandchildren more often etc.
So, any retirement plan must take inflation into factor to build a sufficient corpus, else may have to cut down and compromise on your lifestyle post retirement. It would be prudent to ascertain the money that you would require and start investing accordingly to build an adequate corpus.
There are several ways to ensure income in retirement. Mutual funds of various hues – equity, hybrid, ELSS – are best suited for long-term wealth creation needs. Equity is known not just to provide above-average long-term returns, but also is more tax-efficient than many other investment instruments, which means that your absolute income is higher. Beyond mutual funds, there are pension instruments such as NPS which can provide an assured income in retirement along with tax deductions in your earning stages. If you are risk averse, you may consider options such as PPF.
(The writer is CEO at Bankbazaar.com)