A plan about investing Rs.5000/month SIP (Systematic Investment Plan) for 20 years requires a 20 year old continuous working life and similar savings trend. The question is what if one dies earlier. You must take a TIP or Term Insurance Plan. A TIP makes the financial plan death-proof and allows you to do SIPs for wealth creation.
Regular investment is a good habit & doing a SIP in equity mutual funds is one of the best ways to accumulate for a retirement corpus in the long term. For how much to accumulate for retirement refer to my previous articles:
But the primary question is without you, who will save for your son’s medical education? If you die early, will your wife and family be able to lead a comfortable life? Can your daughter get the wedding she deserves even if her father is no more? Your life is the cornerstone of your financial plan. Without you, that plan can crumble in seconds. All your family’s most important financial goals will still have to be funded, whether or not you are alive. When working parents die prematurely, most children suffer. And when parents don’t plan when they still have time, the suffering increases for the family. So, it is extremely important to make your financial plan death-proof as early as possible. This is where a TIP plays a huge role.
It’s never too early to buy a term insurance plan, but purchasing one at a younger age works out cheaper.For example a 30-year old needs to pay Rs.700-900 a month to get a Rs.1 cr term insurance cover. By purchasing a TIP, you are buying the surety of your family receiving Rs.1 cr if you die tomorrow. In case you survive, you will have regularly invested money in SIP and also reached that Rs.1 cr savings. This shows a TIP along with an SIP makes financial planning for future goals complete.
Once we agree that you need a term insurance plan even if you SIP through mutual funds, the next thing to decide is what should be the amount of term cover you will buy. Traditionally, it is suggested that you should buy a cover of 10-12X their annual income. Another way to work it out would be with the perspective of your monthly SIP amount. Monthly TIP premium should roughly be about 1/10th of your monthly SIP amount or annual premium should be roughly 1.2X of your monthly SIP amount. Ideally once should take a TIP up to the age of 55-60 post which the premiums tend to increase rapidly.
If you can invest Rs.5000 a month in a mutual fund SIP, then you must invest 10% of the SIP amount or Rs.500 on a TIP whose premium can also be paid monthly. In case you are big saver and you put Rs 20000 a month in SIP, then invest Rs 2000 in a term cover monthly premium. So, depending on your economic status and savings power, you should allocate a portion to term insurance plan or TIP every month.
Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’