Different financial planners will give you very different concepts of the best way to handle your financial portfolio. However, regardless of what type of clients they serve and where in the world they operate from, one concept is very clear among all money managers:
Once you start investing, you should not pause till the end of your earning years
Investments are meant to continue for a sustained period of time; only then can they give you the returns you want.
In order to avoid any pauses in investments, it is important to insure yourself against risks and sudden expenses that might derail your long-term investment plans and badly affect your corpus generation.
Quick Real-world Example
Say you are 35 years old and have invested in an SIP in which you invest all your monthly savings, which is Rs 10,000. You have decided that you will continue this fund until you are 60, which is for 25 years. You have no other investments or insurance policies, but you are very happy with the following calculation:
- Investment = Rs 10,000/month
- RoI = 10.5%
- Term = 25 years
- Returns = Rs 1.5 crores
You want your investment to give you Rs 1.5 crores at maturity. However, just like every other Indian living in an urban city, you fall victim to sudden circumstances that are beyond your control:
- At age 39: road accident
Full recovery: Rs 3 lakhs
- At age 49: surgery to remove heart blockages
Full recovery: Rs 5 lakhs
- At age 55: hip fractured in a bathroom accident
Full recovery: Rs 4 lakhs
In all three instances, you are forced to pause investments because you are hospitalized and there is a pause in your salary too. Here is the effect on your investments. Note that the investment is Rs 10,000 and RoI is 10.5% throughout.
Period 1 (at age 39):
- Term = 4 years
- Returns = Rs 6 lakhs
Period 2 (at age 49):
- Term = 10 years
- Returns = Rs 21.3 lakhs
Period 3 (at age 55)
- Term = 6 years
- Returns = Rs 10.1 lakhs
Period 4 (at age 60)
- Term = 5 years
- Returns = Rs 7.9 lakhs
While your target was Rs 1.5 crores, the actual earnings are merely Rs 45.3 lakhs. Moreover, you have to pay close to Rs 5 lakhs as LTCG tax too, bringing the net to Rs 40 lakhs.
You have lost Rs 1.1 crores
This is gross mismanagement of money
Also note that medical reasons are just one of the many varieties of challenges/expenses that could derail your investments over a course of 25 years.
How to Protect My Investments?
With a simple health plan that you can opt for yourself as well as your family, none of the medical expenses would be a financial problem. Here are some figures for a health plan that protects you for Rs 5 lakhs:
- Premium for 1 year – Around Rs 7,500/year
- Premiums for 25 years – Around Rs 2 lakhs
Therefore, in our example, a small amount of Rs 2 lakhs has protected you in such a way that you don't have to lose Rs 1.1 crores. In short:
Health plan worth Rs 2 lakhs protects investments worth crores!
Read this piece to know how to save even more on health plans for yourself as well as your family.