“Someone's sitting in the shade today because someone planted a tree a long time ago.”
― Warren Buffett
In this quote, the someone sitting under the tree is us and the tree is the legacy planning done by our parents and grandparents.
New Year 2019 is here. You are older than you were in 2018. Today, you are more mature than you were last year. In 2018, your finances may have revolved around earning more, investing in high-return plans, and diversifying your investments because the markets were on a downswing.
As New Years 2020, 2025, and 2030 come and go, however, your financial planning will change from a desire to make good investments to a desire to leave behind a healthy corpus for your dependents, that is, your spouse, your children, and even your grandchildren. In short, by and by, you will start your legacy planning, just like your parents and grandparents before you.
BFSI and Finance experts agree that the mid-30s is the right time to begin legacy planning for the urban salaried Indian. So, don’t wait until you are in your late 40s or 50s to start saving for your children and grandchildren. In this New Year 2019 piece, we will look at some age-old legacy planning instruments and some new-age ones worth investing in.
Real Estate (Property)
For several generations of Indians now, real estate has been the primary legacy planning instrument. However, with the industry in the correction phase, it is highly unlikely that this investment will appreciate favorably for the next 15 – 20 years. The OneInsure Research Desk suggests you do not invest in this legacy planning instrument. Here are some reasons why:
- Very few can afford to buy a house without a home loan. Home loans burden you for 25 – 30 years. Moreover, you fall into a liquidity crunch.
- Annual or bi-annual maintenance expenses are not cheap.
- You are bound to a particular city and do not have much freedom to move fluidly; for example, for professional reasons.
After property, FDs have been the most popular legacy planning instruments in India. Many parents invest in FDs in their children’s names. These FDs mature at crucial junctures in their children’s lives and provide a lump sum; for example, for education or marriage expenses.
However, the popularity of FDs has also been waning due to the drop in FD interest rates from the highly attractive 14% rate 30 years ago to 6.5% today. And this rate is only going to go down further. Moreover, people tend to break FDs easily to satisfy their short-term goals. Additionally, FDs do not have life cover to safeguard your family in case you are no longer physically present with them.
Child plans are guaranteed income insurance plans that do not have any of the negatives of FDs. Not only do child plans give at-par or higher returns than FDs, they have the following advantages too:
- Locked-in Interest Rates: Ensure your RoI never dips, which usually happens with FDs
- Goal-oriented Savings: Make it very difficult for you to break investments
- Life Cover: Since child plans are insurance policies, there is a handsome sum assured in case of your untimely demise, which will ensure your family’s dreams and aspirations do not go off track
- Tax Saving: Returns earned on child plans are tax-free in nature
Read Also: Better and Beyond Fixed Deposits
Whole Life Insurance
Whole life insurance is the oldest insurance-based legacy planning instrument in India. It still enjoys a favourable outlook in the market with millions who have invested in it, thanks to the work done by LIC of India. Key features of whole life insurance:
- It assures protection for life by giving maturity benefits along with sum assured and guaranteed death benefits. The premium rates are generally fixed.
- It gives an option of cash value; that is, the monetary value of the policy issued to the policyholder at the time of cancellation/surrender of the policy.
- You can claim deductions up to Rs 1,50,000 under Section 80(C) of the Income Tax Act, 1961, on premiums paid towards life insurance policies.
- Most importantly, it helps in legacy planning because a whole life plan is generally active for a person till age 99, hence at whatever age the person passes away (before 99), the policy benefits are paid out to the beneficiary as a parting gift from the insured member. No matter what is happening in the market, you can be rest assured of guaranteed returns.
- Retirement/Pension Plan: This classic legacy planning instrument allows you to invest for a limited time in order to receive guaranteed benefits at retirement. With new-age retirement plans, you can choose a premium payment term as short as 5 or 7 years too.
- Term Plans: Because of the sheer affordability and popularity of term plans, many urban Indians choose to use term plans as legacy planning instruments. Term plans these days can be opted for till one is 99 years old. Since it is highly likely that one will not live up to 99, the eventual pay-outs from the term plan can be used by the dependents to fulfill their aspirations and expectations.
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