The Hindu Business Line : Planning for a comfortable life

He is a chain smoker and realises the importance of life insurance. He proposes to retire at the age of 60. His wife is 32-years old and a homemaker. She earns Rs 2,000 every month from tuition classes.

Their daughter is studying in class I . His investments include a flat, which he is currently occupying (valued at Rs 15 lakh), gold worth Rs 1.5 lakh and provident fund (PF) accumulation of Rs 3.15 lakh. His other investments include public provident fund (Rs 60,000), equity funds (Rs 2 lakh) and stocks worth Rs 2 lakh. He holds fixed deposits of Rs 1.25 lakh and cash balance of Rs 25,000.

His home loan outstanding is Rs 13 lakh and EMI for the same is Rs 1.61 lakh a year. He has credit card dues of Rs 20,000. He is planning to utilise his savings in PF, mutual funds and stocks to build a house at his home town in another 12 years.

He receives an annual salary of Rs 3.5 lakh on a net basis and his annual household expenses are around Rs 1.2 lakh. He is paying a premium of Rs 20,050 for an endowment policy — for the sum assured of Rs 5.5 lakh.

His personal expenses are Rs 20,000 a year and he saves Rs 29,000. His current basic salary is Rs 12,000 and dearness allowance is Rs 6,000 a month. He also receives HRA and other allowances. His bankers, while sanctioning housing loan, arranged for a mortgage policy for the entire loan amount and included the premium in his loan account.

Goals

He wants to take a life insurance policy. Bhaskar’s daughter needs Rs 5 lakh (at today’s cost) as educational expenses at her 16th year and her marriage expenses at 24 are estimated at Rs 5 lakh (today’s cost).

He plans to invest every month towards this corpus with the share of equity to debt at 60:40. He wants to know his monthly contribution under the systematic investment plan of an equity fund for meeting the above said needs.

He anticipates a windfall receipt of Rs 25 lakh from his uncle in the form of inheritance. He proposes to invest this money for his retirement. He plans to invest 25 per cent in equity (with an expected return of 15 per cent), 50 per cent in debt (with an expected return of 8 per cent) and 25 per cent in immovable assets (which he expects to grow at a rate of 9 per cent). He also wants to know what will be the corpus available to buy annuity at 60 years.

Alternatively, he plans to create a Trust, making his wife and daughter the beneficiaries.

Twenty five per cent of the benefits from the Trust will go to charitable purposes. He wishes to know the tax implications of creating the Trust.

Bhaskar’s wife proposes to take a deferred annuity by contributing Rs 1,500 every month for the next 20 years, out of her income.

Assuming the rate of return as 9 per cent, she wishes to know the annuity, if her life expectancy is 70 years.

Bhaskar is interested to write a Will and wants to know if a hand-written Will is valid.

He also wants know the validity of his Will, as he has included all types of movable and immovable properties. He also wants to know if it is compulsory to register a Will.

Solution

If he intends to ensure the same monthly expenses for his family and also save for his daughter’s education and marriage, he has to take an insurance policy.

To cover risk, he may need a policy for Rs 23 lakh and the effective premium will be Rs 11,800 a year. His existing endowment policy will not yield a return beyond 5.5 per cent.

He can surrender the policy (the loss arising on surrender will probably be 50 per cent of the premium paid, but he may be eligible for any nominal interest. He can utilise the money to buy a single premium term-assurance plan.

For meeting his daughter’s education and marriage expenses, he needs to save monthly Rs 4,300 and Rs 2,200 for 120 months and 216 months to reach Rs 9 lakh and Rs 14 lakh respectively. If debt and equity together manage a return of 10.5 per cent a year, both the goals can be achieved.

Investments in equity may grow to Rs 1.35 crore and debt investments of Rs 12.5 lakh at 8 per cent will be worth Rs 34 lakh in 22 years. His investments in immoveable assets will be worth Rs 42 lakh at the end of this time frame. Once he decides about the inheritance, he can plan for the surplus of Rs 29,000.

If he creates a private Trust, the income will be charged. It is better to create a Trust for the deferred benefit of a minor child, by accumulating the income of the Trust until such time the minor attains majority. Multiple Trusts may be created for the benefit of the same person, but for different purposes such as higher education and marriage. Each of the Trusts is taxed alike and is eligible for the basic exemption and deductions.

If Bhaskar’s wife contributes Rs 1,500 every month, the corpus in 20 years will be Rs 10 lakh. From the age of 52, she will be receiving Rs 5,450 every month, adjusted for inflation, based on her life expectancy.

A Will can be written in one’s own handwriting. Such Wills are called holographic Wills and are valid. Both movable and immovable properties can be included. In India, registration of a Will is not compulsory.

Queries can be sent to financialplanning@thehindu.co.in

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