: MUST KNOW Financial updates --All you want to know about mirror wills
LUGI CHENNAITEAM
| The Financial Planning Edition | Issue Date: July 16, 2013 |
How should you go about planning for your child's future?
"If there must be trouble, let it be in my day so that my child may have peace" - Thomas Paine.
As rightly stated by Mr Paine (a famous English-American political activist, author, political theorist and revolutionary), this is what every parent wishes for. As a parent, you not only want your child to have a sound education, but also celebrations on important occasions for your little one, not to mention a grand wedding. But in order to fulfil these desires, it is imperative that you follow the right approach towards planning for your financial goals.
While planning for your child's needs, it always pays to start early. This is because if you start saving and invest early, it will give you a larger time horizon to meet your financial goals (such as child's education and marriage) and even build a bigger corpus.
Consider the following example:
Example 1).Mr Shah has a 3 year old son, who is going to graduate after 15 years. Mr Shah intends that his son should pursue engineering. If the cost of graduation in today's terms is Rs 5 lakhs, then how much is Mr Shah going to need to send his son to engineering college after 15 years?
| Son's Age | 3 years |
| Cost of Education in today's terms | Rs 5 lakhs |
| Time left for Graduation | 15 years |
| Inflation Rate | 10% p.a. |
| Cost at time of Graduation course | Rs 20.88 lakhs |
| Amount Mr Shah needs to invest per month | Rs 4,180 |
The cost of education after 15 years rises to Rs 20.88 lakhs due to inflation. And an investment of Rs 4,180 every month (assuming it earns a return of 12% per annum) will help Mr Shah to realise this financial goal. However, if Mr Shah delays this investment, and starts to invest for his son's education after 5 years from now, then he would need to invest more than double i.e. Rs 9,079 per month.
Let's take another example...
Example 2).Mrs Gupta has a daughter aged 2. She wants to create a marriage corpus that should be ready for her daughter in 22 years. Currently, Mrs Gupta imagines that she would spend Rs 15 lakhs on her marriage if it were happening today. How much would she need to save for her daughter's marriage every month to get her married after 22 years?
| Daughter's Age | 2 years |
| Cost of Marriage today | Rs 10 lakhs |
| Time left for Marriage | 22 years |
| Inflation rate | 10% p.a. |
| Cost at time of marriage | Rs 1.22 Crore |
| Amount Mrs Gupta needs to invest per month | Rs 9,516 |
The marriage expenses after 22 years rise to Rs 1.22 crore due to inflation. And an investment of Rs 9,516 every month (assuming it earns a return of 12% per annum) will help Mrs Gupta to realise this financial goal. However, if Mrs Gupta delays this investment, and starts to invest for her daughter's marriage after 5 years from now, then she would need to invest almost double i.e. Rs 18,464 per month. Hence you see, the earlier you start investing, the less you'll need to invest each month to achieve the same amount of money at the end of the goal.
Today, most parents save for meeting various needs of their children, but it is important to understand that saving alone is not sufficient. It is vital to save an 'appropriate sum of money' and invest it systematically in suitable investment avenues. Simply, saving money in your savings bank account will not earn high returns, and might not enable you to create the necessary corpus to meet your financial goals. Hence you must select the right investment options so that your portfolio progresses towards each of the financial goal set for your children's better future.
Selecting the ideal portfolio mix (Equity, Debt, Gold) could be a daunting task for most investors. Many investors are hesitant to put their savings in the stock market due to volatility. But, you see, in the long term equities as an asset class will largely help you to create the corpus required to meet the financial goals - even after adjusting for the rising cost of living in the form of inflation. If you have a good understanding of equity markets, insights about stock-picking strategies, and sufficient time at your disposal for analysis, you could invest in equities through stocks. However, for most other investors it would be prudent to exploit opportunities in the equity markets through equity and equity related mutual funds. Therefore, if you are many years (10 years or more) away from a said financial goal (say funding your children's professional education), then you may take a greater exposure to risky asset classes such as equities. This is because you have greater flexibility and opportunity to grow your wealth. Any setbacks the portfolio suffers can be recovered with sufficient time in hand. But when the goal is 3-10 years away, you can balance your portfolio with investments in equity and debt instruments. A near to ideal allocation could be 40%-50% in equities, 10%-15% in gold as a hedge to the equity exposure and balance in debt and fixed income products. It is important to de-risk your portfolio when there are only a few years left for the goal. So, if the goal is less than 3 years away, you must completely avoid equity or gold, and shift 100% of your risky portfolio to debt/fixed income.
With the increasing awareness about growing cost of education and other child care expenses, a large number of companies have launched various "child care" investment products. People often talk about buying insurance policies that will mature around the time of your child's education or marriage. These products claim to take care of most expenses with insurance cover. Before you blindly hawk into these financial products, it is imperative to understand their viability for you. Many a times, the products that you buy to meet your children's expenses, prove to be costly ULIPs or often come with higher charges (and much higher commissions to the agent who sells you the plan).Mutual fund houses too have launched products which they claim to have designed especially to take care of child care expenses. Retaining investments for long in speciality mutual funds also doesn't always guarantee good performance and may have exit loads which can go as high as 4%. You see, one must not get carried away with the name of an investment product or a mutual fund. It is imperative to maintain your asset allocation by investing in the correct basket of mutual funds.
While chalking out your financial plans it is necessary to include a sufficient insurance cover as well. This is because the demise of the breadwinner of the family could lead to a potential setback to your child's future goals. ULIPs and endowment plans relatively don't offer adequate insurance and may not generate adequate returns either. It is vital that you keep your investments and insurance separate. The only role insurance must play in your life, is to protect you and your family from financial trouble. Hence by supplementing the investment portfolio you have created for your children with adequate term insurance, you will be able to meet your objective of protection without having to pay for heavy charges and commissions.
Key points to keep in mind:
- Before preparing a financial plan, you must evaluate your children's future needs, and then start working towards chasing those 'need based goals'. Forecast the expenses that may arise in future (pursuing education overseas or throwing a party for your child's birthday)
- Begin the process of saving and investing early. This will enable you to create an adequate corpus for the fulfilment of your children's desires and ambitions
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The financial decisions which determine your asset allocation and portfolio mix should be backed by your risk tolerance level (Income, Expenses, Financial responsibilities etc.) and risk appetite (Age, Past experience etc.)
- Never dip into the funds saved for your other priorities (Retirement, Medical expenses, Housing rent etc.) to fund your child's education. It would be sensible to plan your finances better, preferably with the help of an expert financial planner
- Never get carried away by names of financial products. Evaluate their characteristics and viability before making any ad-hoc investment decisions
- Always maintain an adequate insurance cover to cater to the expenses of your children (such as marriage or pursuing higher education) which may arise after your unfortunate demise
- It is prudent to keep your investments and insurance separate
All you want to know about mirror wills
By Sakina Babwani, | 1 Jul, 2013, 08.46AM IST
For most people, marriage is not only a romantic union, but also a financial one. It is not uncommon to come across couples holding bank accounts, property and otherinvestments jointly. If such couples are interested in succession planning, they would do well to consider a unique kind of will known as a mirror will.
What is it?
As the name suggests, mirror wills are two separate wills that are drafted exactly like each other, with just the name of testator— the person who is making the will—being different on both documents. In this case, the spouses can bequeath property to each other after death. In the absence of a surviving spouse, all the assets mentioned in the will are passed on to their children or any other beneficiary who has been named in the will.
Since the contents of both wills are the same, lawyers give a discount of up to 50% for drafting them. Though a very popular concept in Western countries, the idea of mirror wills is yet to pick up pace in India.
"Not many people are aware that they can opt for a mirror will, which is a cost-effective option for couples who hold property jointly," says Sandeep Nerlekar, CEO, Terentia Consulting Group.
How is it different from a joint will?
Some may believe that a joint will is the best solution in such cases. However, experts opine that joint wills can be complicated to draft and execute and, hence, should be avoided. For the uninitiated, a joint will is a single document, wherein two or more persons agree to bequeath property as a team.
So, it is actually multiple wills in one document. Such wills are revocable at any time by any of the testators during their lives. Any surviving testators, too, are free to revoke it. On the death of the testator, the legatee becomes entitled to the properties of the deceased.
Keep in mind
If you are interested in drafting a mirror will, you need not be concerned about the legalese. While the couple's wills would be exact replicas of each other in terms of bequests, executors and guardians, there is no legal rule mandating that the wills be drafted in exactly the same words. What is essential is the common intention to bequeath property to the spouse after death.
In such wills, spouses appoint each other as executors of the will. An executor is a person who carries out the wishes of the person drafting the will as per his intentions. As a safety measure, you must appoint an 'extra' executor. So, in the event of the simultaneous death of the husband and wife, there should be a third person who can act as the executor of the wills.
If you have minor children, you should also appoint a guardian to look after them in the mirror will. Experts recommend appointing at least two so that there is someone to look after the children if one of the guardians passes away.
The drawbacks
Mirror wills work best when the couple holds all their assets jointly. If a couple owns some property jointly, and the rest in individual names, this option cannot be exercised. Instead, you can try drafting mutual wills.
These wills work on similar lines as mirror wills in that the spouses bequeath property to each other after death, but with one big difference. The two wills are not replicas of each other since the property being passed on is not the same.
"Drafting mutual wills can get a little complicated. So, it is advisable that a couple drafts separate wills, where the majority of the property is not held jointly," says Nerlekar.
The fact that mirror wills implicitly rely on a couple's mutual trust and honesty is another minefield. Remember that your spouse is not legally bound to keep the will unchanged. Therefore, if either spouse changes the will without informing the other, the latter can do nothing about it.
The bottom line is that you need to trust your spouse completely if you choose to draft mirror wills. Lastly, couples with such will have to be prepared to work in tandem.
Every time you buy additional assets or dispose of an existing property, ensure that you change both the wills. A change in the husband's will does not automatically get registered in the wife's will, and vice versa.
In the absence of a surviving spouse, all the assets mentioned in the will are passed on to their children or any other beneficiary.For most people, marriage is not only a romantic union, but also a financial one. It is not uncommon to come across couples holding bank accounts, property and otherinvestments jointly. If such couples are interested in succession planning, they would do well to consider a unique kind of will known as a mirror will.
What is it?
As the name suggests, mirror wills are two separate wills that are drafted exactly like each other, with just the name of testator— the person who is making the will—being different on both documents. In this case, the spouses can bequeath property to each other after death. In the absence of a surviving spouse, all the assets mentioned in the will are passed on to their children or any other beneficiary who has been named in the will.
Since the contents of both wills are the same, lawyers give a discount of up to 50% for drafting them. Though a very popular concept in Western countries, the idea of mirror wills is yet to pick up pace in India.
"Not many people are aware that they can opt for a mirror will, which is a cost-effective option for couples who hold property jointly," says Sandeep Nerlekar, CEO, Terentia Consulting Group.
How is it different from a joint will?
Some may believe that a joint will is the best solution in such cases. However, experts opine that joint wills can be complicated to draft and execute and, hence, should be avoided. For the uninitiated, a joint will is a single document, wherein two or more persons agree to bequeath property as a team.
So, it is actually multiple wills in one document. Such wills are revocable at any time by any of the testators during their lives. Any surviving testators, too, are free to revoke it. On the death of the testator, the legatee becomes entitled to the properties of the deceased.
Keep in mind
If you are interested in drafting a mirror will, you need not be concerned about the legalese. While the couple's wills would be exact replicas of each other in terms of bequests, executors and guardians, there is no legal rule mandating that the wills be drafted in exactly the same words. What is essential is the common intention to bequeath property to the spouse after death.
In such wills, spouses appoint each other as executors of the will. An executor is a person who carries out the wishes of the person drafting the will as per his intentions. As a safety measure, you must appoint an 'extra' executor. So, in the event of the simultaneous death of the husband and wife, there should be a third person who can act as the executor of the wills.
If you have minor children, you should also appoint a guardian to look after them in the mirror will. Experts recommend appointing at least two so that there is someone to look after the children if one of the guardians passes away.
Mirror wills work best when the couple holds all their assets jointly. If a couple owns some property jointly, and the rest in individual names, this option cannot be exercised. Instead, you can try drafting mutual wills.
These wills work on similar lines as mirror wills in that the spouses bequeath property to each other after death, but with one big difference. The two wills are not replicas of each other since the property being passed on is not the same.
"Drafting mutual wills can get a little complicated. So, it is advisable that a couple drafts separate wills, where the majority of the property is not held jointly," says Nerlekar.
The fact that mirror wills implicitly rely on a couple's mutual trust and honesty is another minefield. Remember that your spouse is not legally bound to keep the will unchanged. Therefore, if either spouse changes the will without informing the other, the latter can do nothing about it.
The bottom line is that you need to trust your spouse completely if you choose to draft mirror wills. Lastly, couples with such will have to be prepared to work in tandem.
Every time you buy additional assets or dispose of an existing property, ensure that you change both the wills. A change in the husband's will does not automatically get registered in the wife's will, and vice versa.
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Ways to check your spending spree
B. VENKATESH
If you have problems with self-control, use only cash for your purchases.
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A debit card could work better than a credit card to check splurges.
July 6, 2013:
It is no secret that you spend more when you use your credit card than if you pay cash. But will your spending behaviour change if you use a debit card instead? It turns out that behavioural psychology can throw some light on this issue.
Consider credit card purchases. You buy and enjoy the product today but your credit card payment is typically due a month later. The pain of paying is distanced, while the pleasure of owning the product is immediate. This immediate gratification can sometimes drive you to indulge and stretch your household budget.
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A debit card could work better than a credit card to check splurges.
It is no secret that you spend more when you use your credit card than if you pay cash. But will your spending behaviour change if you use a debit card instead? It turns out that behavioural psychology can throw some light on this issue.
Consider credit card purchases. You buy and enjoy the product today but your credit card payment is typically due a month later. The pain of paying is distanced, while the pleasure of owning the product is immediate. This immediate gratification can sometimes drive you to indulge and stretch your household budget.
PRODUCT FEATURES
Behavioural psychologists have also found another interesting behaviour about credit card purchases. Most individuals focus on the features of the product that they buy while using a credit card.
Whereas these individuals focus on the cost of the product when they pay cash. The finding is not entirely surprising. The pain of parting with cash forces you to measure the amount you give up while the distancing of the pain in the case of the credit card drives you to look at the joy of owning the product.
The question is whether you would behave differently if you use a debit card instead of a credit card. It appears that debit card could be better than a credit card, but not as good as cash. The reason is simple. The pain of parting with cash is only virtual and not physical in the case of a debit card. Your brain cannot simulate the pain based on virtual cash, as it can with physical cash. You can no doubt visualise your bank balance reducing, with the instant message of transactions on your mobile. But that is unlikely to have the same effect as parting with cash from your purse.
Behavioural psychologists have also found another interesting behaviour about credit card purchases. Most individuals focus on the features of the product that they buy while using a credit card.
Whereas these individuals focus on the cost of the product when they pay cash. The finding is not entirely surprising. The pain of parting with cash forces you to measure the amount you give up while the distancing of the pain in the case of the credit card drives you to look at the joy of owning the product.
The question is whether you would behave differently if you use a debit card instead of a credit card. It appears that debit card could be better than a credit card, but not as good as cash. The reason is simple. The pain of parting with cash is only virtual and not physical in the case of a debit card. Your brain cannot simulate the pain based on virtual cash, as it can with physical cash. You can no doubt visualise your bank balance reducing, with the instant message of transactions on your mobile. But that is unlikely to have the same effect as parting with cash from your purse.
WHAT’S BETTER
This does not mean that debit cards are no better than credit cards. In fact, you should use a debit card if you want to control your spending.
Instead of overloading your credit card and consequently paying high interest on the amount outstanding, you can use your debit card and only spend the amount you have in your bank account. If you choose to use a debit card, have a separate bank account for your spending needs.
This would help ensure that you do not wipe out your regular bank account where your salary is credited every month. And if you have serious problems with self-control, use only cash for your purchases. The instant pain of paying is the only factor that can slow you down from spending all the money in your bank account.
This does not mean that debit cards are no better than credit cards. In fact, you should use a debit card if you want to control your spending.
Instead of overloading your credit card and consequently paying high interest on the amount outstanding, you can use your debit card and only spend the amount you have in your bank account. If you choose to use a debit card, have a separate bank account for your spending needs.
This would help ensure that you do not wipe out your regular bank account where your salary is credited every month. And if you have serious problems with self-control, use only cash for your purchases. The instant pain of paying is the only factor that can slow you down from spending all the money in your bank account.
Insurance firms face guerrilla backlash from sacked employees with sensitive information
Life insurance firms are caught in a strange menace, battling a guerrilla backlash from people they fired. Several insurers have alerted the regulator that sacked employees, who walked away with data on thousands of policies, are now misusing the customer information given at the time of buying the policy to 'blackmail' the companies.MUMBAI: Life insurance firms are caught in a strange menace, battling a guerrilla backlash from people they fired.
Several insurers have alerted the regulator that sacked employees, who walked away with data on thousands of policies, are now misusing the customer information given at the time of buying the policy to 'blackmail' the companies.
In the past one month, many insurance firms have been inundated with letters from customers raking up old policy issues, alleging misselling and threatening to move court.
The letters, surprisingly well-drafted and mostly from high-value clients, have raised suspicion that the customers in question have been provoked by men who have access to key information.
Besides aggrieved ex-employees, some in the insurance industry said a north-based broker dealing with multiple insurance companies could be involved in the racket.
The modus operandi is simple: former employees reach out to customers and tell them that they were given a raw deal; the intention is to threaten and force an insurance company to come to the negotiating table; the deal is that the customer pays some commission to the former insurance man for his 'services'.
"Some data has been leaked from a third-party vendor," said Indiafirst Managing Director and Chief Executive Officer P Nandagopal.
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The recent incidents are taking place soon after many policy renewals and almost a year after several companies received calls from fraudsters posing as officials of the Insurance Regulatory & Development Authority, the industry watchdog.
Last week, some of the firms took up the matter with the regulator. "It could lead to reputational and financial loss and can impact our persistency (or policies in force) ratio. The regulator has advised companies to investigate the cases and file police complaints if necessary," said an industry consultant.
PNB Metlife Insurance is planning to report the incidents to Delhi Police's Economic Offences Wing. "When we threatened to take the matter to the EOW, they stopped misleading our policyholders," said Rajesh Relan, MD and CEO of PNB Metlife. Since insurance companies face a challenge in terms of high attrition, the incidents have also raised concerns over data theft in the life industry. "Sales executives often take data of policyholders and make them change policies to the new company they join," said the CEO of another large private sector life company.
The industry has lost over 6 lakh individual agents and 5,000 direct employees since 2010 after the rules were changed for Unit-Linked Insurance Products ( ULIPs), which for some years sold like hot cakes.
Five insurance covers you should have
To protect your family from any financial crisis, build a comprehensive portfolio by including the following covers.Contrary to common perception, this will not burn a hole in your pocket as long as you do not fall prey to your agent or bank's sales pitch. Here are five covers you must invest in because, combinedly, they will constitute an ideal protection portfolio and insulate your family from any crisis.
Term insurance
Annual premium for a sum assured of Rs 1 crore: Rs 6,000-8,000 per year for a 30-year old non-smoking female with a policy tenure of 20 years.
Approach a financial planner to formulate an investment strategy and chances are you'll be asked to buy a term cover first. Though it's the simplest and most cost-effective type of life cover, it does not promise a maturity corpus unlike the more popular endowment plans and unit-linked insurance plans (Ulips). It kicks in after the policyholder's death, which means your premium will not 'earn' you anything. The sum assured is handed over to the insured's nominees, ensuring their financial security— and your peace of mind.
The cost, too, is very less. For instance, a 25-year-old (male, non-smoker) can buy a Rs 1 crore cover for an annual premium of nearly Rs 6,000. The term policies sold online are cheaper than their offline counterparts. "Most people build huge liabilities, close to the present value of their future savings, during their working years. At any point, they have liabilities in the form of mortgage loan, car and personal loans, and credit cards. Besides, they have significant regular expenses for their kids' education and lifestyles. These necessitate an adequate life cover to shield the insured's dependants financially in his absence," says Sunil Sharma, appointed actuary, Kotak Life.
As a thumb rule, you should buy a life cover equivalent to your expected income for five years, plus any outstanding loans.
Personal accident insurance
Annual premium for Rs 10 lakh: Rs 1,500
As the name suggests, this cover is restricted to accidental deaths. However, it can come to a policyholder's rescue in the face of disabilities caused by an accident since it also covers income loss due to absence from work. "An accident and disability cover is, perhaps, the most underrated product in the insurance space," says Mahavir Chopra, head, ebusiness and personal lines, Medimanage.com, a health insurance consultancy firm. "The risk of an accident and the resultant disability is huge. The latter could put you out of action for several days, leading to loss of income. In this context, a disability cover is more important than a health insurance policy," adds Chopra.
While choosing such a policy, experts suggest that you should make sure it covers four eventualities— death, permanent total disability, temporary total disability and permanent partial disability.
Annual premium for a Rs 5 lakh health cover: Rs 6,000-7,000 for a 30-year-old.
"Given the rising healthcare costs, a healthinsurance policy is indispensable for everyone," says Neeraj Basur, CFO, Max Bupa. "For an individual, the first step is to have a comprehensive indemnity-based cover in place," he adds. This is true even if you have just started earning and do not have any dependants because you will have to shell out a much higher premium if you buy it when you are older. Besides, you should not depend on the cover provided by your employer since a change of job could leave you vulnerable.
You can also enhance your cover by adding a fixed benefit plan, which hands over a predefined amount when a claim is made. "Such plans can help replace loss of income due to absence from work. Since the amount is paid to the insured, he can use it to meet expenses other than hospitalisation, such as those on food and travel, recuperation, and so on," says Basur.
Home insurance
Annual premium for a structure cover of Rs 20 lakh: Rs 1,200
Most home loan borrowers are familiar with home loan insurance, thanks to their lenders, buthome insurance is different. While the former protects a family from loan liabilities in case of the policyholder's demise during the policy term, home insurance protects one's property from manmade or natural calamities.
"During floods, like the one in Uttarakhand, all possessions, including houses, are swept away and very few people are in a position to rebuild their homes on their own. Home insurance can provide financial support for resurrecting their dwellings," says Joydeep Roy, CEO and whole-time director, L&T Insurance. The scope of coverage could include damage due to terror attacks, too, whereby policyholders receive a compensation for the value of their property and other articles.
Critical illness
Annual premium for a standalone cover of Rs 25 lakh: Rs 1,500-2,000
If you have bought health insurance, you might question the need for this cover, but experts recommend it. This is because while a health cover takes care of hospitalisation bills and related expenses, a critical illness covers long-term medical care needs for life-threatening diseases like multiple sclerosis and cancer. Most health plans offer a maximum cover of Rs 10 lakh. "One needs to worry more about managing a critical illness rather than death. The developments in medicine have helped prolong life, but funding the treatment costs of critical illnesses remains a challenge," says Chopra.
"A critical illness cover can also come in handy if the policyholder is unable to resume work after the treatment, say, for cancer. The payouts will help maintain one's lifestyle during the recuperation period," explains Sharma.
You also have the option of buying a critical illness rider attached to your term plan.
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