Insurance, Retirement, Tax & Estate Planning - Chapter 5

Insurance, Retirement, Tax & Estate Planning - Chapter 5

When we talk of financial planning, there are some key sub-components to it. Let us talk about four important parts of the financial planning process viz.  Insurance planning, retirement planning, tax planning and estate planning.

Critical Role of Insurance in Your Financial Plan

Why is insurance so important in your overall financial plan? Insurance gives you protection against unforeseen circumstances and thus ensures that your financial plan does not get derailed. What is the role of insurance in financial planning and why it must be the pivot on which any financial plan is built? Let us look at the 4 types of insurance that must be part of your financial plan.

Planning your life insurance cover

A few basic debates are part of the life insurance argument. Firstly, should you opt for endowment plans or should you opt for term risk covers? The idea is to keep your insurance and investment separate. That means; instead of loading larger premiums on you through endowments, a better way will be to take a term policy with a much lower premium and use the amount saved to buy appropriate mix of mutual funds for long term wealth creation.

The second question is what is the quantum of insurance required? Let us assume that your monthly expense for the family is Rs.100,000 per month. That means, your life cover must be large enough for the corpus to earn a similar amount per month. Liquid funds will yield about 4% annually in post-tax terms (that is what is material). That means you will earn nearly 0.33% on a monthly basis. To earn an income of Rs.100,000 per month, your corpus must be equivalent to Rs.3 crore (100,000 / 0.0033). That means you will require a term cover of approximately Rs.3 crore to earn an equivalent income of Rs.1 lakh for your family.

Insuring your health against hospitalization costs

Health insurance is not just about Section 80D benefits that the Income Tax Act offers. The truth is that medical insurance forms the crux of your financial plan. Today, hospitalization and medical expenses have become prohibitive. A medical insurance will leave you and your family without too many worries. You can look at floaters to get a bigger cover for your premium paid. Ensure that your medical coverage is comprehensive.

Insuring the assets that you own

You purchase a lot of expensive gadgets like flat screen TVs, washing machines, laptops, double-door refrigerators, high-end dishwashers etc. Insuring these assets hardly costs anything. But the last thing you want is to see are any of your appliances being blown up by a fire or a short circuit. Asset insurance gives you the required peace of mind.

Insuring your liabilities is an essential step

What exactly is insuring liabilities? Assume that you purchased a home 5 years back by taking a home loan. Home loans are long term liabilities and will have to be repaid over a period of 15 to 20 years. In the event of sudden death of the bread winner, the family will struggle to pay the home loan EMI, which means that the bank will take possession of the home. Effectively, the family loses the roof over its head. The smart answer would be to take a term insurance to the extent of the outstanding loan principal.

Buying insurance is the starting point and your focus must be to buy adequate insurance at low cost. That is only possible with term plans (pure risk covers).


Key Points to Keep In Mind When You Buy Term Insurance

Here is a list of term insurance dos and don’ts that you can use as a guide when buying term insurance plans.

  • The earlier you buy, the better off you are

The earlier you take term insurance, the bigger is the cover that you will get. Consequently, your premium liability each year will be much lower.. Start off with a substantial term policy the moment you start earning and then you can add on at regular intervals.

  • Buy for the tenure that the term policy is required

Buy insurance only for the time period that is relevant for you. If you buy term insurance at the age of 40 then you need not worry about continuing with your term insurance beyond the age of 60. Stick to the time period that is relevant to you.

  • Scout around best deals in the market

Don’t settle for the first insurer who knocks at your door. Try to get quotes from 4-5 insurers and compare the pros and cons of the various quotes. Today you have online portals for comparing. Make the best of this information and get a good deal for yourself.

  • Beware the marketing claptrap (daily premium, weekly premium)

Insurance is a product that sold hard but you need not fall for the bait. Insurers will try to entice you by showing how cheap the insurance policy is in daily terms or weekly terms. Claims like Rs.20/day premium and 99.6% claims settlement rate don’t matter.

  • Riders are add-ons so choose carefully

Riders come in the form of additional covers for accident, accident compensation covers, disability covers etc. Some of them may be useful and some may not add value. All these riders come at a cost and they will increase your eventual annual premium payable.

  • Be honest and transparent with your health insurer

Medical test is a must and you must insist upon the same. A health policy without medical tests comes with its own risks at the time of settlement. Disclose your medical problems, whether you are diabetic, whether you are a smoker or an alcoholic etc. It may not change your premium but better to disclose and document the same.

  • Your term policy amount must cover liabilities and expenses

How much term cover you need? Your term cover should at least cover the value of your liabilities and 5 years of income. This is a thumb rule but it is a good assumption to start off your term insurance planning with.

  • Consolidate your term insurance into 2 or 3 policies

Don’t split your needs across too many policies. In the above case, you can split Rs.1 crore across 2 policies at the most, not beyond that. By adding more policies, you are adding to your administrative burden without any added benefits.

  • Read the fine print because the devil lies in the details

Every insurance policy is a contract of Good Faith and hence the fine print is important. There are conditions when your premium can be increased and cases when your policy claim can be rejected. Read them thoroughly before signing on the dotted line.

  • Get the documentation and nominations in order

Documentation may appear to be a drab process but it is a must. Keep your policies in physical and digital format for easy reference. Set reminders and ensure that premiums are paid on time. Let your spouse and children know where your policy papers are. Also, ensure that the nominee details are updated.


Life and Health Cover: 4 Points to Remember

Life or medical, your coverage amount has to be thought through. The rule is optimization. That means; always go for the plan that offers maximum life or health coverage and maximum amount for the treatment. Here are four rules to follow.

Term policies for life and floaters for health cover

That is a basic rule to follow. Don’t take expensive endowment, money back covers and ULIPs. In most cases, the loading is too much and it is not too transparent either. When it comes to medical covers, family floaters are a lot more economical and sensible in terms of cost of insurance.

Look the exceptions to the coverage in the fine print

Exclusions are part of every life policy and every medical policy. There are time wise exclusions and there are item wise exclusions. Every health insurance plan has its exclusions based on pre-existing diseases. In case of life cover, certain types of death are not covered and death within the cooling period is also not covered. Look for maximum age renewal.

Be wary of insurers who reject claims on flimsy grounds

Claim settlement ratio is the number of claims settled by the insurer over the total claims it receives. Normally, such cases are handled by TRPs. LIC has a very good settlement ratio in life covers. Always opt for a health plan from an insurer with a high claim settlement ratio. This way you will ensure that your claim will not be rejected unnecessarily.

Consider all India network and hospital coverage network

In health insurance, you are entitled to get treatments from network hospitals empanelled with a particular insurer. There is no point purchasing a plan if you are struggling to find an associated hospital to avail the cashless benefit. Ensure that the medical cover also covers pre and post hospitalization medical care as it can up to quite a bit.


Key Considerations in Retirement Planning

Planning for your retirement is one of the key aspects of your long term plan. In case of retirement planning also; the earlier you start the better. It is only when you start early that the power of compounding will work in favour of long term growth. The longer you invest, the more you save and hence the more you invest at attractive returns. Here are 5 considerations in retirement planning.

Constantly adjust your risk-return trade-off

All financial planning is essentially a risk-return trade-off. When you have 30 years to go for retirement, you obviously need to start off with a larger exposure to equities. As your age progresses and based on your financial considerations your risk appetite will reduce and the equity component has to come down proportionately.

Strike a balance between lump-sum and annuities

Post retirement, your financial needs will not only be a lump-sum corpus but also regular income in the nature of annuities. You need regular flows to pay your routine expenses. There are annuity plans that will automatically bifurcate and ensure that you get some part of your savings as regular annuity income. The other method is to invest the corpus in a debt fund or liquid fund and structure it as a systematic withdrawal plan.

Make your retirement plan tax efficient

Once the initial corpus is created through the power of compounding, then all you need to do is to ensure that the corpus is sustained till your retirement. Another important consideration is what happens to your investments in LIC endowments and provident funds. These instruments will shift to the EET (Exempt, Exempt, Taxed) mode at some point.

Take care of your insurance and debt

Firstly, ensure that your outstanding debt is cleared well before you retire. This includes your home loan, children’s education loans etc. A debt-free retirement gives you a lot more flexibility to plan your post-retirement activities. Ensure that medical insurance is fully taken care of so that emergency medical expenses do not hamper your retirement corpus.

Look at alternate sources of income post-retirement

At the age of 60 you still have another 15 years of active working life left in you. You may not be comfortable in a full-time job but you can certainly leverage your skills and your network. Most employers are more than keen to utilize experience in some way or the other. There are advisory positions and roles that you can assume. Keep yourself busy.

Retirement planning is unique in many ways. You are betting your entire future on it. The better you prepare and plan for it, the more successful you are likely to be!


Enjoying a Tax Smart Retirement

Ensure that your post retirement flows are as tax efficient as possible. The Income Tax Act does offer a higher tax exemption limit for senior citizens but there is nothing like a concessional rate of tax for those who are retired. Let us understand with a Retirement calculator.


Equity Funds

Debt Funds


Bank FDs

Tax Free Bonds

Tax on corpus

10% Tax after 1 year on LTCG

Indexed LTCG at 20%

Full corpus tax-free

No tax on corpus

No tax on corpus

Tax on income flow

Dividends pay 11.648% DDT

Dividends pay 29.12% DDT

Interest fully tax-free

Interest fully taxable

Interest fully tax-free

Risk profile of product

High Risk

Medium Risk

Low Risk

Low Risk

Medium Risk

Return profile

High Returns

Above average Returns

Low Returns

Low Returns

Attractive post tax returns

The Retirement income tax calculator captures the comparative merits and demerits of various asset classes that people normally use to plan their retirement corpus. When you retire, you need to focus on the tax efficiency of the corpus, the regular flows over time so that your post-tax effective returns can be maximized.  The bottom-line is that when it comes to deciding how much tax to pay post retirement, should equity constitute the substantial portion? Of course, post retirement this corpus can be invested in products like debt funds and MIPs to give you tax-efficient returns.


How to Arrive At Your Retirement Corpus

Your future retirement corpus will depend on an extrapolation of your current expense level. For that you need to inflate your costs on an annualized basis. Here is how your retirement corpus plan will look like…


Current Cost

Future Value needed

Current Monthly Expense

Rs.75,000 per month


Rate of inflation

5% annualized


Time to retirement

30 years


FV of Monthly Expenses



FV of Annual Expenses



Yield on Safe Liquid Funds



Corpus required (30 years)

(39,00,000 / 0.05)

Rs.7.80 crore

In the above case, the individual will need a retirement corpus of Rs.7.80 crore to maintain his current monthly expense post-inflation. If your corpus of Rs.7.80 crore is invested in a safe liquid fund yielding 5% after 30 years, then it yields a monthly income of Rs.3,25,000 which is the future value of your needs. How to plan for this huge corpus?

Planning for your retirement through SIPs

Considering that the individual has 30 years to retirement, how to approach the retirement corpus of Rs.7.80 crore by leveraging the power of compounding?


Invest in Debt Fund

Invest in Equity Fund

Invest in ELSS

Corpus required

Rs.7.80 crore

Rs.7.80 crore

Rs.7.80 crore

Time to retirement

30 years

30 years

30 years

Mode of targeting

SIP in Debt Fund

SIP in Equity Fund


Effective CAGR yield




Monthly SIP required to reach the target

Rs.41,327 pm

Rs.12,512 pm

Rs.6,773 pm


The figure in red colour show how much you need to save on a monthly basis to reach the target corpus of Rs.7.80 crore over the next 30 years under different investment assumptions. Clearly, if you have a time frame of 30 years, then reaching Rs.7.80 crore is not all that difficult if you can be disciplined.

What to infer from the above retirement simulation?

  • With a time frame of 30 years it would be sub-optimal to put the money in debt funds. In fact, the equity fund SIP will give you the power of rupee cost averaging and equities will give you the power of compounding. This combination works best.
  • In retirement planning, the biggest risk is the risk of not taking adequate risk. When you commit the funds to a debt fund for 30 years, you are forcing underperformance. Taking a calculated risk through equity funds is the best way to plan a 30 year retirement.
  • If you are into equity funds then you really can start off with a very affordable monthly SIP. In the SIP, you get the benefit of rupee cost averaging plus the added benefit of sustained wealth creation. Additionally, it also synchronizes with income flows.
  • The key is to drive to save more. A retirement corpus may look to be huge but if you plan your SIP across the right assets with calibrated risk then you can easily achieve your targeted corpus. Treat the above savings as a target and crimp expenses.
  • The sooner you start planning for retirement, the better it is. It allows you to take higher risk of equities and also works the power of compounding in your favour. Even if you start small, you must start saving early for your retirement.

The best way to plan for your retirement is to tag SIPs specifically for this purpose. By working backward and keeping a genuine cushion, you can save enough for retirement.


Why Tax Planning Must Align With Overall Financial Plan

The last 2 months of the year is when most tax payers rush to invest in tax saving products. Before you invest in any of these tax saving instruments you need to ask yourself a simple question; does this fit into my overall financial plan? Your financial plan is the starting point towards your medium term and long term goals. The financial plan is based on 4 basic premises; maximizing returns, minimizing risk, ensuring adequate liquidity and creating tax efficiency. The fourth pillar of financial planning is what tax planning is all about. Tax planning and financial planning cannot be seen as distinct activities. Here why to sync tax planning with financial planning

Moving towards a larger financial pathway

Your financial plan is your pathway to your long term goals and your medium term goals. Be it your retirement, your child’s education, your child’s wedding, margin money for your apartment; all these require planning. More importantly, they also require resources and hence they need to be planned for. Obviously, if you earn a very low rate of return or if your returns are eaten away by taxes, you are unlikely to reach your financial goals. The best way to attain your milestones is to make your money work much harder in post-tax terms.

Aligning your cash flows with tax planning

When you make your financial plan, it is all about your cash flows. You typically do a SIP or systematic investment plan to get the best of rupee cost averaging. Since your earnings are periodic in nature, your outflows for investments also need to be periodic. That is what aligning your cash flows is all-about? If you do not align your tax plan with your larger financial plan then the two could actually be at cross purposes.

Focus on the right products for your needs

When you plan your taxes, it is essential to focus on the right product. If you are young and are looking to create wealth over the long term, then an ELSS makes a lot more sense than a PPF. You are not only going to create more wealth in the long term but also it will be more tax efficient in terms of tax exemptions and lock-in period.

Avoid over investment in an asset class

Let us understand this with an example. Your financial plan dictates that your exposure to debt should be to the tune of 25%. While you have allocated funds to debt mutual funds, your exposure to PPF is also adding to your debt component. At the end of 10 years you may realize that your exposure to debt has inadvertently gone up to 40% and hence it has become sub-optimal. Your portfolio rebalancing must factor this.

Investment decisions must be a part of your financial plan

Don’t look at tax planning as distinct from your financial plan. Tax efficiency is one of the four pillars of your financial plan. By creating a tax efficient portfolio you can substantially enhance your wealth creation potential over the long term. That is possible only if you have aligned your tax planning to your overall financial plan. When you focus on tax efficiency of your financial plan, your job becomes a lot simpler. You know how much tax you need to save and your investment mix can be planned accordingly. In fact, there are times when it makes more economic sense to pay off your tax and let your money stay invested in high return investments. These trade-offs are possible when your tax plan is aligned to financial plan.

It is a lot more important to ensure that tax planning actually aligns with your long term financial plan. After all, that is the financial master document of your life!

6 Questions to Ask Before Tax Planning

The key to tax planning is to manage taxes in such a way that you can minimize your tax outflow and enhance the post-tax returns on your portfolio. Here are 6 questions you must ask yourself about tax planning.

Should I plan taxes myself or seek expert advice

While filing of tax returns is quite simple with the advent of digital e-filing, you still need expert advice on how to handle the laws and bye-laws of the Income Tax Act. A professionally tax advisor will be in a better position to help you manage your taxes in the best possible way and also reduce your tax liability.

Is the tax plan in sync with overall financial plan?

This is perhaps the most important aspect you need to factor in while planning your taxes. Remember, to plan your taxes you need to invest and these investments must be in sync with your overall financial plan. If the financial plan allows you to allocate up to 60% in equities, you cannot just keep buying ELSS funds for tax saving outside the ambit of your financial plan.

What is my trade-off in paying tax versus planning tax?

When you plan taxes there is always a trade-off. If you do not plan, then you will have to pay the full tax. That brings us to the next question. When you invest to save tax then is the investment really worth it. It will depend on how you select your tax saving investments. For example, if you are planning to save tax under Section 80C, then your lock-in is 5 years in case of Bank FD but just 3 years in case of ELSS. Also, ELSS is more tax efficient and helps you to create wealth in the long run, which the bank FD cannot. These are factors you need to consider in the tax payment versus tax planning trade-off. At times, it may make more sense for you to just pay the tax than plan for it!

Am I adopting a tax planning approach in sync with income flows?

Don’t put yourself in a situation wherein you have to run around to arrange funds in the last quarter to make your tax-saving investments. That is what a lot of people do. A better way is to adopt a SIP approach to tax saving. Instead of buying ELSS funds in bulk at the end of the year, you can get the same tax benefits by doing SIP on ELSS funds. It not only gives you the benefit of rupee cost averaging (RCA) but also ensures that your SIP outflows are in sync with your income flows. This makes your cash flow matching much easier.

How am I going to productively use the tax saved?

Tax planning is not just about saving taxes but also about how you use the money so saved. You need to achieve two purposes with tax planning. Apart from reducing your taxes you also need to plan how you will productively utilize the money so saved. For example, if you are going to save Rs.12,000 per year by taking Health Insurance, then what are you going to do with the Rs.12,000 saved. That is like an income and needs to be accounted for. Here is how:


Just spend the money

Put in Bank FD

Create Monthly SIP

Allocating Rs.12,000 saving per annum

Nothing invested

Rs.12,000/year at 7% FD rate and 30% tax

Rs.1,000 per month at 15% annual CAGR

After 20 years

Nothing created

Rs.363,480 (post tax)

Rs.78.54 lakhs



Marginally Productive

Highly Productive

Have you remedied pending tax cases?

Before you start tax planning ensure that any previous queries by the IT department pertaining to old returns or any notice sent to you are responded to. If previous queries or cases are not cleared, then the IT department will withhold your refund till the time your earlier cases are cleared. Quite often, these notices are just routine notices but if you do not respond to them then it will show as “Pending” against your name. You can check these out by logging in to your secured PAN area on the Income Tax website.

Estate Planning: What It Entails

Everyone has an estate. Your estate is comprised of everything you own; your car, home, other real estate, checking and savings accounts, investments, life insurance, furniture, personal possessions. The idea is to pass on the estate benefits to your heirs (and possibly to charities) in your absence in a smooth manner. Writing a will, creating a trust and finalizing an estate plan gives peace of mind about the future utilization of your assets. Let us look at some of the features of a good estate plan.

  • Include instructions for passing values (religion, education, hard work, etc.) in addition to your estate and assets
  • Include instructions for your care if you become disabled before you die
  • Name a guardian and an inheritance manager for minor children
  • Provide for family members with special needs and other challenges
  • Provide for loved ones who might be irresponsible with money or who may need future protection from creditors
  • Include life insurance to provide for your family at your death, disability income insurance to replace your income if you cannot work due to illness or injury, and long-term care insurance to help pay for your long term care if required
  • Provide for the transfer of your business at your retirement, disability, or death with outlined roles, responsibilities and benefits
  • Minimize taxes, court costs, and unnecessary legal fees

Estate planning is an ongoing process, not a one-time event. Your plan should be reviewed and updated as your family and financial conditions change over your lifetime. Also ensure that estate plan ensures transfer of assets in the most tax efficient manner.