Factors to be Evaluated before Choosing Investment Plans
There are some key elements to be considered while choosing an ideal investment plan. They are:
ULIP vs Endowment (Risk vs Return)
The first aspect to keep in mind is the policyholder’s risk appetite. A more conservative and older investor, may opt to go in for an Endowment Plan where the returns are pretty much guaranteed upfront, but this however will yield a relatively lesser return. The though process could be is that this investor is keep to ensure they get their investment back at a known % return without too much stress and variables involved. Whereas a younger and more maverick investor may choose to opt for the ULIP route to ensure better returns, but at a slightly higher risk.
Financial Goals (Milestones)
The financial goals of the investor at specific timelines in his/her future life should determine what type of scheme they should invest in. These goals including others may be buying a larger home, saving for children's higher education costs(mostly abroad), or planning for the children’s marriage or for a retirement corpus and depending on the amount of money required at these stages, investment plans could be opted for and invested in.
Age / Financial Commitments of Investor
Another important factor for the investor to take into consideration is his/her age and financial commitments…a younger person with young children may not have to make too many financial commitments for education/marriage etc and hence can afford to make larger commitments for investments as well may look at investing in plans with higher returns. Hence the age at which the policyholder is making this investment is critical in the decision process.
Expenses vs Savings
Current and Future expenses being incurred by the policyholder on a periodic basis is also a factor that is vital in deciding the investment plan that an individual may opt for. For example, if the investor has regular financial commitments like mortgage (home loans), car loans or other personal loans, these are long term in nature and hence the future expenses are likely to be not very different from the current expense level. Also if they have a propensity for travelling on vacations / eating out regularly / wearing expense clothes, these expenses are not likely to reduce or go away and hence the ability for savings is reduced, there by reducing the capacity to invest in significant proportions in these plans.
Replacement of Income
It is extremely important that the sum assured covering the plan and getting paid at the maturity or the unfortunate demise of the investor be sufficient to cover for the loss of income of the bread winner without any change in the family’s lifestyle. There is also the possibility that following an accident, the investor could be disabled and in this case as well this sum assured should cover family expenses. Saving money also helps the family build up a corpus that can yield interest income which can contribute towards expenses.
Corpus for Unexpected Emergencies
Creating a corpus for unexpected emergencies is also an important part in financial planning for any individual. While one has planned and invested for known expenses like education, marriage, retirement etc, there could be other unexpected emergencies like a major illness to the bread winner in a family or another member for which the health insurance cover was insufficient. There could also be any natural calamity/Act of God peril that is unplanned for…this corpus becomes useful at these moments, but the investor has to make provisions for this corpus apart from other regular investments.
Existing Insurance Coverage
As we have mentioned before, all investment plans also have a life insurance component in them and this is an important part of all investment plans. Prior to investing in any of these plans, it will be useful for the individual to take stock of their existing insurance coverage and then decide which plan to invest in given the additional insurance coverage that will be available under the said plan. The higher the existing insurance cover, the lesser the insurance coverage needs to be in the investment plan to be purchased. It is important that the cover provided by the new plan along with the existing coverage should be able to pay for him/her or his/her family's expenses in the years to come in case of the demise or disability of the investor.
Family Size and Other Income
The number of dependents that the primary family has also determines the sum assured the investor needs to invest in. If the investor has a wife and only a single child as dependents then his/her needs would be relatively lower when compared to when s/he may have 2-3 dependent children or brothers/sisters, parents, parents-in-law etc. The current age of the children also should be considered while choosing the ideal plan. Another factor to keep in mind is if the spouse/children are employed and earning a salary. If yes, then the family is not completely dependent on the primary insured and hence the investments can be made accordingly.
Most of the investment plans also provide riders like Critical Illness, Accidental Death or Disability, Waiver of Premium, Term or Hospital Cash Rider. The investor should consider taking these riders along with the basic policy to ensure comprehensive coverage under the Investment plan, should something happen at a later date.