Creating Value

YOU heard enough about why you should buy insurance. So you wake up one morning and decide to buy yours that day. And then, you realise, you have no clue where to begin. Well, how about here for a start.

Step 1 – Evaluate your life insurance needs
An extremely popular product, life insurance offers a lot more than just tax planning and investment returns. You are afforded the ability to plan for unforeseen events that could adversely affect your family's financial profile.

Factors to consider
Your financial profile and needs are different from your neighbour’s. The same holds true for your insurance needs. Your decision when going for insurance must revolve around the number of dependants and their financial needs.

Factors you should consider
§ Wealth, income and expense levels of your dependants
§ Significant foreseeable expenses
§ Inheritance you would leave them
§ Lifestyle you want to provide for them

How much insurance?
Obviously the above factors don’t mean much unless they are quantified. A time-tested approach used by insurance and financial planners globally is the capital needs analysis method.

Calculate: How much life insurance do you need?

When should I re-evaluate?
Whenever any of the factors discussed above change.

Step 2 – Understand the key concepts
Risk cover v/s investment returns
Insurance options range – from low premium policies with that offer almost no returns, to high premium ones that offer returns depending on the fund option you choose.

We recommend you buy policies skewed towards investment returns only if you are in the high-tax bracket, prefer to invest in low-risk, fixed-income options and have exhausted all the other such investment options available.

Whole life v/s limited period
As you grow older, the number of dependants may decrease (since children would be independent). Also, your wealth may reach a level where it can support your dependents’ financial needs in the event of your death.

You should therefore consider whether if you need to insure yourself for whole life or for a limited term. Obviously, the cost of insurance for the latter is lower.

We recommend you go for whole life only if you do not expect your wealth to ever reach a level where it can support the financial needs of your dependents.

ULIP vs traditional
Today ULIPs are more popular than any other option. But your life insurance agent may be the only one recommending you the ULIP. Before you sign the cheque decide which is best for you: ULIP or Traditional endowment .

Tax Planning
The premium paid for an insurance policy also qualifies for tax deduction under Section 80C of the Income Tax Act. But don't buy insurance only to save tax. Read why insurance + investment + tax = a bad combo!

tep 3 – Selecting a policy
Calculate the insurance you need
Consider the current expense profile of your dependents and the current wealth level of your family. Consider also the risk tolerance level of your dependants.

Selecting your Premium Paying Term (PPT)

How long do you want to pay your insurance premium for? This decision depend on the following factors:
§ How many years of regular income you expect
§ Level of your regular savings
§ How much insurance premium you can firmly commit to
§ How long you want to be insured versus how long you expect to pay a premium for

Other important questions
§ Do you want to participate in bonus/ profit share?
§ What is the primary objective - risk cover or investment returns?
§ Do you want accident cover?

Buying insurance can be as easy as buying a cell phone. Find out how and get ready to face those life insurance agents.

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INVESTING in equities is riskier than and definitely demands more time than other investments. However, it can probably be more rewarding than you can imagine and certainly very exciting! World over, and even in India, stocks have outperformed every other asset class over the long run. Stocks are probably your best bet against inflation too.

If equities tempt you but you are scared to take the plunge during these volatile times, here's a complete step-by-step guide on investing in equities.

Step 1: Understand how the stock market works

When you read you begin with A-B-C. When you sing you begin with Do-Re-Mi. And when you invest in stocks you begin with business-company-shares.

Before you embark on your journey to invest in equities, teach yourself how the stock market works. Read this easy guide .

It's not that difficult: Just follow these 4 golden rules. And while you are at it<>

Step 3: Decide how much to invest
Since equities are high risk, high return instruments, how much you should invest would really depend on how much risk you can tolerate. Take this quizto find out what your risk profile is.

Once you have done that, use this asset allocation test to calculate exactly how much of your savings you should invest in equities.

Step 4: Monitor and review
Monitoring your equity investments regularly is recommended. Keep in touch with the quarterly-results announcements and update the prices on your portfolio worksheet atleast once a week. You can use Moneycontrol'sPortfolio to update the prices of your equity holdings.

Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the RiskAnalyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.

Finally, ensure that you avoid these seven most common investing mistakesand sail smoothly into your financial bright future.