Publication details: Money Manager – CNBC Bajar – 07-07-2016

Responses, opinion and view from Kartik Jhaveri.

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Good financial habits can take you a long way on the path of financial well being and prosperity. When people run into financial issues, it is usually the result of several bad decisions that pile up to create several ongoing issues. To protect your financial future, you need to identify loopholes and take measures to plug them to set forth on the path of financial freedom and prosperity.

When we think of good financial habits, there is no standard set of rules. From budgeting, saving, curbing credit card and other discretionary expenditure, to planning and investing for goals…. There is no end to the number of good financial habits we can inculcate.

However there are two important, and probably the most neglected habits, I would like to put forth….

1. What are these two habits?

• One – Get your risk management in good shape.
• Second –  Create and update your Will.

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2. Let’s begin with the first habit. How does one manage his risk and get his risk management in good shape?

It is important to have a solid risk management package. To begin with, ensure you have adequate life cover… How does one do that?

• Before getting into insurance requirements, it is financially wise to set up a contingency fund to take care of your living expenses of about 3-6 months in case of any emergencies. Make sure this money is parked in a highly liquid instrument such as  a savings account, FD or bond fund.
• Life insurance is an essential aspect to safeguard your family’s financial security. It is an important risk management tool that will help your family meet their critical needs and lead a comfortable life even when you are not around.
• How to plan your insurance requirements –
  • Assess your life insurance needs and make sure you have an adequate life cover to take care of all outstanding loans, provide for all financial goals and provide a substantial monthly income for your family, in case of any eventuality. A term policy is a good option here. This is a highly useful and cost effective option.
  • A rule of thumb is to have a life cover that is 8-10 times your annual salary.
  • Insurance lets you leave an inheritance – Even if you don’t have any other assets to pass to your heirs, you can create an inheritance by buying a life insurance policy and naming your family members as beneficiaries. This is a great way to set your children up for a solid financial future and provide for any monetary needs that will arise.
  • Tax benefit – Life insurance premiums qualify for deduction under section 80C of the Income Tax Act (subject to the overall limit of Rs. 1.5 lakhs). However, this should not be the driving force behind making the decision of taking a life insurance policy. The need to improve risk management should be the driving force behind opting for life insurance.

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3. Does it end with life insurance? Are there any other aspects of insurance one needs to focus on?

It does not end with securing a life cover. The next important step is to protect your health.

Health insurance – Things to keep in mind

• There is a popular saying about health insurance : “Buy health insurance when you don’t want it, because you may not get it when you need it.”
• Health insurance provides risk coverage against expenditure caused by unforeseen medical emergencies. In current times of high medical inflation rates, failing to hold adequate amount of health insurance cover can prove to be a major personal finance disaster.
• Any medical emergency results in a sudden outflow of money. This then hampers your financial goals as the additional surplus is diverted towards medical expenses.
• Many organisations provide basic health insurance to their employees. This coverage may be insufficient in case of an emergency. Also, such policies lapse the moment the employee leaves the organisation. Hence it is prudent to have a standalone medical cover. Having a family floater policy is a good option.
• Points to consider while buying a policy:
  • Most important – Cashless facility, network of hospitals, extent of coverage – based on room rent, no claim bonus, co-pay (after age 60), exclusions.
  • Very important – Lifelong renewals, day care procedures & overnight stay, coverage of pre-existing illness, reimbursement of pre & post hospitalisation expense, preventive health check-up, domiciliary treatment, maternity benefits.
• Tax benefit –
  • Payments towards health insurance premiums are eligible for tax deduction under section 80D of the Income Tax Act.
  • Premiums paid for self, spouse or dependent children – The maximum deduction is Rs. 25,000 (from AY 2016-17). In case any of the persons are senior citizens, the deduction amount is enhanced to Rs. 30,000 (AY 2016-17).
  • Additional deduction for premiums paid for parents – The maximum deduction is Rs. 25,000 (AY 2016-17). If parents are senior citizens, the maximum limit is Rs. 30,000 (AY 2016-17).

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4. Does the risk management package include anything else?

Yes… After securing your life and health, it is important to secure your assets.

Asset insurance – Things to know

• For most of us, purchasing a house is the biggest and probably the most expensive expenditure in our lives. Hence whether or not to buy property insurance should be a no-brainer.
• Eventualities such as fire, burglary and natural calamities could leave you considerably poorer as you struggle to pay for various repair works or to replace destroyed or stolen items. In such situations, property insurance could prove to be a savior.
• Property insurance is largely of 2 types –
  • Structural insurance – Which covers damage to the structure of the home.
  • Content insurance – Deals with your belongings within the home.
• The two can be purchased separately or in a combined policy. If you own the house you are living in, a policy that combines structural and content insurance is a good option. In case you are a tenant, content insurance makes more sense as the landlord would be responsible to fund any structural repairs.
• Now that we have a fairly good idea of how to get our risk management in good shape, let’s move to the next important habit which is making a Will.

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5. Why is it important to make a Will?

• Where this is a Will… There is a way!
• Creating wealth is just one aspect of financial planning. It is complete only when you get to decide what happens to your accumulated wealth after you are gone.
• And what is the best way to do this? The smoothest way is leaving behind a Will to ensure that the wealth is transferred to people you choose, that the interests of the weak or of minors are provided for and that your wealth is distributed without family disputes.
• A Will does not only distribute wealth- it can also offer responsibilities. Who will take care of your children in absence of you and your spouse? One can write a Will appointing a trusted person as the guardian of their children when neither of the parents survives. One can also write a Will for creating trusts.
• If you die without a Will (i.e. intestate) then your assets are distributed as per the Indian law or the succession laws of the religion to which you belong.
• A common misconception is that all the estate is automatically passed on to the spouse, because children and sometimes even relatives can stake a claim to the property. Laws of inheritance and succession are complicated and diverse in nature and differ for different religious groups.

6. What are the points to be kept in mind while drafting a Will?

• Who can make  a Will and how?
  • Every person who is of sound mind and is not a minor can make a Will.
  • You can make a Will on plain paper in India – a Will has no prescribed format. It’s not legally necessary to make a Will on stamp paper. A Will can even be handwritten.
  • A Will must be attested by 2 witnesses who must witness the testator executing the Will.
• Consolidate your assets
  • If the person had been investing and buying properties without informing his heirs, then the task becomes difficult for them after the death of the individual. The heirs will have to go through heaps of papers to know the deceased’s legacy. Hence make sure you have listed all your investments and assets in your Will and ensure they are bequeathed to the rightfully deserving people.
  • Mention who should own your assets and in what proportion after you have gone. If you are giving your assets to a minor, make sure you appoint a custodian of your assets till the individual you have selected attains the age of majority.
• Nominations
  • Ensure that your investments are well insulated with nominations.
  • Also make sure that the nominees and joint holders in your investments are synchronised completely with your Will.
  • Remember that a nominee is only a trustee of the funds, which he is expected to safeguard till such time as the legal heir or beneficiary can be determined and the proceeds can be passed on to him. A Will overrides a nomination.
• Appoint an executor
  • Certain persons are required to implement your Will after your death, such as, executors, guardians, witnesses, etc.
  • An executor is a person who is appointed by a testator (person making the Will) to execute his Will. A probate of Will is granted only to an executor appointed by the Will.
• Organise your documents
  • You should not stop at just making your Will.
  • You should organise all your documents and information so that they can be found easily to make your asset distribution smoother. This way your spouse, children and grandchildren are secured if something unfortunate were to happen to you.
  • Keep a checklist of important information with yourself and inform the executor or someone you trust as to where it can be found.
• Safe custody of Will
  • Just writing a Will is not enough. You need to make appropriate arrangements for its safekeeping and execution.
  • Getting your Will registered is one way of ensuring safety of your Will while making it easy to establish it as your genuine testament.
  • A registered Will is kept in safe custody of the registrar and cannot ordinarily be tampered with, destroyed, lost or stolen.
  • For better safety of your Will, you can also keep a copy of your Will with the main beneficiary or the executor.

7. Once the Will is made is the job over?

No, your job isn’t over yet!

• It is a good beginning, but now you must update your Will annually.
• You can make alterations or additions by using an instrument called a codicil. A codicil has to be executed and attested like a Will.
• While reviewing your Will, make sure you incorporate all the changes with respect to acquisition of new assets or disposal of existing ones, change in beneficiaries, etc.