Life insurance is not an investment

Rajesh Ramakrishnan, 40, lives in Surat with his wife Parul, 40, son Manas, 9, and elderly mother. Rajesh works in the private sector and Parul is a housewife.
What is the couple saving for?
They are in the process of selling a house and purchasing a new one. The cost of the new house is Rs 1 crore. They want to ensure that the entire transaction is financially smooth.They want a corpus of Rs 40 lakh for Manas’ higher education. Rs 20 lakh for Rajesh’s 70-year-old mother in case there are any health eventualities. Rs 4.80 lakh annually post retirement. Rajesh also wants to buy a car for his wife. They wish to save Rs 1.5 lakh for foreign travel as well. All the costs will be revised based on inflation.
Where are they today?
Cash flow: The total annual inflow from all sources is around Rs 39 lakh against an outflow of Rs 34 lakh. The outflow comprises routine household expenses, insurance premium, rent, EMI and tax.
Net worth: Their total assets are worth Rs 1.75 crore, which includes cash and near-cash assets worth approximately Rs 4.6 lakh; assets for self consumption worth Rs 89 lakh — house under construction and expected sales proceeds from old house, car, jewellery — and assets from investment perspective worth Rs 82 lakh. There is an outstanding liability of Rs 12.43 lakh on credit card, home loan and car loan. The couple’s net worth is Rs 1.63 crore.
Contingency fund: The balance in the savings bank account is Rs 4.5 lakh, against the mandatory monthly expenses of Rs 1.34 lakh. This is approximately 3.42 months’ reserve.
Health & life insurance: The family has a health floater policy of Rs 15 lakh and Rajesh has a life cover of Rs 5.12 crore. This is mainly by way of term plans and a few investment-oriented policies.
Savings & investment: The balance in the savings bank account is Rs 4.5 lakh. Invested assets include mutual funds worth Rs 20 lakh, land worth Rs 42 lakh and EPF worth Rs 20 lakh.
Fiscal analysis
Rajesh’s salary is good and the family’s savings rate is also decent. Funds lying idle in the savings bank account should be invested in an FD. They should enhance the family’s health cover and prune investment-oriented high-expense life insurance polices. Their borrowing is within permissible limits, but the couple must pay off expensive loans first.
The way ahead
Contingency fund: The couple must maintain a contingency reserve of Rs 4 lakh, out of which Rs 30,000 should be held as cash in hand and the rest in an FD linked to a savings bank account.
Health & life cover: Since they can afford it, the couple should enhance health cover from the existing Rs 15 lakh for the entire family.
Planning for fin goals
Home-buying: They need to pay Rs 73 lakh after one-two years for completing the transaction to buy their new home. They will receive almost a similar amount from the sales proceeds of the old home. They should invest this sum in a fixed deposit and make payments from it whenever required.
Manas’ education: The couple should start investing Rs 25,000 monthly in a large-cap equity mutual fund and increase the contribution amount by 10% every year.
Retirement planning: After retirement, they require Rs 4.8 lakh annually at today’s cost. This can be generated by liquidating existing investments in land and contributions made to EPF.
Parental responsibility: Earmark existing investment in mutual funds to support the elderly mother.
To be featured in this fortnightly column, write to moneymakeover@ timesgroup.com