Planning for Children’s Future – Case Study

Prasad (42) works with Indian Railways as an engineer and his spouse Subhra (35) is a home maker. Prasad has all along been posted in project areas away from urban centres. They have two daughters Vaishna (11) and Vaidehi(5).They are staying in their official  accommodation and have rented their owned  flat. Besides the regular savings in EPF, PPF, NSC, KVP and Life Insurance policies, the surplus income has been invested in landed properties. They do not have exposures in equities and mutual funds. Their primary concern is education and marriage of both the daughters. They would like to go for vacations both in India and abroad. Prasad would like to take a plunge into business once the futures of both the daughters are taken care of. They also want a comfortable retired life.

The details of his financial position and the plan are as follows:

Annual  Income and expenses: (in  Rs)

  • Salary and Rental Income                            :   10.05  Lakhs
  • Yearly   Expenses(Fixed and Variable)       :     2.55  Lakhs
  • Life and vehicle Insurance                           :     1.38  lakhs
  • Housing loan repayment                              :     1.37  lakhs
  • EPF & PPF                                                      :     0.54  Lakhs
  • Tax                                                                  :    0.62  lakhs
  • Net annual Cash Flow                                               :     3.59 Lakhs
  • Monthly surplus                                             :     29916/-

Investments (Current value in Rs)

  • NSC and KVP                                                 : 2.19 lakhs
  • EPF                                                     : 4.68 lakhs
  • PPF                                                     : 1.30 lakhs
  • Land and flat                                     : 87 lakhs
  • Insurance policies                             : 6.5 lakhs
  • IDBI Flexi Bonds                              :0.60 lakhs
  • Cash                                                    : 2.40 lakhs

Total 104.67 lakhs

Liabilities

  • Home loan outstanding                    : ` 8.92 lakhs

Financial Goals

1. Vaishna’s Graduation in 2017 –   Cost: 8 Lakh

  • Future Cost                                      :  12.39 Lakh (Inflation 6%)
  • Current Investments Allocated     :  6.22 Lakh

2. Vaishna ’s Post Graduation in 2021 – Cost :6 lakhs

  • Future Cost                                                 : 11.06 Lakhs (Inflation 6%)
  • Current Investments Allocated  :  3.56 Lakh

3. Vaidehi’s Graduation in 2024 – Cost : 8 Lakhs

  • Future Cost                                                  :  18.65 Lakh (Inflation 6%)
  • Suggest SIP in diversified equity MF      :  5,000 pm

4. Vaibhavi ’s Post Graduation in 2028 – Cost :6 lakhs

  • Future Cost                                      : 16.63 Lakh (Inflation 6%)
  • SIP in diversified equity MF         : 2,500 pm

Marriage of Vaishna in 2025 –Cost: 10 lakhs

  • Future cost                           : 22.60 lakhs
  • Current investment allocated(Landed Property)  : 5lakhs
  • SIP in diversified equity MF/Gold ETF   : 3,000 pm

Marriage of Vaidehi in 2031 – Cost: 10 lakhs

  • Future cost               : 32.07 lakhs
  • Current investment allocated(landed Property) : 5 lakhs
  • SIP in diversified equity MF/Gold ETF  : 2,000

Retirement Planning (Retirement in 2029)

  • Monthly Requirement : 51, 400 at retirement
  • Retirement Corpus Required Rs. 1.53 crs (Inflation 6%)

Retirement benefits from EPF, Gratuity, Leave encashment and monthly pension can meet the target corpus with a shortfall of 16 lakhs which can be achieved by a monthly SIP of 2,000 in an Index fund.

Asset Allocation

The current asset allocation is heavily weighted in favour of investments in landed property (84%).The recommended exposures through SIP in equity and gold ETF will gradually shift the balance.

* Equity MF returns assumed at 12%

Recommendations

Emergency Fund:

  • At present Rs.2.40 Lakhs in Savings Banks of SBI and ICICI Bank.
    • Recommendation – Invest Rs.1.4 lac in FD and the balance in MODs/Flexi deposits accounts.

Life Insurance, Accidental Insurance and TPD

  • Insurance need -   : Rs.94 Lakhs.
  • Has Rs.17 Lakhs cover with annual premium of Rs. 1, 24,000/- with mostly endowment policies which yields between 5-6%.
  • Recommendation – Rs. 77 Lakhs of term insurance with PA and TPD rider. Premium – Rs.30, 000; One Endowment policy for SA Rs.6, 93,000 and annual premium of Rs. 51,000/- can be made paid up. The savings thereon can be used to pay term insurance premium of Rs.30,000 and balance can be invested in MF SIP for 15 yrs which can yield Rs.8,76,000 (12% return) and this will almost compensate the maturity proceeds of the policy.

Health Insurance

  • Currently medical facilities available from the employer.
  • Recommendation – A family floater policy of Rs.3 lakhs.

Vacation Planning

  • The savings of Rs. 1, 00,000 per year can be invested in an income plan of Mutual fund and the proceeds of principal and dividend can be used for vacations in India and abroad in alternate 4 year periods.
    • Risk of over exposure in landed properly: Prasad has taken over exposure in landed property and purchased plots which need to be mutated in his name. He needs to take preventive steps for encroachment. We recommend to sell two  plots and invest the proceeds in a 3 bed room flat .The proceeds from the remaining landed property can be  used for the children’s education if a need arises for their education abroad and the balance can be used as capital for his own business when he decides to take a plunge into it.

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8 comments

  1. Dear Mr. Praharaj,

    A nice article. Thank you. I have a question after seeing your profile. Although only indirectly related to your post I hope you answer it.

    Have been a risk officer in a insurance company perhaps you can provide an insight which other CFPs can’t.

    Most personal finance bloggers (non-CFPS and perhaps a few CFPS too) recommend the following:
    Take adequate term insurance, be open and frank while filling the form so that claim cannot be rejected but spread your cover over two different firms just in case. This is claimed to be based on common sense.

    I don’t disagree with splitting your cover part but don’t see the logic or enough proof behind it. If you have been honest upfront claims can be delayed but not rejected. So why split your cover and give trouble to your nominee upon your death?

    I hope you do agree that getting two claims is more leg & paper work than getting one. Having a taken a term insurance with the sole purpose of providing for my loves ones why would I want then to run around?
    My question is why do this? Are there any specific advantages?
    When insurance companies realize that the dead person has more than one insurance policy do they sit back and wait for the other firm to pay up in the hope that they find a reason to reject? There are many such associated questions but will stop here hoping for some insight. Excuse the long comment.

    • Dear Mr Pattu,
      The insurance need is estimated taking into consideration the expenses of the family,educational cost of the children, marriage of the children, outstanding loans etc.The needs will be met one after the other except the expenses one.So it will be preferable to discontinue that part of the Term insurance cover for which needs are already met and continue with the cover for which the needs are still there.This can be beneficial for the client since he/she can save the premium cost and this can be possible if the cover is split into two/more policies.On claim settlement, IRDA’s grievance mechanism will take care of the non settlement / harassement if any.

      • Thank you for your reply. I have no issues with need based multiple term policies: larger cover after marriage, children etc.

        My issue is about advice given to split term policies to reduce chances of rejection. Such a statement requires proof. Is this really true?

        • The advice is based on the following factors:
          (1) The mortality risk charge is lower at lower age and hence preferred over top up. Further the term of thre policies will depend on the goal year.
          (2)The need for coverage for education and marriage is already there and amount should made available to the family in case something happens to Mr Prasad.It is not that the need for cover will be required at the time of education and marriage.
          (3) In case of general insurance policies ,complications in claim settlement are possible due to the principle of indemnity but in case of Life Policies no such complications are invisaged, if disclosures have been made at the time of the contract .I am not assuming any chance of rejection.

          • Thank you. So its the amount of cover which is more important then the number of policies. A single policy with adequate cover is just the same as mutiple policies for the same cover.

            The advantages of dropping some policies is understood.

            Thanks again,
            pattu

  2. Interesting comments.
    you write
    “In case of general insurance policies ,complications in claim settlement are possible due to the principle of indemnity”

    Doesn’t indemnity come into play when a person with AD and CI riders with term policy dies?

  3. Dear Kumar,
    There are basic differences in the application of the principle of indemnity to Life and General insurance and are mootable especially on the recent versions of Life Policies.
    But in the instant case,the need analysis by HLV has taken care of the financial underwriting aspects that might have raised issues on higher compensation being covered.In this case, the Life policies covering death,the whole SA amount will be paid by the respective insurers.
    In general insurance,had the loss been less than the SA, the issue of co sharing would have arisen.

  4. The article in question is based on a actual financial plan prepared by the author.This is 100% original.But i agree in general to the problem of plagiarism especially with the spread of internet.Regarding any violations you need to bring specific cases.

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