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What Is Wealth And How Can You Build Wealth with Life Insurance?

dateKnowledge Centre Team dateNovember 18, 2020 views120 Views
What Is Wealth And How Can You Build Wealth with Life Insurance?

Are you wealthy? Would you consider your parents wealthy? Do you think you will acquire wealth one or two decades later? If yes, it’s time to think how.

Eyeing a wealth goal is a reasonable aspiration. However, like any other destination, you need to know what it looks like to be able to ascertain whether you arrived at the right place. So, you need to define your savings goal that eventually becomes your wealth. Fortunately, there is more than one way to do so, including pension plans, saving life insurance etc.

What Does Wealth Mean?

Meaning of wealth could be different for different investors. For some, the precious metal is wealth, while for others it could be a valuable real estate. However, scientifically both of these investors may have wealth but that may not make them wealthy.

The real meaning of wealth should be to have enough money to fulfil your needs and meet your financial goals and aspirations when you need it.

Meaning, you may not be a billionaire now, but if you can:

  • Pay the down payment of the house property you dreamed of a few years ago
  • Fund your child’s goal of attending the top b-school in the UK
  • Comfortably sip your coffee at the age of 60, knowing you are going to live well into your well-funded retirement

You are wealthy, and you have built the wealth you need. What does wealth mean for you?

How to Build Wealth?

Building wealth is a long-term consistent effort, considering you are starting from zero. But, with a little plan and clarity on your financial priorities, you can build considerable wealth during your earning years. Before you begin the journey of building wealth for yourself, you should keep the following financial principles in mind:

  • Wealth building is a boring activity if it is entertaining to check for faults in your wealth plan
  • Long-term wealth should take priority over present expenses
  • Your involvement in the saving and investment management should be nominal.
  • Do spend time in understanding your long-term investment choices before investing for a peaceful investing experience
  • Convert your savings to investments as soon as possible

Here are a few important steps you need to take to start on this journey:

1. Budget Your Expenses for Savings

You need to decide a savings ratio before you start splurging your income. Although, the higher your savings ratio the better, it does not mean you should try saving 90% of your income. However, if you can manage that, nothing else is better!

  • At least 10% of your income must go towards your retirement goal, even if you are already contributing through NPS or PPF
  • Minimum savings ratio should be 30% (including retirement savings) of your in-hand income
  • 50% is the most optimum savings ratio

2. Put the Contingency Plan in Place

A contingency plan is to ensure that your investments remain unaffected due to health or accidental emergency. So, here are the things you need to do for a good contingency plan:

  • Purchase adequate life and health insurance cover. Life insurance cover should be 10 to 15 times your annual income. While health cover could be the best you can secure within your budget.
  • Create an emergency fund. An emergency fund should be equal to six-nine months of your necessary expenses including insurance premiums, EMIs and house rent if applicable.

3. Start Investing Your Savings

Once your contingency plan is in place, you can start investing your savings towards long and short-term goals.

  • Short-term investments: These are the goals you need to meet within five years. Best investment options for these goals are bank FDs, debt funds, etc.
  • Long-term Investment (Except Retirement): You can use the tax-saving investments like equity-linked saving scheme (ELSS), unit-linked insurance plans (ULIPs), provident fund (PPF), guaranteed saving plans for long-term goals.

    If you have important life goals like child education and marriage, you can use plans like ULIP and guaranteed savings plans. These plans will help you fulfil the child’s goal while you are alive and even if you are gone too soon.

  • Saving for Retirement: You may already have an NPS or EPF subscription which continues with your salary. You need not stop or change anything with this investment. However, you should add an investment plan like a unit-linked insurance plan to your retirement investments. Here’s how ULIPs help your retirement goal:

    o You can invest till the age of 100. Thus, you can start at 30 and continue the same plan throughout your life

    o You can create a monthly pension from ULIP plan, using the systematic withdrawal feature after the age of 60

    o The pension is virtually tax-free as withdrawals from ULIPs are exempt under section 10(10D)

Thus, ULIPs can help you create a tax-free pension after you retire. Whereas, the pension from annuity plans will be taxable at the slab rates.

4. Review Your Insurance, Savings & Investments

You should review and upgrade your insurance cover with your income and lifestyle growth. You also need to ensure that your savings ratio either remains consistent or grows with your income.

Similarly, you need to check the progress of your investments towards your goals from time to time. Increase the investment to the goals which are lagging. You will easily know if you have surplus savings, start a new wealth goal with it.

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