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Things to not expect from a Savings Plan

dateKnowledge Centre Team dateDecember 05, 2020 views189 Views
Things to not expect from a Savings Plan

A savings plan is a life insurance investment plan that offers various prospects and is not limited to just saving money. It also helps in investing and multiplying your money efficiently and systematically. The investment will empower an individual to meet the financial needs of his/her family and fulfill his/her financial goals. According to a survey in 2018, in India, as much as 83% of people have planned their retirement by investing in a savings plan. Indians have maintained a high net savings rate, which is about 19.7% of GDP. This is because the savings-investment plan comes with numerous features to help individuals fulfill their financial goals. Let's explore these features:

Entry Age and Tenure:

With savings plans, people usually get a broader entry age with versatile investment tenure. The determination of the risk appetite of the policyholder is done by the entry age. Thus, a saving plan is planned out based on the risk profile of the policyholder. Since people in their 20s and 30s take higher risks to receive profitable returns, unit-linked insurance plans (ULIPs) will be suitable. Contrarily, the people who are reluctant to take risks are more suited for money back plans, thus keeping their money safe despite low returns. Additionally, the mid-to-long term investment tenure allows depositing a significant corpus during the period.

Life Cover and Riders:

There are particularly some saving plans that are preferred over others. For example, ULIPs are preferred due to the dual benefit of a life insurance cover and market-linked savings returns they offer. Also, LIP savings plans have an option of adding specific riders. These riders benefit from enhancing the financial protection of the policyholder and his family in case of any disability, illness, or accidental death.

Investment Options:

Savings plans offer a variety of options when it comes to investing in financial instruments. It ranges from equities involving reasonably high risk to traditional and safer instruments such as fixed interest securities. It can be any corporate bonds, government securities, and money market instruments.

Charges:

While selecting a savings plan, it is essential to know about the extra costs and charges associated with certain actions. The other extra expenses can be in the form of fund management charges, discontinuance charges, fund management charges, premium allocation charges, switching charges, mortality charges, partial withdrawal charges, and other miscellaneous charges. These attached charges cannot be avoided, but the best plan will have minimum charges and offer versatility regarding cash withdrawal, receipt of the policy term, and bonus.

Tax Benefits:

A good savings plan should also be instrumental in saving tax. According to the 80c of the Indian Income Tax Act, 1961, the premiums of most life insurance savings plans can be deducted from taxable income up to Rs. 1 Lakh. Besides, under section 10D of the Indian Income Tax Act, 1961, the benefits of maturity and death are also subject to tax exemption. Thus, the savings plan is the most preferred tax saving instrument.

With so many options, it can be quite a task to choose the right savings plan. Let us see how to go about choosing the right one.

How to choose the right guaranteed savings plan?

The market is full of several saving investment plans, and every plan has its circumstances corresponding to it. It is essential not to invest in a wrong savings plan without thoroughly researching the fund and plan's assets allocation. One way of collecting information is by doing a proper background check about a suitable savings plan's features. Many people decide to buy a savings plan online as it is a better way to avoid any brokerage or excessive and arbitrary charges. However, it is paramount to indulge in some self-study on the savings plan best suited for you.

To meet any unforeseen financial commitments, people save ample money and build a vast corpus. However, you need a certain plan to think smartly and always look ahead at the big picture. Let us explain what things should be kept in mind while doing so are.

  • Clarity of goals

    Primarily, you have to make a checklist of the financial goals which you wish to achieve in life. It should be a structured goal for every step of your life, such as house buying, marriage expenses, child care, and early retirement. With this checklist, you will have a brief idea of how much money to set aside every month. If you are planning to invest in savings, preparing a checklist is crucial once you start earning.

  • Choice of investment

    Since you have many profitable options to save your money, you can benefit from it. Presently, ULIP is the best saving plan as it offers dual benefits of insurance and investment. Based on your risk profile, the premium amount is invested in equity, debt, or a combination of both of them based on your risk profile. It will thus give you a good return and secure your family financially during an unforeseen event.

  • Automatic transfers

    You have to set your salary account so that the money is automatically transferred to the investment account. Thus, a direct debit will not tempt you to hold back the money, since the transfers are done automatically on a specific date. However, if you have opted for manual transfers, you might skip saving for a few months.

  • Contingency fund

    Life is unpredictable, and thus you should always plan for contingencies or emergencies you might come across when you expect it the least. It is always better to set aside at least some percentage of your monthly salary for a contingency fund. Thus it will help you meet the unfortunate expenses with confidence. For this, you must choose highly liquid investment choices such as bank deposits because there might be a requirement for quick cash.

  • Wise and Planned Expenditure

    To start saving regularly, you should cut down all of your unnecessary expenses. Always try avoiding the usage of credit cards as the interest rates on them are relatively high. It is advisable to use cash or your debit card while shopping. This helps you keep track of how much money you're spending, thus instilling a sense of financial discipline.

    Now that you have a brief idea about how to go about choosing the right plan let us see what the status of saving plans in India is.

Status of Saving Plans In India

India maintains a reasonably high net savings rate. The national saving rate is almost 19.68 per cent of the entire GDP. However, in 2019, the gross savings rate and net savings rate declined by around 7% and 12%. Moreover, net savings rate growth as a % of GDP has been regularly falling since 2011-12. Besides, a considerable percentage of income is still in the cash or currency form. People invest them in low-yielding bank deposits and unproductive assets like Gold. This whole scenario needs to change.

To determine the best saving plan, you need to finalize an investment horizon and narrow down your risk appetite. Also, you must be careful about the specifics of the saving plan you are opting for. Consider all the vital factors such as the features of the saving plan offers, how flexible it is, and other additional benefits such as add-on riders.

Below is a table of interest charts of various saving plans in India.

Savings Plan Rate of Interest Guaranteed Income
Fixed Deposit 5.5-7.5% Yes
Public Provident Fund 7.10% Yes
Recurring Deposit 4.5-6.5% Yes
Liquid Mutual Funds 6.5-7.5% Low-risk Market Linked Returns
Equity Linked Savings Scheme 12-15% Market Linked Returns
Equity Mutual Funds 12-15% Market Linked Returns

Now, let us talk about the above plans in brief.

  • Fixed Deposit- FDs are low-risk investments. Investors can invest a particular sum of money for a specified period and earn a fixed interest rate. Upon maturity, the investor can redeem the money along with interest. FDs come with a five year lock period.
  • Public Provident Fund- PPF contributions are subject to a tax deduction. Investors can claim up to INR 1,50,000 for a tax deduction. Also, the returns are free from tax. The minimum investment is ₹ 500, and the maximum is ₹ 1,50,000. The rate of interest is compounded annually, and an investor cannot open multiple accounts. It comes with a 15 years lock period.
  • Recurring Deposit- You can invest a minimum amount of ₹ 500 for a bank RD, and ₹10 for a post office RD. The interest differs from bank to bank. Besides, the interest rates are subject to market fluctuations. The tenure of an RD savings plan varies between 7 days to 10 years.
  • Liquid Mutual Funds- The minimum investment here is ₹ 500, and there is no upper limit. It does not have any restriction on entry or exit loads.
  • Equity Linked Savings scheme- The minimum amount is ₹ 500 via SIP and no limitations on maximum investments. The lock period is e years, but you can continue to invest in this scheme. The investment up to ₹ 1.5 lakhs is tax exempted. However, the long term capital gains (LTCG) over INR 1 lakh is subjected to taxation.
  • Equity Mutual Funds- The minimum lump amount for equity mutual funds is ₹500. The taxation is done based on the holding period.

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Frequently Asked Questions (FAQs) for Life Insurance

The premium is one of the most important factors to consider before buying a policy. Many people buy a life insurance policy with a high sum assured but are unable to process the premiums for the entire premium payment tenure. You can get a better idea of the premium outgo with the premium calculator available in the 'Tools and Calculator' section of www.canarahsbclife.com.

Life insurance plans come with several riders which increase the efficiency of the policy for the buyer. For instance, if you have a history of terminal illness in your family it would be advisable to opt for terminal illness rider with your term insurance. Riders or add-ons help in customising the standard policy benefits for the requirement of different families. The iSelect term insurance plan comes with a built-in cover for terminal illness, and option for protection against accidental death or disability. You can also opt to cover your spouse's life under the same policy by paying an additional premium.

Insurance companies calculate the premiums based on several factors such as age, gender and occupation.

Age:It is one of the biggest factors that influence life insurance premiums. Premiums tend to be low when the life insured is younger as the chances of contracting diseases is low. Young people also opt for policies with longer tenures and pay premiums for a longer duration, which makes the policy cheaper for young people.

Gender:The insurance premium for women is generally lower when it comes to life insurance plans. Women live longer and pose a lesser risk of a claim leading to lower premiums for them.

Lifestyle habits:The premiums for people who smoke or drink is always higher due to higher health risks.

Policy term:Policy terms are also taken into consideration by insurers while deciding the premium amount. Policies with longer tenure are cheaper as compared to short-duration policies.

Mode of purchase: The platform that you use to buy the policy also determines how much you will have to pay for the plan. People who buy life insurance policies online have to pay lower premiums as compared to offline policies.

Occupation:The nature of your work is an important factor that influences the premium amount. Certain occupations like shipping and mining are considered more dangerous as compared to jobs in services industries. The insurance premium rises with the risk profile.

Processing life insurance claim is a transparent and smooth process with Canara HSBC Oriental Bank of Commerce Life Insurance.

In case of the death of the life insured, the nominee will have to intimate the company by filling a Death Claim Form and sending it to the nearest branch office.

Once the form is received, the claim is registered by the insurer.

After the registration of the claim, the company will send the claims pack along with the related forms such as physicianâ s statement form and employer certificate that need to be filled.

Along with the duly filled forms a few documents such as original [policy document, death certificate, copy of bank passbook, hospital or treatment records, photo identification and address proof have to be provided.

The claim is processed on the submission of relevant documents. Once the documents are verified, the claim amount is released post all due diligence.

Household expenses rise with age. The cost of children's education increases along with other lifestyle expenses. The iSelect term plan offers an option to increase the cover according to the life stage. If opted, the insurance cover increases by 25% at every 5-year terminal till the 20th policy year.

Even though a life insurance policy is bought to protect your family in your absence. There are chances of the claim being rejected due to several factors.

False information: If the policyholder provides false information or conceals important information while buying the policy, the insurer has the right to reject the claim after his/her death.

Type of death: Deaths due to suicide in first policy year, intoxication or pre-existing disease is not covered under life insurance.

Premium payment: The payment of premiums on time is of utmost important to avail the benefits of life insurance. Life insurance policy may lapse on the failure to pay the premiums

Nominee details: An insurance company can put the claim on hold if the nominee details have not been filled or not been updated by the policyholder.

Suicide: If the life insured commits suicide within 12 months of buying the policy, the insurance companies generally pay 80% of the total premiums paid.

Buying life insurance online is not only safe but a better option. Online life insurance policies have lower premiums and the individual is not required to visit the insurer's branch or a bank. Online insurance policies also offer higher benefits. Customers should, however, buy online policies only from credible insurers and should check for SSL certificate on the website to ensure that the website is legitimate.

The cost of life insurance policies varies depending on factors like age, gender and occupation. The average cost of life insurance plans, especially term plans, is very low compared to the amount of coverage offered.

An individual is allowed to have multiple life insurance policies. People opt for more than one policy to increase the cover or avoid claim rejection. In case of multiple policies, even if the claim is rejected by one insurer, the beneficiaries may receive the benefit from a different insurer.

Life insurance policies are of different types. In the case of unit-linked or endowment policies the policyholder receives the maturity benefit at the end of the policy term. However, in the case of term insurance plans, there are no maturity benefits. The death benefit is only paid out after the death of the life insured.

When you buy life insurance, the insurance company asks for the nominee details. Only the person named as the nominee in the policy can cash out a life insurance policy in case of death of life insured.

A life insurance policy is generally taken for a specified period. After the policy duration of a term plan gets over, the policy simply terminates and ceases to exist. However, in the case of unit-linked plans or endowment, you can use the policy as a tool for retirement planning and the accumulated corpus is used by the insurer to pay you monthly amounts for your entire life.

If a policyholder purchases a term plan for 25 years and dies during the policy term. The family receives the death benefit. In the case of iSelect term plan, the policy provides four payment options to the beneficiaries. If the regular payment options are chosen the policy works as a source of regular income.

It is a popular misconception that life insurance is only for accidental deaths. A term life insurance plan like iSelect also covers terminal disease along with death. A terminal illness cover is important as health insurance pays only for the cost of treatment and hospitalization, but a terminal illness cover pays you a lump-sum amount which takes care of other expenses. On the other hand, unit-linked policies such as Invest 4G cover death and also provide decent returns for other financial goals such as buying a house of child's education.

It is ideal to buy life insurance in your early 20s because it’s is the time when people have just started with their professional life and so there are lesser responsibilities and financial liabilities to take care of. Also, if you buy life insurance at this age, you will be paying relatively lower insurance premiums since it’s a due fact that mortality rate in case of young people is low. And that is why insurance companies offer lesser premium rates to younger people as they think that they are most likely to be fit and healthier with less chances of filing a claim in future.

Once you have cancelled your life insurance policy, you will instantly lose your life insurance cover. Afterwards, your insurance company will get in touch with you and ask for valid reasons regarding the cancellation of your policy. In case you cancel your life insurance policy within the grace period, i.e. 15 to 30 days, depending on your insurer, then insurance company will reimburse the premium amount paid by you. But, no refunds will be paid to you if the policy is cancelled after the grace period.

Yes, you can take life insurance under Married Women’s Property (MWP) Act, 1984 only if you are a married man and a resident of India. Buying a life insurance plan under MWP Act would be helpful in saving your family’s financial well-being when you are not around. As per this policy, only wife and children would be eligible to receive the death benefits. You can also buy a policy if you are a widower or a divorcee. However, in that case, you can give your child’s name as your beneficiary. It is very simple to buy a life plan under MWP Act. All you need to do is to fill up an MWP addendum while purchasing an insurance policy.

Yes, there are different payment options for you to pay premiums. Here’re some of them

    1. Regular premium payment option – This premium payment option allows you to pay premiums equal to your policy term either monthly, quarterly, half yearly or annually.

    2. Single payment option – Through this premium payment option, you can pay the lump-sum amount in one single payment.

    3. Limited payment option -In this premium payment option, you can pay premiums for a specific period of time less than policy term either monthly, quarterly, half yearly or annually, but benefits of insurance can be enjoyed for a longer period of time.

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