Latest Expert Exchange Queries

Make your inventory and invoicing software GST Ready from Binarysoft info@binarysoft.com
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: VAT Audit :: cpt :: ACCOUNTING STANDARD :: due date for vat payment :: form 3cd :: list of goods taxed at 4% :: TAX RATES - GOODS TAXABLE @ 4% :: TDS :: ARTICLES ON INPUT TAX CREDIT IN VAT :: articles on VAT and GST in India :: ACCOUNTING STANDARDS :: VAT RATES :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: empanelment :: Central Excise rule to resale the machines to a new company
 
 
« News Headlines »
 Know how you can claim return of income in Form 26 AS case
 What you must know for tax filing this year
 How to file tax return if you have two Form 16s
 10 things you should know about Form 26 AS
 How to file income tax return without Form 16
 How to rectify income tax returns
 Income-tax (21st Amendment) Rules, 2017
 Deadline for filing income tax return nears; here are 10 common mistakes that you must avoid
 All you need to know about form 26AS
 How to file income tax return?
 7 changes that affect income tax return filing this year

Start investing early to reap the riches later in life
June, 24th 2008

Sameer felt like he was living a dream, when at 23, he got a campus placement in a multinational company after completing his management studies. Being the only son of well-to-do parents, he didnt have any immediate family obligations and started spending with lan. Clearly, saving money was the last thing on his mind.

Life went on, until he met Prakash, an old friend who had decided to make a career out of the booming insurance sector. Minutes into their meeting, Prakash started canvassing the merits of life insurance, listing out benefits such as convenience, safety and the various sops offered by existing policies. He told him how an early start would give him an edge, considering the mortality costs are lesser and hence, the premium, too. Prakash insisted that his friend buy a term cover, which is the cheapest form of insurance, and then think of investing in insurance.

Sameer saw sense in whatever he said, but remained undecided on whether he should opt for a cover right away or wait till he had dependents.

A senior colleague advised him to seek professional help from Vishwas, a well-known financial planner. When Sameer told him of his dilemma and laid out the comparative tables provided by Prakash on the premiums payable now and five years later, Vishwas smiled and agreed that this was a common dilemma that often went unclarified.

Vishwas held that making available a lump sum to ones dependents to help them overcome the financial loss in his absence was the right perspective to be adopted for life insurance. According to him, Sameer required no life insurance as he had no dependents and that the ideal time for the young MBA to buy a cover would be when he was married, which would be 4-5 years later.

But, what would be the cost of deferring his insurance cover by so many years?

The financial planner laid down a table for easier understanding.

Vishwas pointed out that the decision to defer life insurance by five years would cost him Rs 58,500 for a cover of Rs 25 lakh and Rs 1.17 lakh for a cover of Rs 50 lakh (see table).

Isnt that a big amount to lose? asked Sameer.

On the face of it, yes. But, you can make it up by starting to invest now, said Vishwas. Let us say you put the amount you would have paid as premium, i.e. Rs 6,250 per year, for the next five years. The savings account would fetch you 3.5% per annum interest today. At this rate, your investment of Rs 31,250 would have grown to Rs 33,515 at the end of five years. At that point, you take the insurance policy for a cover of Rs 25 lakh and stop putting money in the savings account. In other words, you let the Rs 33,515 balance in your savings account compound for the next 30 years (the tenure of the policy) at an assumed 3.5% per annum. At the end of your policy period, this amount would have amounted to Rs 94,000, well over the extra Rs 58,500 you pay for starting the policy late.

Similarly, you can accumulate Rs 1.88 lakh by depositing Rs 12,500 per year for five years in the savings account and letting it compound thereafter. That would be well in excess of the Rs 1.17 lakh difference you will pay by starting the policy five years hence.

I am sure you understand this is an extremely conservative option. The corpus would be much higher if you swapped the savings account with a public provident fund account, which guarantees a return of 8% per year now. By the time your policy matures, you would have accumulated Rs 3.69 lakh and Rs 7.38 lakh, respectively, for the two premium amounts mentioned earlier.

There are options galore, really. A recurring deposit of Rs 650 per year for 35 years, at an interest of 5% per annum, would accumulate Rs 58,750. Put the same amount in a PPF account every year and you accumulate Rs 1.12 lakh at the end 35
years, Vishwas explained. The returns would be exponential if you invested in equities for that long a timeframe.

This was an eye opener for Sameer. The discussion on insurance had somehow taught him the value of investing early in life so as to reap the benefit of compounding, said to have been described by Albert Einstein as the the most powerful force in the universe.

Note: The premium and the coverage figures used above are purely for representation purposes. The premium quotes have been obtained from the website of a leading life insurance company.

The writer is a certified financial planner and full member of FPSB India. The views are those of the writer and do not represent those of FPSB India. Readers are advised to consult their professional financial planner for advice.

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Article Management Solutions System Article Management Software S

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions