Today most of the people will have their financial plan in place to secure their unforeseen future. Most of the earning members in the family does have an insurance cover provided by their respective employers which can even be extended for the family members by paying some premium amount.
What to do if something unexpected happens to the earning member of the family who has taken up the financial responsibility of the house? Is it possible for an individual to build enough safety for the near and dear ones which gives them financial security even in their absence? To avoid a situation wherein the family members may have to face a shortage of funds, it is better to have adequate insurance cover to keep the family members safe and secure.
One of the common questions, which strikes an investor when it comes to financial planning is whether to go for insurance or mutual funds. It is better to opt both instead of choosing one as both of them come in handy to create an effective financial plan which helps to secure the future of the near and dear ones in the long run. Apart from this, one can even include assets like real estate, gold to further enhance the safety net.
Now let's first understand the meaning of insurance and mutual funds in brief.
What is Insurance?
Insurance is a contract which protects insurers from financial loss. It forms a part of risk management and is used primarily as a hedge against the risk of loss or contingency. A firm which provides insurance is known as insurer or insurance company and the person or entity who buys insurance is known as a policyholder or insured.
Key Takeaways of Insurance
- Insurance is a kind of contract in which the insurer will compensate another against the loses from specific contingencies.
- The key components which make up the insurance policies are premium, policy limit and deductible.
- Types of insurance policies include - Health, Life, Auto, Homeowners and so on.
What is a Mutual Fund?
A mutual fund is a type of investment tool which is made up of a pool of money which are collected from various investors to invest in securities like equities, debt, money market instruments, other assets. These funds will be operated by the professional money managers who will allocate the fund's assets and attempts to produce capital gains for investors.
The portfolio of a mutual fund is structured in a way that it will match the investment objectives of the investor to realize the financial goal.
Key Takeaways from Mutual Fund
- The mutual fund or MFs are a type of investment vehicle which consists of a portfolio of equities, debt and other securities.
- Mutual funds charge a fee (annually) and in some cases, commissions will be levied which will affect the overall returns of investors.
- They give the small or individual access to the investors to diversify their investment through professionally managed portfolios at a low price.
- Mutual funds are segregated into several kinds of categories which represent the kind of securities they are invested in, the investment objective and the type of returns investors seek.
How much Insurance Cover should an Investor have?
After understanding their general meaning and features let's check how much insurance cover should an investor have?
One of the important questions which arise in the mind of an investor at the time of chalking out financial planning is how much insurance is required to cover the family under certain unforeseen circumstances.
An investor has to consider certain factors before arriving at the appropriate insurance coverage for the family:
- Financial Liabilities - This one will include everything under the roof be it a car loan, home loan, even sum up (any deferred payments)
- Existing Annual Income - The main objective is to have an amount of coverage which is adequate to help generate sufficient income which will replace the existing annual income.
- Financial Goals - Children's education and marriage, purchase of a house and so on.
- Age of the Investor - A young investor will require a higher coverage as compared with the one who is aged as his/her responsibilities and liabilities would have been taken care of.
Please Note: Before arriving at the final figure do deduct the corpus which one already has in the form of savings in FDs, mutual funds, any other form of investment.
In most of the developed economy, experts believe that one should have an insurance cover which is equivalent of 7 - 10 times of their annual income as an insurance cover for the family.
In a country like India, even the inflation factor has to be included to arrive at the number. That is as the rate of inflation in India is higher when compared with developed economies, it is better to have a cover which is equivalent to 10 - 15 times of the annual income of an individual plus other outstanding liabilities (if any).
For Example: If a person earns Rs 10 lakh per annum, then he/she should have a cover which is between Rs 1 crore to Rs 1.5 crores plus liabilities (if any).
As we all are aware that insurance premium has to be paid every year, it is important to give weight-age to one's ability to pay premiums year on year while determining the duration of the insurance coverage. So continue to invest in mutual funds for reaching financial goals but do not forget to purchase adequate insurance to cover your life.
Every individual will have their own set of predetermined financial goals and objectives so it is better to consult a financial planner or good adviser who will customize your financial goals as per your aspirations.
About the Author
Archana is a Content Writer at GoodReturns. She has been writing articles related to investment planning and personal finance for more than two years.