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How much Insurance do you really need? Also the methods of calculating insurance needs for your family.
Income Replacement Value
Insurance needs = annual income * number of years left for retirement.
Let’s say your annual income is Rs 10,00,000. And you are 45 years old with 15 more years for retirement.
In this case your insurance cover equals Rs 10,00,000 * 15 = Rs 15000000.
Another way in which income replacement works is to multiply the annual income by 10 (also known as Income Replacement Multiplier).
Human Life Value
HLV is defined as the present value of all future income that you could expect to earn for your family’s benefit. It also includes other value you expect to contribute, less personal expenses, life insurance premiums and taxes through your planned retirement date.
Alok at 40 yrs of age and his gross income is 10 lacs. He pays taxes of Rs 300000and his personal expenses are 120000per annum, he pays for an ins Rs 15000 per annum/
Surplus left for family isRs 565000 per annum or Rs 47000 per month
Assuming ret at 60 years in case of death he has 20 years left
565000*10.6=59.89 or 60 lacs
Need based method of Insurance
Insurance analysis of couple
OS Loans and Liabilities at actuals + (Add)
Goals- Child Edu/ Child Marriage/ House purchase/ All Heads of Expenditure which family will need to maintain the same lifestyle(PV of expenses till spouse LE)= Total INSURANCE NEED
TOTAL INS- EXISTING LIFE COVER- LIQUID ASSEST= INSURANCE COVER NEEDED AFTER CONSIDERING EXISTING RESOURCES
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What is debt refinancing and how will it help in reducing your EMI?
Nowadays, one of the most frequent query which we face from our clients is, how can I restructure my debts, what are the different ways to reduce my monthly loan commitments, Currently my loan interest is on a higher side how can I reduce it etc. Actually, the answer for all these questions is the same – debt refinancing. But, what is debt refinancing?
The “refinancing” is a term which most of us Indians are less familiar with. Most of us tend to carry our loans or investments till the end of their term and are reluctant to change it. In the current era of frequently changing interest rate, refinancing can revolutionize your debt planning. The recent regulatory changes in interest calculation for debt have also impacted investors to explore more on debt refinancing or debt restructuring.
The debt refinancing is the process by which you replace your existing loan with a new loan, with new terms and conditions prevailing in the current market condition. The new loan pays off the current debt, so the debt is not eliminated when you refinance. However, the new loan will have better terms or features that improve your finances.
The process goes like this
- You have an existing loan that you would like to improve in some way.
- You find a lender with better loan terms, and you apply for the new loan.
- The new loan pays off the existing debt completely.
- You make payments on the new loan with new conditions until you pay it off or refinance.
The refinancing may be a time consuming process and most of the times, it comes with a fee. So, why go through the process? Let’s have a look at the several potential benefits to refinancing.
Benefits of refinancing
Save your money
The common reason for refinancing of debt is to save money on the interest cost of your debt. The loans which were taken at a time when the interest rates were on a higher side, will fetch a higher cost when the current interest rate is much lower than that. By doing refinancing, you can save that interest rate difference which will reduce your loan burden.
For example, Mr.Ramkumar has taken a home loan for his new house in Bangalore on 01st July 2008 the following are the details.
After ten years, If Mr. Ramkumar goes for a loan refinancing the following will be the benefits.
By refinancing his home loan, Mr. Ramkumar has saved Rs.4,91,198 on the total interest for the next 10 years’ term.
Reduce your financial commitments
The other benefit of refinancing is that it leads to lower required monthly payments. The result is easier cash flow management and more money available in the budget for other monthly expenses. If we look at Mr. Ramkumar’s case, by refinancing, he gets the following benefits:
By refinancing his loan, Mr. Ramkumar has reduced his EMI by Rs.4093.08 which will give him a total benefit of Rs.4,91,170 during his whole tenure of the loan. The amount he has saved on the EMI can be reinvested and he will benefit from that investment growth too.
Some people also increase the tenure of the new loan as the principle of the loan is lower than the original loan. This will help them in reducing the EMI further low, sacrificing a longer tenure.
Increase the limits rather than availing a different loan on higher interest.
The debt refinancing helps to increase the limits of the existing loan at the time of requirement rather than going for a new loan with higher interest. The best example is to refinance the home loan to a higher limit rather than going for an auto loan or a personal loan which have higher interest rates than home loan. This helps to save the interest cost. For eg:- the prevailing interest rate for home loan is 8.80% whereas the interest rate for auto loan is 9.2% to 9.7% and personal loan 12.3% to 14.9%.
Helps in consolidation of debts
If you are having multiple loans, it is pretty difficult to manage too many number of loans and it is very hard to remember the EMI dates if the number increases. The debt rebalancing helps to consolidate different loans in to one and reduces your effort of managing too many loans at a time. This can also help you to streamline the interest of different loans and get the benefit of interest cost reduction.
Shifting from a high interest loans to a lower one
The best way to know one’s personal finance management capability is to look at his ability to manage his debt. Nowadays, credit card and other fast credits like personal loans etc. are the integral part of an individual’s finance. Most of the people who handle this type of credit do not know the consequence of missing a monthly payment. The biggest example is a credit card which charges a higher rate of interest which can go up to 30% in a year along with the other charges when you miss an EMI. The loan refinancing helps an individual to shift this outstanding to a less interest loan and help him to repay it on a longer term and thus helps him to align his finance management properly.
Change your loan type
There are two types of interest systems prevailing in the debt market – the fixed rate and floating rate. In a fixed rate system, the interest rate will be fixed till the end of the term of the loan and in a floating rate system, the interest rate will be changed according to the prevailing interest rate. Both these systems have their merits and demerits. The fixed rate will always be higher than the floating rate at the time of taking the loan. The fixed rate will be more beneficial in increasing interest scenario where as the floating will be beneficial in reducing scenario. The refinancing of the loan helps you to shift from one type of interest system to another and vice-versa without paying any extra charges.
Helps in tax planning
The refinancing also helps you in your tax planning too. In India there are certain tax benefits for some categories of loans especially home loans, where as some loans do not have any tax benefit example an auto or a personal loan. We can do our tax planning by shifting the loans to a tax benefit loan and thus avail the benefit of tax planning.
The refinancing will benefit an individual, when there is a difference between his loan interest and the current interest rate. Sometimes, the process of refinancing may incur cost and further documentation. In such cases, the individuals can negotiate with the bankers on the charges. The best time to do the refinancing is the end of every financial year when the banks usually come up with lot of fee waivers. Even if the refinancing is done there will not be any changes in the debt balance, collateral and mode of payments.
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