Dilshad answers queries in Hindu Business Line.
Are Debt funds right for you? Why are they called fixed income products when they don’t provide a fixed return?
Prenuptial agreements: building a safety net around assets – MINT Newspaper
http://www.livemint.com/Money/ngLavHhlUeaCqDN2xoqa2K/Prenuptial-agreements-building-a-safety-net-around-assets.html – 18 January 2016
A and M have been friends and dating each other for the past one year. They decided to tie the knot in December 2015. And being financially savvy, they also decided to sign a prenuptial agreement before marriage, to avoid any dispute over division of assets in the future, in case of a divorce.
While everyone hopes that the union of marriage be life lasting, the cold reality is that even in India, the level of divorce has increased. In the US, according to the Centers for Disease Control and Prevention, more than half the marriages end in divorce, according to 2012 statistics. According to one estimate, in India, while the divorce rate was just 1 in 1,000 a decade back, it is 13 per 1,000 now—still low, but growing at a steady pace. To protect oneself from undue harassment over ownership of assets, a prenuptial agreement must be in place. But in India, these are considered taboo, and are not openly discussed.
A prenuptial agreement is a contract between two individuals who are about to get married, detailing the assets, liabilities and financial resources held by each, and an equal division of assets, should a divorce occur.
The agreement should detail the division of property, financial assets, liabilities as well as division of personal possessions clearly, and should be notarised by independent lawyers for each party. Further, it should be fair and duly acknowledged by both parties.
In India, however, prenuptial agreements are neither legal nor valid, since marriage is not considered a contract in most faiths. It is a religious bond between husband and wife, and prenuptial agreements need the contract to be made valid under the Indian Contract Act, 1872. In some religions, however, marriage is considered a contract and, therefore, the laws applicable are different and need to be approached appropriately.
Many countries, including Canada, France, Italy, and Germany have matrimonial regimes. Also called marital property systems, these are systems of property ownership between spouses providing for the creation or absence of a marital estate, and if created, what properties are included in that estate, how and by whom that is managed, and how it will be divided and inherited at the end of the marriage. In the UK, as of 2007, prenuptial agreements are enforced (although there have been some exceptions).
I had called one of Mumbai’s top divorce lawyers to understand whether the richer section of India chooses to have prenuptial agreements. The lawyer mentioned that roughly 10% of marriages, mainly in the affluent socio-economic group, opt for these.
Till just about five years ago, such agreements were almost unheard of in India, but are now on a rise, mostly among the more affluent classes. One could attribute the change to a growing number of divorces in the country.
What makes these agreements unique for many Indians is that couples forgo their rights to traditional Hindu laws in order to make sure that their individual finances are safe. Recently, Minister for Women and Child Development, Maneka Gandhi, had spoken to D.V. Sadananda Gowda, the Minister for Law and Justice, on the need for prenuptial agreements to be made mandatory before every couple ties the knot. This is because there are many women from lower socio-economic backgrounds, who fight endless battles in court over marital ownership of property and assets post-divorce. Alimony somehow seems inadequate and is decided by the husband on a case to case basis, and may be insufficient to meet the cost of living needs of the woman post-divorce.
Prenuptial agreements can be a good starting point discussion between the to-be bride and groom, so that both are fully aware of the family assets, liabilities, business ownership and heirlooms, that each family owns, and how the ownership distribution would be in case of a divorce.
These agreements can protect one’s financial stability. For instance, in many family-run businesses in India, the manner of holding of shares and ownership are structured such that the business is closely held to avoid outside intervention. Most of the management decisions are taken by the head of the family-run business, without considering democratic decision making in the process.
Discussion about division of property in family run businesses and Hindu Undivided Families (HUFs) should be clarified by both the boy and the girl through open and transparent discussions.
I see little reluctance to discuss such agreements among the affluent family run business class clients.
To be open, transparent and clear on the mode of holding of assets in a family-run business also forms the basis of discussion among investors. Estate planning and future outlook of the business along with distribution of assets are among other issues discussed at the financial planning stage itself.
A prenuptial agreement also protects the children’s future, in case of separation. Most couples work towards the common benefit of their children’s needs such as education, marriage, and their day to day needs. However, some families would prevent transfer of assets to children so that the other spouse is not benefitted. A prenuptial agreement can prevent such anomalies and decisions.
Sometimes, all clauses may not be covered in a prenuptial agreement, since circumstances change and so do financial conditions. This could further create a rift between the couple in the future.
In conclusion, it is always better to tread on the path of financial ownership and obligations when the mind is calm. Make a prenuptial agreement earlier, rather than when the mind is in a state of turmoil and emotional suffering in the event of a divorce.
Marriages are made in heaven, but divorces are created on earth, and we cannot shut our minds to this reality.
Dilshad Billimoria is a certified financial planner, and director, Dilzer Consultants Pvt. Ltd.
Taxation on Mutual funds and tax offset provisions – 17 Nov 2015
Income tax has its own set of complex rules and is vast and varied. One such area of complex rules is that of capital gains and related tax rules. Capital gain is the gain one makes from sale of a financial or non financial asset. Financial asset can mean equity shares, mutual funds, bonds, exchange traded funds, gold bonds and non financial asset would be real estate. Capital loss is the loss one makes from sale of financial and non financial assets.
Read more at: http://www.moneycontrol.com/news/mf-experts/taxationmutual-fundstax-offset-provisions_4198721.html?utm_source=ref_article
Should you review your insurance after home purchase? Dilshad writes in moneycontrol – November 16, 2015
Financial plans and the suggested course of action are based on the facts pertaining to you. When a financial advisor hands over a financial plan to you and suggests buying an insurance cover, the value of that insurance cover is based on factors such as your current income, expenses, goals, assets, liabilities and commitments.
Dilshad makes a Financial Plan for Rajat Mishra- Outlook Money – November 2015
Festival Loans- Is it really a sweeter? Dilshad comments in Outlook Money – November 2015
Are you under insured- find out how much insurance cover you really need- Dilshad comments in Economic Times – Wealth 26 October 2015
When Aegon Religare Life Insurance began operations in India in 2008, its marketing campaign focused on the problem of underinsurance in India. In the past seven years, pure protection term plans have become more popular but a large number of Indians are still afflicted by KILB (Kum Insurance Lene ki Bimaari). A recent study by global reinsurer Swiss Re estimates that for every $100 (approximately Rs 6,500) needed for protection, the average Indian household spends only $7.8 (Rs 507), leaving a massive protection gap.
This gap is largely because Indians prefer to invest in endowment insurance plans or Ulips instead of buying pure protection term plans that have no maturity value. Only 14% of the 4,488 respondents to a recent survey by Ficci and Canara HSBC OBC Life Insurance had bought term insurance. An overwhelming majority (64%) had taken traditional plans and 19% had invested in Ulips.
If you have bought an insurance-cum-investment plan, chances are that the protection element is not big enough to meet this basic objective of buying life insurance. Traditional plans fall between the two stools of good returns and adequate life cover—they offer poor returns and very low life cover.
Meet Rahul Barman, a telecom professional who pays almost Rs 1 lakh a year for three traditional plans that combinedly cover him for Rs 10 lakh. That’s quite inadequate for a person who earns Rs 6.4 lakh a year, is the primary breadwinner of the household and plans to start a family next year.
Rahul Barman, 30 yrs, Faridabad
Dependents: Wife (26) and elderly mother
Annual income: Rs 6.24 lakh
Monthly expenses: Rs 32,000
Outstanding loans: Nil
Recommended insurance cover: Rs 80 lakh
Existing life cover: Rs 10 lakh
Additional cover required: Rs 70 lakh
Cost of additional insurance: Rs 650 per month
Important tip: Though the required insurance is low right now, it will go up when the couple start a family sometime next year.
How much cover you need
An adequate life cover ensures that the family goals are not hampered due to the breadwinner’s death. “Insurance should be taken to ensure goals are met on the target date, and the family does not have to bear financial loss, in addition to emotional loss, in the case of resources planned for a particular goal being insufficient to meet the goal expenses,” says financial planner Dilshad Billimoria.
So, an individual must have an insurance cover that can help replace his income if something untoward happens to him. The life insurance cover should be big enough to generate income that can take care of the expenses of the family till his dependents are self-sufficient.
Web aggregators help you compute the ideal life cover taking into account your income, dependents and liabilities. However, you need to go beyond these calculators to ascertain the right sum assured. One broad approximation is about 6-7 times the annual income of the individual.
But this does not always reflect a person’s insurance need. If he earns Rs 12 lakh a year (Rs 1 lakh per month) but has taken a home loan of Rs 50 lakh, he needs more cover than the Rs 72-84 lakh suggested by this approach. Pune-based Nagesh Pathak has an outstanding home loan of Rs 51 lakh. His life insurance cover must be big enough to settle this debt. On the other hand, if an individual also has other assets and investments, his insurance needs would be far lower.
“A simple rule of thumb would be 15 times gross annual income for those below 40 and 10 times for those above 40. To play safe they can add approximate current value of all goals to this figure,” says financial planner Suresh Sadagopan.
Other more sophisticated means of arriving at the ideal figure include human life value (HLV), need analysis and income replacement methods, amongst which the former is the most commonly used one.
Nagesh Pathak, 36 years, Pune
Dependents: Wife (33) and Daughter (6)
Annual income: Rs 10 lakh
Monthly expenses: Rs 24,000
Outstanding loans: Rs 51 lakh
Recommended insurance cover: Rs 1.5 crore
Existing life cover: Rs 5 lakh
Additional cover required: Rs 1.45 crore
Cost of additional insurance: Rs 1,350 per month
Important tip: At Pathak’s age, the premium will not be too high. If he delays the decision by 3-4 years, the premium will shoot up after he crosses 40.
How to work out human life value
The required insurance is equal to the present value of all future incomes that the life assured is likely to earn minus the amount of expenses, tax liability and existing insurance cover. For example, let’s assume a 45-year-old sole breadwinner earns Rs 5 lakh a year. His personal expenses, including taxes paid, amount to close to Rs 1.25 lakh and he is currently paying an insurance premium of Rs 20,000.
“His family is thus left with Rs 3.57 lakh, which is the amount they would need to maintain their current lifestyle,” says Billimoria. Assuming inflation of 8%, the human life value will be Rs 30.56 lakh, which is the minimum cover he needs to buy.
Apart from this, the insurance should also provide for crucial financial goals, such as a child’s higher education and marriage. These are one-time expenses and their present cost should be taken into account while calculating the cover. The table on the left shows you how to calculate your insurance needs.
What online term plans offer
While a large number of Indians continues to invest in insurance-cum-investment plans with an eye on tax benefits, the advent of online term plans has slightly tilted the scales in favour of protection plans. These online policies are 20-30% cheaper than their offline counterparts.
Many insurers are now selling term plans only through the online channel. You can buy these covers directly from their websites or through aggregator portals.
The premium of these policies is so low because there is no intermediary and because the online buyer is perceived as a lowrisk customer. He is educated, earns reasonably well, is concerned about protection and is likely to have health insurance as well. In case of a medical emergency, he may be able to quickly reach a hospital and access specialised medical treatment. These factors combine to lower the risk for the insurer.
Some companies such as HDFC Life also offer the monthly premium facility so it becomes easier for the buyer. A 30-year-old man will have to pay only Rs 900 a month for a cover of Rs 1 crore for 30 years. At 35, the premium is slightly higher at Rs 1,070 per month.
However, go for the monthly premium option only if you are disciplined about your finances. When you purchase online, there won’t be any agent running after you for the renewal premium. If you are the forgetful sorts and don’t pay when the premium is due, your policy can lapse. Once this happens, you will have to buy afresh at a much higher premium. Companies offer a grace period of 15-30 days for late payment of premium but don’t bank on it. Missing a monthly premium could result in the policy lapsing and you losing the insurance cover.
Agents try to dissuade online buyers, saying such policies don’t get good service from companies. This is not true. The online customer can expect the same quality of service from the insurance company as any other customer. When a claim is processed, there is no differentiation between a policy bought online and one purchased through an agent. Besides, all insurance companies have to comply with the rules laid down by the insurance regulator Irdai.
Choosing the right term plan
Term plans are no longer the plain vanilla products they used to be till a few years ago. Insurance companies have crafted innovations that suit various customers and situations. In some plans, the insured amount goes up to account for inflation.
In others, the payout is not given as a lump sum but staggered over 10-15 years. There are also plans where you get back the entire premium paid at the end of the term. However, not all of these innovations are good for the customer. A plain vanilla term plan that pays a lump sum amount on death is perhaps the best way to insure yourself.
Have you been mis-sold an insurance policy- Here’s what you can do- written by Dilshad Billimoria in Economic Times – 15 Sept 2015
What one can do with unwanted and mis-sold insurance policies – By Dilshad Billimoria
Sometimes customers get misguided when buying an insurance policy. Here are some of the options you can explore if you have been sold a bad or unwanted insurance policy.
Let us examine some basic types of traditional insurance policies from the point of view of what corrective measures one can take if one has been mis-sold one of these.
Basic types of traditional insurance policies include:
1. Endowment Plans.
2. Money Back or Cash Back Plans.
3. Retirement / Annuity products.
4. Unit Linked Insurance plans.
An investor realises he has been mis-sold a policy when:
— It does not meet the objective for which it was bought.
— Returns don’t match what is stipulated in the policy document.
— The maturity benefits don’t meet the requirements of the policyholder.
In such cases the investor must understand what is the best way to limit the loss from such a policy. If the free-look period of the policy is not over then the buyer can immediately return the policy and ask for a refund. Normally, the refund would be made minus certain charges such as administrative costs etc. However, if the free-look period is over then the investor has to look at other alternatives.
In such a case (after the free-look period is over) remaining options before the investor include:
a) Let the policy lapse
b) Surrender the policy
c) Make it a paid up policy.
d) Take a loan against the policy.
Let us examine these options in detail.
A policy lapses if the policy holder stops paying premium anytime before the completion of three years or the period specified for this purpose in the policy. In case of traditional insurance policies, excluding ULIPs, this period is typically three years. Once a policy has lapsed the risk cover ends and no amount is payable to the policy holder.
Consequently, investors must keep a note of due dates of premium payable to prevent their policies lapsing. If premiums are not paid even within the grace period, the policy lapses and the only option is to reinstate the policy if one wants to continue it. Reinstatement of a policy means revival of the policy benefits. To effect this, the insurer will require the policy holder to pay the arrears of premium along with penalties and interest.
Letting one’s policy lapse is one of the options one can look at if one has bought a bad policy. More importantly, with decreasing costs of mortality due to reduced insurance costs and better claim ratios, it may be better to buy a new policy rather than reinstating an old one, although the maths has to be worked out on a case-to-case basis.
Surrendering the policy
Surrendering the policy means stopping payment of premium and cancelling the policy contract before the stipulated maturity date. For a policy to be eligible for surrender i.e. to have acquired a surrender value, premiums should have been paid for at least 3 years in case of traditional policies excluding ULIPs, or as specified in case of other policies. In case of traditional policies the amount the policy holder gets on surrender is called the cash value. This cash value is calculated as follows: First, the first year’s premium is subtracted from the total of premiums paid till date of surrender, then the resulting amount is multiplied by 30%. To this, bonus accrued, if any, till date, is added to arrive at the cash value payable. The longer the time period for which one pays premiums and the closer one is to the actual maturity date of the policy, the higher is the cash value received. If one surrenders the policy in the initial years, one would not even receive the principal paid fully.
For example, say you have taken a policy requiring annual premium payments of Rs 20,000 with a sum insured of Rs 5,00,000, and the policy tenure is 20 years. If you plan to surrender this policy after paying premiums for 5 years, you will receive only (Rs 20,000*4 = Rs 80,000)*30%= Rs 24,000 (assuming no bonus has accrued on this policy till date) while you have paid a total premium of (Rs 20,000*5) = Rs 1,00,000. Hence this is a loss-making option.
For Unit Linked Policies, surrender is possible only after 5 years at 100% of fund value. This means surrender is not possible at all before 5 years. As per proposed IRDA regulations, ULIP products need to build a reserve from premium collected every year in order to provide the customer a higher surrender value in case of pre- mature surrender before 5 years. This is aimed at protecting investor interests.
As per these proposed guidelines, insurance companies will have to set aside a portion of the annual premium paid for ULIPs, as a discontinuance charge meant to be used to meet the costs incurred by the insurer in case of premature surrender before 5 years.
Paid Up Value status
Once premiums have been paid for a minimum defined period (typically 3 years in case of traditional policies) if subsequent premiums are not paid, the sum assured is reduced to an amount equal to ( the total premiums paid/ total no. of premiums that were required to be paid) multiplied by the sum assured. This reduced sum assured is called the paid-up value of the policy.
It sometimes happens that one pays premiums for a policy for a specific period and then realises it does not meet one’s objective. In such as case, if the policy has acquired a paid-up value you can stop paying premiums on the policy and let it continue to maturity at a reduced sum assured and maturity benefit. You will then receive a reduced sum assured and maturity benefit on maturity of the policy.
This normally happens when large sum assured and consequently large premium policies are bought and later the investor realises that the returns would be poor on maturity.
Taking a loan against a policy
As surrender of a policy, even if mis-sold, would lead to a heavy loss, one can meet one’s funding needs by taking a loan from the insurance company against the cash value accumulated in a policy. As long as the interest cost of the loan is less than the yield from the policy you can use the loan to fund the future premium payments and finally encash the policy on maturity thereby avoiding a loss. This is because the return on the policy would recompense you for the interest cost of the loan. The percentage and quantum of loan offered on policies differs from one insurance company to another. Normally for unit linked insurance plans, loan against policy is only available when the entire investment is in debt / GOI instruments and normally a loan amount of only 60-80% of the market value of the policy is given.
The advantage of taking a loan against a policy from the insurer, is that rates of interest are normally lower than what banks charge and loan can be generally taken for the tenure of the policy.
The author is a Certified Financial Planner, Dilzer Consultants Pvt Ltd (SEBI Registered Investment Advisor).