3. Protecting Your Wealth.pptx finance

finance class

1. Abhinav Rajverma Protecting Your Wealth

2. Topics: Protecting Your Wealth Life Insurance Health Insurance Property Insurance Liability Insurance 2

3. Introduction The need for both Life and Health Insurance arises from the principle Protect Yourself Against Major Catastrophes . Health Insurance Protection to self and family against financially devastating medical bills Life Insurance Protection to family if one dies 3 Planning and Control If you plan carefully enough, you can control your finances even after your death.

4. The Importance of Insurance 4 Most of us avoid thinking about and planning for our deaths – most of us do not seek out a life insurance policy. When you consider your need for insurance , you need to keep in mind its purpose . An insurance policy spells out what losses are covered, what the policy costs, and who receives payment. Health Care Is Expensive No incentive to economize Medical care extremely sophisticated – drugs development High malpractice insurance costs

5. Life Insurance 5 Life Insurance is sharing financial consequences of risk by paying a premium (risk pooling). Nominee – beneficiary designated to receive the proceeds Make no sense without a spouse/partner or dependents You probably need life insurance if: You have children You have dependents You own a business – business debt Need Life Insurance? How Much Do You Need?

6. How Much Do You Need? 6 Earnings Multiple Approach Normally, five to fifteen times your gross salary is recommended Most insurance companies will not insure an individual for more than twenty times his or her annual income The goal of this approach is to replace the primary breadwinner’s salary for a predetermined number of years. How Much Insurance One Needs Step 1: Adjust the pre-incident salary down to compensate for the reduction in household expenses = Target replacement salary (TRS) Step 2: Get the appropriate interest rate (post-tax and inflation-adjusted) Step 3: Calculate the Earnings Multiple for life insurance Step 4: Calculate the life insurance needs = TRS * Earnings Multiple

7. Example: Life Insurance Needs 7 Example: Current Annual salary = Rs. 10 lakh; Inflation-adjusted post-tax return = 2%; Calculate the life insurance needs for 10 years for a surviving family of three. Assume expenses for three is expected to reduce by 20%. Solution: Step 1: Target replacement salary = Rs. 10 lakh * (1 – 20%) = Rs. 8 lakh Step 2: Interest rate (post-tax and inflation-adjusted) = 2% Expense coverage for 10 years Step 3: Earnings Multiple for life insurance = Step 4: Life insurance needs = TRS * Earnings Multiple  

8. Life Insurance Needs – Other Methods 8 Financial Needs Approach Short-term needs (+) Long-term debts (+) Family maintenance expenses (+) Resources available to meet needs (-) Human Life Value Approach Human life value (or economic value of a life) is the present value of the future earnings potential of that person. The amount of insurance needed will equal how much the insured person will earn until retirement. Function of current after-tax income, income growth rates, an after-tax future investment returns, remaining number of years the insured person is expected to work

9. Example: Human Life Value Method 9 Example: Mr. John aged 40 years, draws an annual salary of Rs. 10 lakh. His personal expenses are Rs. 4 lakh per annum that includes taxes, insurance premium, etc. Assuming retirement age of 60 years and expected rate of return being 8%, estimate human life value of Mr. John. Solution: Step 1: Surplus Income = Rs. 6 lakh per year Step 2: Working Span = 20 years Step 3: Get the PV of 20-year annuity = HLV Net Rate for Growing Annuity =  

10. Life Insurance: Major Types 10 Term Insurance Protection for a specified time period Least expensive; premium increases over time Fixed death benefits No cash value Cash-value Insurance: Insurance + Saving Whole Life Insurance Unit Linked Insurance Plan (ULIP*) Child Plan Endowment Plan Money Back Plan Retirement Plan Group Insurance Plan *CG tax on any income if Annual Premium is more than Rs. 2.5 lakh

11. Important Clauses 11 Contract Clauses Free Look Period Grace Period Revival clause Loan Clause Payment Premium Clause Suicide exclusion Life assured dies by suicide within 12 month Reasonability clause Reasonable charges in the same geographical area for similar or identical service Indisputability clause Ensures that insurers do not arbitrarily dismiss claims on grounds of inaccurate declaration by the policyholder

12. Riders and Payout Options 12 Riders: Enhanced protection and coverage benefits Accidental Death Benefit Permanent Disability Waiver of Premium Critical Illness Accelerated Death Benefit Income Benefit Payout Options Lump sum payout Periodic Payouts Lump sum payout with regular income Lump-sum payout with increasing income Which settlement should you choose?

13. Health Insurance 13 Health insurance is a contract where an insurance company provides medical coverage. Medical coverage includes hospitalization, surgeries, day care procedures, etc. Major Types Individual Health Insurance Family Floater Senior Citizen Critical Illness

14. Property Insurance 14 Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. Need to prepare for unlikely, unlucky events. How much and what kind of insurance to buy is a challenge. Types of Insurance Coverage Replacement cost Repairing or replacing property at the same or equal value Actual cash value The replacement cost minus depreciation Extended replacement cost More than the coverage limit if the construction costs have gone up

15. Liability Insurance 15 Liability insurance provides protection against claims resulting from injuries and damage to other people and/or property Legal costs and payouts – insured party would be found liable . Not covered: Intentional damage, contractual liabilities, criminal prosecution Liability insurance a must for vehicle insurance policy Types of Liability Insurance General Liability Bodily injury and property damages Reputational harm; Advertising errors Professional Liability Negligence; Misrepresentation Violation of good faith and fair dealing Employer Liability Workers’ compensation if employees get injured or sick because of their job Product Liability Third-Party Liability

16. Summary 16 Life insurance controls the financial effect on your family when you die. There are two types of life insurance – term and cash-value. Basic health insurance provides combination of hospital, surgical, and physician expense insurance. Major medical expense insurance covers medical costs not covered by basic health insurance. Property insurance and liability insurance

17. Thank You for Your Time 17