Money
How the fear of early death drove this Mumbai woman to buy ₹10 crore term cover
Summary
- At the time of onboarding, 68% of Mehta's portfolio was in real estate and the rest of it in financial assets. Stable assets such as FDs and a generous bank balance comprised a huge part of financial assets.
Mumbai-based Ruchi Mehta (50) was never too worried about money management until her mother died in 2020. Soon after, she was involved in a long-drawn and tedious process of gaining access to her inheritance. That is when Mehta decided to opt for full-fledged financial planning so that her daughter did not have to undergo the same experience if something untoward were to happen to her. This was all the more important for her as a single mother.
"By the end of 2020, the agency I was working with shut down. I needed to take stock of all my savings and investments. But that proved to be difficult. More importantly, I had to land a stable job, which I did in 2021 when I joined BookMyShow. The next step was to take charge of my money," she says.
A colleague told her about Mumbai-based International Money Matters (IMM), a Sebi-registered financial planning-cum-investment advisory company. Mehta approached the firm.
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The background
Mehta was running her own design and production consultancy firm in New Delhi before her marriage broke down in 2015. "I shut it down and moved to my hometown Mumbai," Mehta says. She started afresh and is now working as an assistant vice president at BookMyShow. Mehta had thus far invested in fixed deposits (FDs) and real estate on the advice of her father who died in 2011 and had accumulated decent savings by the time she got in touch with Kalpana Ambavane, a senior financial adviser at IMM, in 2022.
"My broader goal when I went to IMM was simple. I wanted to have a consolidated view of my investments and also ensure the well-being of my daughter so that she can pick up the threads without any hassle if something happens to me," Mehta says.
At the time of onboarding, 68% of Mehta's portfolio was in real estate and the rest of it in financial assets. Stable assets such as FDs and a generous bank balance comprised a huge part of financial assets. She lacked growth assets such as mutual funds and gold. She had also bought a term life cover of Rs10 crore for which she was paying ₹6.7 lakh annual premium. "I have a family history of people dying early. This made me seek a high life cover policy so that I can protect my daughter financially while I am living," she says.
The portfolio transformation
Since real estate is an illiquid asset, IMM decided to focus on her other financial assets. Ambavane of IMM looked into her FD portfolio and calculated the XIRR on a post-tax basis for ongoing FDs having different maturities and interest rates. "It came in at 4%. We decided to close some of FDs to deploy the money in equity and hybrid mutual funds," says Ambavane.
Mehta had identified a few goals for herself such as her daughter's education, purchasing a vehicle, home renovation, post-retirement household expenses and a vacation fund. "We recommended that she add a couple of additional goals such as creating an emergency corpus, vehicle loan foreclosure and a medical corpus for herself," Ambavane says.
So far as life insurance is concerned, she did not need such a high term cover. "We recommend life cover onlyto the extent of total corpus needed to achieve the financial goals. Even if her existing investments grow at the rate of 8%, it would be sorted. However, one cannot ignore psychological needs. We told her to bring the term cover down to ₹4 crore for which she now pays ₹1.6 lakh annual premium," Ambavane says.
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Mehta also had a couple of old endowment policies in which the life cover was minimal. "Since most of the premiums for these had already been paid and the remaining premiums were a small part of her net-worth, we recommended that she continue with those policies," she says.
Mehta also needed a source of regular income if she were to stop working. "We recommended buying a guaranteed income plan in which regular income would start after a few years. We do not advise mixing investment with insurance, but in her case it was a small part of her net-worth. Since the policy was bought before high premium policies were taxed, we managed to lock in a high yield on a post-tax basis," Ambavane says.
Mehta had a health insurance policy of Rs25 lakh coverage. IMM recommended her to enhance the coverage by taking a super top-up plan which is an economically cheaper option. They also told her to include her daughter in the policy. A personal accident and critical illness cover equivalent to one year income were also recommended. She now pays ₹29,687 for the base health cover, ₹6437 for the super top-up and ₹6400 for the personal accident cover.
"Once the waiting period of super top-up is completed, we shall tell her to restructure the health policy with a low base cover and higher super top-up cover. The reason being the premiums for a base policy are higher which may pinch in the later years of life," Ambavane says.
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Another important suggestion was building a medical corpus to support the health cover during the post-retirement period so that expenses uncovered by the insurance can be taken care of.
"We recommended her to set aside any future income receivable such as gratuity and leave encashment for creating a corpus to provide for higher medical expenses (if any)," Ambavane says.
On the liability front, IMM observed that she had a vehicle loan running at a high interest rate of 9.3% per annum. They asked her to foreclose the loan as soon as funds are accumulated for the same. Another important suggestion was about taking an education loan for her daughter's post-graduation instead of funding it herself. "This will help her daughter build financial discipline," Ambavane says.
Since estate planning is the very core of why Mehta reached out to a financial advisor, creating a will or a trust is important for a smooth succession planning. IMM is in the process of getting it done.
"Money matters stress me out. Having IMM on board has given me a peace of mind. I do not have to be on top of my investments and expenses. They have understood my lifestyle and segregated my goals accordingly. If a big expense is coming in, I tell them about it, and they help me find a way to arrange funds for it. I do not mind paying a fee for this service," she says.
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IMM charges a percentage of direct assets under advice (AuA) as a fee, which reduces as the value increases. “The percentage depends on the value of assets and the complexity involved in managing it," says Ambavane.
