Financial Cocktail Samosas: Bitesized Money Morsels For You, 22/03/2023

Bought the Wrong Insurance? Correct It Now

Life insurance helps secure the livelihood of one’s near and dear ones in the case of one’s untimely demise. This aspect also makes it an emotional product and investors frequently end up buying the wrong type of life insurance.

Broadly, life insurance is of 3 types:

  • Endowment / Money Back.
  • Unit Linked.
  • Term Plan.

Among the above three, only term plan is the one advisable as it helps you get a large cover for a small premium. The other two are insurance-cum-investment products which neither provide you an adequate cover nor are good investments and are in fact, worst of both the worlds. They usually come with high charges and lack of transparency.

A pure term plan doesn’t provide you any money back, like your car, health or house insurance does not if nothing goes wrong. In other terms, the entire premium goes towards providing only life insurance which actually is the reason you take a life insurance.

If a term plan promises a part or entire capital back, beware!! It’s not a pure term plan and be avoided. For investments, you should consider specialized/pure investment products only like mutual funds, FDs, govt investment avenues etc.

If you already have endowment or unit linked insurance plans (ULIPs) and want to exit them, here’s how you can do so:

Surrendering the ULIPs: ULIPs comes with a mandatory lock-in period of 5 years. It doesn’t means you must continue paying the premium for the entire 5 year period. In fact, it can be stopped anytime. Once you stop paying the premiums, the life cover is terminated and the market value of the premium paid minus discontinuance charges is credited to your bank account when the lock-in period gets over.

Getting out of Endowment/Money Back plans: This is slightly complicated. Typically, most insurance companies have a toxic policy and will pay nothing if surrender is within 3 years of starting the policy. Even otherwise, first year’s premium will always lapse. For other premiums, every insurance company has a formula to calculate amount to be paid back, which is not investor friendly anyway. But you have another way out called ‘Paid-up Policy’.

A paid-up policy is what you have when you stop paying premiums but continue to get insurance coverage. However, the benefits reduce accordingly and the Bonuses/additional benefits are not paid.

So, Paid up vs Surrender, which one to choose?There is no one-size-fits-all answer to this question. It could differ even for two individuals having the same insurance policy. Various variables like policy tenure, premiums paid etc need to be analyzed. Generally, if the maturity period is a long way off, say 5-7 years or more, it could be worthwhile to surrender/get your money back and utilize it wisely subsequently.

(Contributed by Jatin Uppal, Deputy Manager, Financial Planning, Hum Fauji Initiatives)

The Dark Side of Fintech Borrowing

What is Fintech Lending? These are web- and app-based services which rely on technology and digital solutions to facilitate the process of seeking out, applying for and repaying loans. Fintech lending has become an increasingly popular option recently for individuals seeking quick access to credit. The positive part is that they help students, homeowners, businesses and underserved communities access financing options quickly and efficiently.

Fintech lending may seem like a quick fix and quick access to loans without the need for lengthy paperwork or physical visits to banks for your financial needs. However, there is a dark side to fintech and as your trusted financial advisor, it is important for us to ensure that you are aware of all sides of this industry before making any decisions.

One of the main concerns about fintech lending is that it can be significantly more expensive than traditional lending. The interest rates in them are usually higher, and there may be additional fees/charges, obvious or veiled, that can increase the overall cost of borrowing. This can lead to financial strain if the borrower faces any adversity or temporary hitch in paying back the loan on time.

Another important factor is that Fintech loans often have short repayment periods, which can put pressure on borrowers to repay quickly. The borrower may then take out another loan to repay the first loan and thus may start the vicious cycle of debt that can be difficult to break.

The lack of regulation in the fintech lending industry is also a concern. Without proper oversight, borrowers can be vulnerable to unscrupulous lenders who may take advantage of their financial situation. It is important to thoroughly research any fintech lender before signing up for a loan to ensure that they are reputable and trustworthy.

In conclusion, while fintech lending may offer convenience and accessibility, it is important to consider all factors before making any decisions. High-interest rates, short repayment periods, and lack of regulation can all contribute to the dark side of fintech borrowing.

(Contributed by Manish Kumar, Relationship Manager, Team Vikrant 2, Hum Fauji Initiatives)

Decoding the New Tax Regime…Should you go for it?

The Union Budget 2023-24 has made the new tax regime the default option for every taxpayer from next financial year onwards. The slabs and tax rates as per the new regime have also been suitably tweaked to lessen the overall tax burden as also making the Rs 50,000 standard deduction available.

What’s new in the New Regime (Sec 115BAC)?

  • The number of tax slabs has expanded under the new system with considerably reduced tax rates.
  • Most of the exemptions and deductions that taxpayers used in the old regime will be unavailable. The positive side of this is that the life becomes simpler!
  • It allows taxpayers to invest their money without any preconceived limitation. There are no mandatory rules and regulations governing your investment pattern under the new program.
  • An individual can switch between the new tax regime and the old tax regime in every financial year. However, the facility of this switch is available only for those individuals having salaried income and no business income.

Both the regimes have their benefits and drawbacks, and which one is good for you would get known only after a bit of calculations.

The new tax regime is very well tailored for new investors and individuals who have only recently begun their careers.

(Contributed by Kritika Saini, Assistant Manager, Team Sukhoi, Hum Fauji Initiatives)

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