Question: I’m a 56-year-old teacher and my husband recently passed away. I own the home in which I live, but do not have a pension or any investments. All my monies are in public provident funds, national savings certificates, and bank deposits. However, I will receive Rs. 20 lakhs from my husband’s life insurance policy. How should I invest this money? I have no children. This policy was bought from the bank – and my husband was paying about 20,000 p.m. as premium for the past 7 years. The bank is handling the claim. My husband was against using the services of an agent, so we went through the bank.

A financial adviser at the bank wants me to put it into a unit linked life insurance, but I’ve heard that this is good only for the person selling it. What should I do? When I said let me think he said there is a scheme closing next week – and then the product will not be available.

You keep saying, take only term. Should I listen to you, search for an agent or listen to the bank?

Answer:

My sincere condolences on the loss of your husband.And sincere apologies for the confusion our industry creates. Confusing seems to be the main item on the agenda for most professional. Sorry, once again.

The bank ‘adviser’ is looking at this as an ‘investment’ issue for you to handle. Of course she is also looking at this as a sales opportunity too!

To me investing is a very small part of your overall money management. From what you have said you actually need to create a ‘box’ (well I would have said corpus for somebody other than a History teacher) which will let you draw money for the rest of your life. On an assumption that you want to create adequate income support after 4 years from now (and corpus exhaustion) let me tell you what to do.

Did you see the question change from ‘how do I invest Rs. 20 lakhs’ I have made it into a life and philosophy question?

Your question now is : What steps should you be taking now to increase your odds of having a secure and comfortable retirement?

That means you’ll have to start thinking about issues such as how much income you’ll need to maintain an adequate standard of living once you retire and whether you can expect the resources available to you (which appears to be the assets you already hold in debt instruments and the proceeds from your husband’s life insurance) to generate the amount you need.

Currently you have about Rs. 38 lakhs in government securities, Rs. 16 lakhs in your husbands’ provident fund and the life insurance claim of Rs. 20 lakhs. This is a total corpus of Rs. 74 lakhs and your house which has a current market value of Rs. 100 lakhs.

First the good news – on a monthly expense of Rs. 12,000 – including your medicines your corpus should be more than sufficient to meet your day to day needs comfortably without cringing. Having said that it does not mean you can go about feeling ‘rich’ and sponsoring nephews thread ceremonies and nieces weddings like your husband used to do!

If the income falls below what you require, then you MUST look into ways to bridge the gap. You have also indicated that you will be able to work for 6 more years as the school you teach wants to keep you there. Immaterial of the money it is worth being in employment – it keeps you more engaged than a one person house. Also you get another 10 years in which to decide where to re-locate for the rest of your life.

The point is, you cannot look at investing options in a vacuum. How you decide to invest the proceeds of your husband’s life insurance policy will depend on factors such as how well prepared you are for retirement, how much you understand risk, mutual funds, bank fixed deposits, company fixed deposits, etc. How heavily you’ll be relying on those funds to generate current income – and how much of ‘emergency fund’ you wish to keep in a bank fixed deposit, company fixed deposit, etc.

There are some tools that people can use on their own to help develop what amounts to their retirement income plan. Visit some websites like myiris.com, moneycontrol.com, www.franklintempletonindia.com, etc. to find out how much money you need for your retired life. This process can be daunting (as well as boring!), though, which is why many people turn to advisers for help. But if the adviser is going to truly advise, then it seems to me that he or she must first spend some time getting to know your financial situation and your needs. In short, the adviser should take you through the scientific, step-by-step process. Without doing that, no adviser would know what sort of investment is appropriate for you.

So if the adviser you’re now dealing with has not gone through this sort of analysis with you, then you ought to re-think. You need to find a financial planner who does not sell – JUST NO SALES. The conflict between advising and selling is very difficult for you to resolve!

I purposely did not want to turn this into a ‘unit linked is good’ or ‘unit linked is bad’ kind of discussion. The product is not so important. Your planner should be able to take you through your existing assets (believe me they are great and perfectly suitable at your level of involvement in investing). However you can do well to put some money in mutual fund MIP schemes (they have a small element of equity), a small SIP in Hdfc Top 200 or Franklin India Flexicap fund. In your case my suggestion is to put Rs. 500,000 out of the insurance proceeds into Hdfc MIP (Long term) – this has some equity, about Rs. 200,000 in Hdfc Top 200, about Rs. 200,000 in Hdfc Prudence and Rs. 10,00,000 in Icici Prudential MIP. Also about 20 lakhs of your maturing national savings certificates, and your husbands PPF should go to Hdfc MIP (LT). All of this will be growth options…you will start withdrawing POST RETIREMENT. The assumption is by the time you retire your house will be worth Rs. 2.5 crores, and your investments will be worth Rs. 2.5 crores. You have no dependents, so you do not need any life insurance at all. No ulip, no term, no ulip pension plan. Frankly close all the bank accounts with banks which do not let u sleep! One bank account, one credit card, – that is enough. 4-5 mutual fund schemes are necessary NOW..however by the time you retire, I would have made it into 3 schemes. Simplify, simplify, simplify that should be your moto. Money management should be MY FULL TIME job, not YOURS…so stay away from the zillion products that we create. You do not need them.

Your financial planner should be able to hold your hand during the investment, create notes on each product and leave it for you to understand it on your own, decide on how much money should be in each asset class. Ideally all of this should be in writing – in a language that you understand. I have seen general insurance agents sell risk cover for ‘cash kept in a safe’ for a business that did not have a safe- so beware of ‘agency’ based ‘advisors’.

That said, I do have serious misgivings about unit linked LIFE INSURANCE plan being pitched to you. That is totally inappropriate – you have no dependants! When it comes to creating a reliable retirement income, I think you have to combine a diversified portfolio of mutual funds with some old fashioned pension plan.

Which is why it is necessary that you find an adviser who is willing to consider a variety of investments to create the cashflow to create  income, security and cash reserves you’ll need in retirement. He may be the guy who can help you with medical insurance as well, a guy who can deal with the post office (or find someone who does it), rather than one who sees a single investment in a life insurance plan as the answer to all your needs.

He reminds me of the saying “If all that you have is a hammer, the world looks like a nail”. Keep it simple – do not get nailed! Keep reading www.subramoney.com it helps!!