Before starting your investment journey, especially in equities, ensure you have term insurance, personal accident cover, emergency fund, and the following covered
Before starting one's investment journey, especially before entering the dynamic realm of equity investment, it is prudent to lay a financial groundwork to address potential risks effectively. Establishing this foundation not only helps when unforeseen circumstances but also fosters a secure financial future and peace of mind.
Ajay Pruthi, a Securities and Exchange Board of India (Sebi) registered investment advisor and founder of PLNR said, "Before you start investing for your goals, you should cover your basics, as these basics help you to build a strong foundation for your financial plan. Term insurance for the earning members of the family, health insurance for the family and parents, Personal Accidental policy for the earning members of the family, Critical illness policy if you have a family history of the same and also an emergency fund. Note that all insurances should be purchased in addition to your corporate cover."
Before delving into ANY investments, establishing an emergency fund is the first step. This fund acts as a safety net during unforeseen expenditures or contingencies.
"Save at least 12 times the monthly income if you are a single-earning member and 6 times if you and your spouse are earning income," Pruthi said. This fund should be kept in a readily accessible savings account with Sweep FD and refill the fund once the emergency has passed.
All types of loans, including credit cards and personal loans, come with higher interest. One should pay off all these high-interest loans first, and then save money for future investments.
Consolidate credit card debts if you have multiple such debts into a comparatively lower rate personal loan and repay it. Home and education loans can be managed separately as they have less interest than personal loans.
Every earning member of the family should prioritise purchasing term insurance, offering coverage until the age of 60. This insurance can be obtained online and an annual premium option should suffice. Experts usually advise having a sum assured of at least 15 to 20 times of current post-tax annual income.
Calculations while deciding the sum assured should factor in existing loans and deduct assets other than the self-occupied home. Pruthi said any reputable brand you are comfortable with will do but do not add any additional riders with it.
In addition to term insurance, personal accident (PA) insurance is important because unlike term insurance, which pays out upon death, PA insurance pays you in case of accidental death or permanent or temporary disability. Purchase a policy with Temporary Total Disability (TTD) coverage ranging from Rs 50 lakh to Rs 1 crore is advisable, aligning with the coverage of term insurance.
Additionally, you should purchase health insurance for your family of around 50-100 lakhs with a base cover of 10 lakhs and a Super Top-Up cover in the range of 40-90 lakhs. Be mindful that there are no room rent sub-limits, no waiting period, and no co-payment in your health insurance policy. You can also purchase a Critical Illness Policy if you have any family history of critical illness. You can also purchase health insurance for your parents/in-laws too.
Acquiring a family floater coverage health insurance policy separate from any company-provided insurance is indispensable and is relatively cheaper the earlier you take it.
The base policy should range from Rs 10-15 lakhs and a super-top up of Rs 40 lakh to 100 lakhs is recommended. Considering separate coverage for elderly parents is also recommended to mitigate the impact of rising premiums on family floaters as they age more chances of co-morbidities increase.
You can also purchase a Critical Illness Policy if you have any family history of critical illness, Pruthi said. Critical illness policies complement standard health insurance plans by providing lump-sum payments upon diagnosis, avoiding the need for frequent reimbursement claims.
These policies cover a wide range of critical illnesses, over 30 critical illnesses including cancer, angioplasty, heart attack, etc.