Making an investment for your parents? Here are the factors to consider when choosing the right plan

Investing for your parents is a thoughtful way to ensure their financial security and well-being, especially during retirement. With numerous investment options available, choosing the right plan can seem daunting. This guide will walk you through the factors to consider and how term insurance can be vital in securing your parents’ future.

Understanding your parents’ needs

The first step in choosing the right investment plan is understanding your parents’ financial needs, goals, and the level of risk they are comfortable with. Consider their current income sources, expenses, health status, and future financial requirements. For example, if your parents are nearing retirement, they might prefer a low-risk investment that offers stable returns.

The role of term insurance

Term insurance is a simple and effective financial tool designed to provide financial security to the insured’s family in case of their untimely demise. The term insurance benefits include a high sum assured at a relatively low premium, making it an attractive option for securing your parents’ future, especially if they have dependents or outstanding debts.

Term insurance benefits

1. Financial Security: Term insurance acts as a financial safety net, ensuring that your parents’ dependents are taken care of in their absence. This type of insurance provides a lump sum payment, known as the death benefit, to the beneficiaries upon the policyholder’s demise within the term period. This sum can help cover living expenses, debts, and future financial goals, ensuring the family’s financial stability and peace of mind during difficult times.
2. Affordability: One of the most appealing aspects of term insurance is its affordability. It offers substantial coverage for a relatively low premium, especially when compared to whole-life or universal life insurance policies. This cost-effectiveness is because term insurance is straightforward, providing coverage for a specific period without building cash value. This makes it an accessible option for many families, allowing them to secure high levels of financial protection without straining their budgets.
3. Flexibility: Term insurance policies come with a degree of flexibility that allows them to be customised to fit specific needs and concerns. Many insurers offer additional riders or benefits that policyholders can opt into for an extra cost. These can include critical illness riders, which provide a payout if the policyholder is diagnosed with a qualifying illness, or premium waiver riders, which forgive the premium payments if the policyholder becomes disabled. This flexibility enables the policy to be tailored to the unique health and financial circumstances of your parents, providing them with coverage that’s as comprehensive as they need it to be.

Factors to consider when choosing an investment plan

1. Risk Tolerance: Assess your parents’ risk tolerance. Fixed deposits or government bonds might be suitable for low-risk tolerance, while mutual funds or stocks could be considered for those with a higher risk appetite.
2. Investment Horizon: Short-term investments may be preferred if your parents need access to funds soon. For longer horizons, equity or mixed asset funds can offer higher returns.
3. Liquidity: Ensure the investment allows for flexibility in case of emergencies. Senior Citizen Savings Scheme (SCSS) and Post Office Monthly Income Scheme (POMIS) are examples of investments with relatively good liquidity and returns.
4. Tax Efficiency: Consider the tax implications of the investment. Plans like the Public Provident Fund (PPF) and National Pension System (NPS) offer tax benefits under Section 80C of the Income Tax Act, which can be advantageous for your parents.

Understanding with an example

Let’s look at some examples to understand how different investment options can work for your parents:

1. Fixed Deposits (FDs): A popular choice for risk-averse investors, FDs offer fixed returns over a specified period. For example, if your parents invest INR 1,00,000 in an FD with an annual interest rate of 7%, they would earn INR 7,000 per year as interest income.
2. Senior Citizen Savings Scheme (SCSS): Specifically designed for senior citizens in India, SCSS offers higher interest rates compared to regular savings accounts. As of April 2023, the interest rate is 7.4% per annum, and the investment is eligible for tax benefits under Section 80C.
3. Mutual Funds: Depending on their risk tolerance, your parents can invest in debt, equity, or hybrid mutual funds. For instance, if they invest INR 1,00,000 in a mutual fund with an average annual return of 10%, they could potentially grow their investment to INR 1,10,000 in a year. However, returns are subject to market risks.
4. Term Insurance: Investing in term insurance for your parents can provide a safety net. For example, a term insurance policy with a sum assured of INR 50,00,000 might cost approximately INR 10,000-15,000 annually for a healthy individual in their 50s. This ensures that in the unfortunate event of their demise, the family will have financial support.

Conclusion

Investing for your parents requires careful consideration of their financial needs, goals, and risk tolerance. Term insurance emerges as a cornerstone in safeguarding their future, offering substantial benefits at an affordable cost.

By evaluating various investment options and their implications, including tax benefits and potential returns, you can make informed decisions that ensure your parents’ financial security and peace of mind. Remember, the best investment plan is one that aligns with your parents’ unique circumstances and financial objectives.