Property as life insurance

You dont like paying premiums for your life insurance policy

But you still need and want life insurance

And you want to create wealth from every penny you own and not let any of it be deployed conservatively

There are so many ideologies when one seriously thinks about creating everlasting wealth. Here is one I have come across recently. Someone,I was talking to,asked me how about considering purchase of real estate and treating that as life insurance?

I started thinking,found that this was quite an interesting idea and worth dwelling upon.

There are some implicit assumptions here i.e. you have a surplus of R 5-10 lakh lumpsum for investments and that you can invest about R 60,000 per month. Assume that you need life insurance worth Rs 60 lakh and you are about 40 years of age.

Disclaimer: For the ones who find this difficult to digest please note that this is possible i.e. a person of age 40 can have a need of only R 60 lakh of life insurance this is based on mathematical modelling and considers a number of factors like working spouse,asset portfolio,planned allocation etc. Please focus on the concept.

What are your options?

1. Buy a term policy for R 60 lakh which would cost you about R 10,000 per annum.

2. If you make an unwise decision of buying endowment type policy,the premium for R 60 lakh would cost you about R 3 lakh per annum. Please do not buy these type of policies as they are severely injurious to your financial health.

3. You go ahead and buy a ready to use fully constructed property equal to your life insurance i.e.

R 60 lakh. You take a home loan to fund this purchase and along with the home loan take mortgage insurance cost of which is marginal. Now instead of paying premium and making some other monthly savings you are paying an EMI. This takes care of your investment need plus you have anyways assumed that this property is your life insurance.

What is the result of this decision?

You have a real asset worth R 60 lakh versus having an artificial asset of R 60 lakh. So if you die,your inheritors will get this property free of any loan as the mortgage insurance would take care of your outstanding principal. This property may be rented and beneficiaries will get a regular stream of income. Plus the property will appreciate over time; sometimes rapidly and sometimes slowly. As and when required,the property can be sold and you have return of capital. Alternatively on death,the property could either be sold off and beneficiaries use what they need and reinvest the balance in another property or some annuity scheme or any other investment as per their desire. The spouse of the deceased may use this property as reverse mortgage. The property is there with your family forever. You may bequeath it from one generation to another. Generations below can eat the fruits of one wise investment done by a fore-father. Children can have an additional source of income for as long as they wish. This revenue stream could be used to purchase more properties with or without EMI. Perhaps children may never need life insurance policies. The more you think about this the more interesting permutations you can generate.

While all this may seem to be interesting,a lot of things need careful consideration. This might turn out to be a stunt if you do not understand everything properly. It would be wiser to consult a knowledgeable professional before you act.

1. The price you might be paying for the real estate. Is it fair?

2. Cost towards maintenance of property which you have to bear.

3. Your income and tax position,the prevailing interest rate and type of funding.

4. Projection of your income and your earning i.e. for how many years there is a likelihood of a steady income.

5. Will you really be able to fund EMIs comfortably ideally you would be as you were planning to invest that money anyways.

6. In case person dies within first 3 years and then if the property is sold the dependants will have to pay short term capital

gains,hence final proceeds may be lesser.

7. Your overall financial plan and financial goals in the broader scheme of things.

8. Estate planning is must for smooth transfer of property.

It is not based on conclusive evidence that I am recommending purchase of property versus life insurance. This is just an option a person may look at based on his/ her financial situation.

Author is Director,Transcend Consulting kartiktranscend-india.com