Youth turn smarter on financial planning amid Covid, but gaps remain: Study

They need hand-holding on life and health insurance, and should not lean on social media influencers, who are often neither qualified nor regulated, say experts

Indian millennials in the age group of 22-35 years seem to have realised the importance of maintaining a healthy savings regime even as the external scenario remains uncertain and ever-changing, as per a recent survey conducted by Tata AIA Life Insurance of 1,000 respondents. 

The study, called 'Financial Planning Preferences of Young Indians', reveals financial trends among Indian millennials and offers insights on savings, decision making, life and health insurance trends. Venky Iyer, executive vice president and chief distribution officer, Tata AIA, says, "The survey clearly indicates the need for insurers to work hand-in-hand with younger consumers to help them understand the level of insurance they need as they progress through different stages in life." By and large, the findings show people start displaying financially responsible behaviour at an early age. Business Standard culled out insights and asked financial experts their views and advice on the matter.

Emergency-ready: The survey showed that young Indians have taken cognizance of uncertainties and have increased their savings to counter future emergencies. Thirty per cent of those in the 22-25-year age bracket have upped their savings ratio as a learning from the Covid catastrophe.

But is the traditional 3-6 month corpus of expenses set aside for emergencies really enough in the post pandemic world? Says Deepali Sen, founder partner, Srujan Financial Advisers: "It is heartwarming to know that this crisis was not wasted, and that youngsters are learning to save for contingencies such as job losses, pay cuts and increment deferments. During such times (or all times) it is absolutely essential to have at least eight months of expenses set aside for any negative surprise in life."  

Emergency funds include household expenses, EMIs and insurance. For those above 35, some experts suggest an emergency corpus equal to 12-18 months of expenses. Sen says, "Having an emergency fund will ensure you do not touch your long-term investments, which have been earmarked for goals such as retirement, children's education, marriage, etc."  

Savings and stocks: According to the survey, savings have not declined, but the nature of investments has been impacted due to Covid-19. There was a dip in debt instruments such as bank fixed deposits, and savings data suggests that a lot of recent surpluses have directly been parked in stocks. Sen says, "When invested in stocks for the first time, investors (youngsters) risk being scarred over the long term. Since the market is highly volatile and young investors do not understand it well enough, they usually cannot figure out when it is a good time to buy stocks or sell them, and how much to buy which stock in order to build a strong investment portfolio."

Health insurance ignored: According to the survey, the younger generation is relatively unaware of insurance. Thirty-six per cent of the respondents in the study were not clued into the features of health insurance, while that number was 30 per cent in the case of life insurance. Vishal Dhawan, board member, Association of Registered Investment Advisors (ARIA), observed similar trends as a Certified Financial Planner (CFP). He says, "There is limited awareness about buying personal health insurance as corporate coverage is fairly common and will continue to be provided as they move across companies as well."

Experts say ideal health insurance coverage depends on the city and type of hospital you would expect to be treated in. Given that it is best to buy a health cover when one is young and healthier, a sum assured of Rs 5 lakh should be considered if it is challenging to arrive at a specific requirement. But should younger people buy critical illness covers? Dhawan says, "Critical illness covers are a good addition to standalone health insurance especially if there is a family history. However, they should not be replacements for a health cover." When buying any health insurance, keep in mind a few things. Read the fine print carefully, including sub limits, maternity coverage waiting period, etc and do not buy the cover based solely on the tax benefits under section 80D.

Life Insurance: The youth are more aware of life insurance than they are of health insurance, the survey shows. Thirty per cent of the respondents are unaware of life insurance. But do financial experts recommend life insurance at the age of 22 or 25 years at all? Ranjit Dani, Think Consultants-Wealth Managers, says, ""Firstly, you should buy life insurance only if you have some income. Having said that, even if you have an income, but do not have financial dependents, you should not buy life insurance." Let's say you are 23 years old, and have just started working. Your elder sibling and parents are also working and no one is financially dependent on you. In such a situation, you don't need life insurance. 

Dani adds, 'If your family has some income but is not financially sound and leans on you, then you should buy life insurance even if you are in your early 20s." As a thumb rule at 25-30 years of age, 25-35 times of your current annual income should cover your life. If you are in the 30-40 age bracket, then it should be 25 times your current annual income. Dani says, "Only buy pure insurance, which is a term insurance plan. No other form of insurance, such as money-back, endowment, or whole life is recommended." Experts also suggest avoiding limited payment options. This is a feature in life insurance plans where you can pay all the due premiums within a much shorter time frame.

DIY and social media influences: According to the survey, the service class would rather plan its own finances than outsource it to experts. Explosion of information on financial planning, influencers and online applications plays an important role towards this shift in behaviour. The 22-25-year age group is more dependent on parents (20 per cent), while the ratio is the least among the 30-plus age group, indicating that investment decisions move from parents to spouse after the age of 30. 

Suresh Sadagopan, founder, Ladder7 Financial Advisories says, "Investment may be easy with online platforms, but most don't have domain knowledge to make sound financial decisions. Likewise, parents may be as clueless as the young children, and you might make the same mistakes your parents make. It's best to see professional advice." Talking about online influencers who are neither qualified nor regulated, nor accountable for their advice, is a toxic trend. Most experts we spoke to suggest going for financial advisers who are regulated.

BOX: A quick look at term insurance riders

Term insurance riders are add-on benefits in a term plan that give you additional coverage. The popular ones include:

Critical illness rider: This cover pays a lump sum amount to the family if the insured is diagnosed with a specified illness

Waiver of premium rider: Here, future premiums are waived and the term insurance policy remains active when the policyholder fails to pay future premiums due to accidental disabilities or loss of income.

Accidental death benefit rider: This pays an additional sum assured to the nominee if the insured dies in an accident.

Income benefit rider: This gives the surviving members additional income on an annual basis for a period of 5-10 years, in addition to the basic sum assured.