LoanRaja Blog- Personal Finance Guide

After deciding to go in for a life insurance policy one has to make up his/her mind how much life insurance he/she needs. Ideally the sum assured should provide for all the needs of your family like children’s education and marriage while meeting the daily basic expenses when the insured person is no more. It may not be an easy decision to make. Firstly, your income level has to permit you to opt for the policy that you want to take. Your need may be more than the disposable income you can spare for paying premiums. Even if you want a higher sum assured the insurer need not oblige you citing your present income.

There are many factors that are relevant in determining the amount of life cover you should buy. One way of doing it is to calculate the level of income a family needs to maintain its standard of living when the breadwinner is not around. Suppose a family’s present need is Rs 30,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family’s monthly expenses of Rs 30,000. To compensate for the fall in value of the rupee one needs to take policies for higher amount.

Changing need

Life insurance needs change through different stages of life. Young people with no dependants may not have much need for life insurance. As one’s family responsibility grows, life insurance needs too increase. When one is single he may not bother much about life insurance. However, at middle age a person having children will feel the need to have more life insurance as the need to give good education to children and marriage expenses will dog him. Thus, a periodic review based on your family circumstances is required in order to ensure that the coverage is adequate. A person employed in some hazardous profession will need more life insurance cover than an ordinary individual.

Basically, the amount of insurance one should buy is dependent on his/her economic value, which is also called human life value. This varies from person to person. Human life value is the capitalized value of the net earning of an individual for the rest of his working life. It is the present value of the total income of the individual, which is lost to the family in the event of his untimely death. Imagine a 25-year-old person earns a gross income of Rs 3 lakh per annum. He is due to retire at 60. If he passes away now his family will be losing Rs.1.05 cr., his future income. The human life value of the person is Rs.1.05 cr.

Age factor

Your age is a crucial factor in deciding the quantum of insurance that you can afford. The rates of premium go up, as you grow older. One can buy more insurance for the same premium at a younger age than at an older age. The need for protection may be quite high, but the present need for disposable income may not permit buying adequate insurance. Premium payment means a regular outflow of disposable income. Not many would like to buy more insurance as it will overstretch the resources. You can then think about buying extra insurance as and when you can afford it.

Some experts say that 8-10 times your annual income will be a good sum to insure. If a person’s annual income is Rs.3 lakh he can take a life insurance policy in the range of Rs.24 lakh to Rs 30 lakh. Another approach is to assess the percentage of income you can spare for paying premium. This can help you to decide on the quantum of life insurance. If you expect to spend a particular amount for the education or wedding of your children, you may like to buy an insurance policy for a specific sum to meet such a need.

One must always remember that life insurance is primarily a protection and is no substitute for investment as returns are negligible. Considering the depletion of value of the rupee due to inflation the actual return at the time of maturity of an insurance policy may well be in the negative. Of course one needs adequate life insurance to safeguard the financial needs of the family members if the unforeseen happens. But it won’t be wise to over-invest. If your family is wealthy you need only a smaller amount of insurance. If the family members are earning independently you can reduce your insurance.

The process of applying for a personal loan is much more straightforward than that of getting a housing loan requires less documentation and faster approvals. The most common documents banks or finance companies need you to submit are proof of residence, identity, Form 16, bank statements and your latest salary slip. These of course may not be standard across all finance companies offering personal loans and some may require you to submit a few additional documents for verification.

Once you have submitted your documents, verification and processing may take upto a week. And public sector banks such as State Bank of India or Bank of Baroda may also ask for a guarantor even if they don’t ask for any collateral. They may require you to provide a guarantor even if you are an existing customer with an excellent track record. Production of all necessary documents is essential for a quick approval of your loan as your funds will not be released till the bank has verified all the information you submitted at the time of approval.

The most common documents you will be asked to submit when applying for a personal loan other than a passport size photograph are:

Proof of identity

Documents that can provide a proof of identity when applying for your personal loan may include a copy of your passport, driving licence, voter ID, PAN card, a credit card with photograph or employee identity card which are as an identity proof and signature proof. Very often employee identity cards are accepted only in the case of government employees or staff of government owned undertakings. Some banks may also refuse to accept driving licence as a valif proof of identity.

Residence proof

Banks offering personal loans will accept a copy of your passport, ration card, voter ID, or LIC policy as a residence proof. In case your present address is different from that given in these documents you can produce a telephone bill, electricity or water bill as your proof of residence. Some banks insist on proof of residing at least one year at the present address as they want to make sure that you reside within the city limits.

Proof of income

Documents you are required to submit as proof of income differ depending on whether you are salaried or self-employed.
If you are salaried banks will require you to submit your:

• Latest salary slip
• Form 16 for the last financial year
• bank statement for the last 6 months

There are banks, which seek bank statement for only three months. Professionals and government employees may be required to submit a proof of highest qualification for which a copy of your degree certificates are required.

Self-employed applicants will have to submit

• IT returns for the last 2 years
• balance sheet and profit and loss account
• proof of office lease such as utility bill, municipal tax receipt or title deed

Some banks will ask for proof of turnover (latest sales / service tax returns) and a proof of continuity in current profession which can be IT returns or certificate of business continuity issued by the bank.

A personal loan is the most popular form of an unsecured loan available to consumers. Although we often see advertising from banks and finance companies making it appear very simple to get such a loan, its rarely as simple as that. Since the loan is unsecured banks go to great lengths to determine that your creditworthiness and repayment capacity is verified and secure.

Eligibility norms and requirements may differ slightly depending on the bank, but broadly fall in the two categories:

• Salaried persons between the ages of 21 and 60
• Self-employed individuals between 25 and 65

Lenders also have different policies for the minimum income requirement and maximum loan amount offered. For example, ICICI Bank would require a net monthly salary income of Rs 8,000 whereas HDFC Bank may accept Rs 7,000 and Citibank insists on a minimum of Rs 8,500. Public sector banks such as SBI and other nationalised banks have different eligibility levels for customers in metros, urban and non-urban centres. Some banks consider gross salary for income calculation. The loan amount also differs from bank to bank. The personal loan limit depends on the borrower’s profile, income, repayment capacity and credit rating.

For government owned banks minimum loan amount offered is usually around Rs.24,000 in metro and urban centres and Rs.10,000- in rural/semi-urban centres. The maximum loan amount can go upto 12 times net monthly income for salaried persons subject to a ceiling of Rs.10 lakh. But some foreign banks like Standard Chartered and Citibank have higher limits. Most banks have lists of approved companies whose employees will find it easier to get a personal loan.

Some banks also verify your application against a negative lists of professions. Banks will usually prefer to offer loans to employees or owners of reputed companies which lend a certain amount of lending credibility to their employees. You also have to reside within the prescribed city limits of the bank. Most public sector banks insist on a guarantor for personal loan even for existing account holders although some banks may offer better rates and discounts on other charges. You can increase your eligibility by clubbing the spouse’s income and taking a joint loan.

Banks and other lenders use direct sales agents normally to run a background check on the loan applicant to crosscheck the information provided at the time of application such as details on employment, salary and the place of residence. The bank wants to be convinced of your income and surplus available to service the personal loan. This is done to ensure that you are capable of making regular payments on your personal loan and repaying it on time.

Be honest in your income disclosures and keep your credit rating high. This increases chances that your loan will be approved quickly, but if you have defaulted on any loans it may go against you at the time of verification and in case you have ever declared bankruptcy it will be very hard for you to get a personal loan