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Three Irreversible Financial Decisions

A lot of decisions pertaining to your personal finance are reversible; and some are not. Here are three decisions that once taken, simply cannot be rolled back. Look before you leap

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A lot of decisions pertaining to your personal finance are reversible; and some are not. Here are three decisions that once taken, simply cannot be rolled back. Look before you leap (or as you'll see for decision number three, fail to leap!)

Decision 1: Annuitizing your Savings
A lot of investors rush in to annuitize their savings with life insurers, goaded by the promise of a regular income stream. What they fail to realise is that most annuities have zero exit clauses; meaning that funds once annuitized, usually cannot be encashed again. A few annuity plans have exit clauses that are applicable under an extremely narrow set of circumstances.

Annuities, while in a way insuring investors against the risk of living too long, also provide very low returns. Additionally, the cash flows from even the so called "increasing" annuities do not keep pace with inflation, and are taxable to boot. Lately, there has been growing awareness about higher return and more tax efficient ways to create an income stream from one's savings. Study your annuity plan carefully before you jump in with both feet.

Decision 2: Delaying the purchase of Life or Health Insurance

It's an inconvenient truth that most of us in India remain inadequately insured; possibly owing to our collective preference for low-yield, low-cover traditional policies. On the health cover front too, many rely on their company-provided policies which, in the range of 3 lakhs to 5 lakhs, sometimes prove inadequate for a family of four to six individuals.

Many families have suffered because they weren't adequately insured through pure risk term plans of comprehensive health insurance plans. Remember that every day that you delay your decision to purchase adequate term life or health insurance, you're taking an irreversible decision to put your family at risk. Some wait until risks become more imminent (such as the early onset of a disease) to become more insurance-sensible, but it often proves too late by then, as insurers may be unwilling to extend coverage at that stage. When it comes to insurance, you'll not be able to bolt the door after the horse has fled.

Decision 3: Investing into locked in "alternative" assets or structures
Many AIF's (Alternative Investment Funds) that invest into private equity, art or real estate have zero exit options for the committed moneys. These funds typically collect moneys in tranches, and skipping future drawdowns could even lead to complete or partial forfeitures of previously paid amounts, so investors need to be double careful while investing into them. The same applies to many fancy 'structured products' that take bets on underlying indices or asset classes.

Uninformed investors often rush into these products with an incomplete understanding of their risks and rewards, only to find themselves caught between a rock and a hard place when they try to liquidate their investments midway. It is advised to carefully trawl through the literature of any exotic investment that falls outside the realm of the ordinary, paying scrupulous attention to the risks involved as well as the exit clauses, or more likely, their absence.


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