MBA Case Study on Financial Planning

MBA Case Study Question and Answer

You are a Financial Planner. Your client Prashant Pandey aged 35 years and works with an IT company earning Rs 15 lakhs per year. His wife Priti, aged 32 years, is a homemaker. They have one daughter aged 5 years. The couple requires your help to make some financial decisions. (You can make any assumptions to further build up your case.)

a) Prashant wants to buy a Pure Risk Life Insurance cover of Rs 1.5 crore. He is confused about whether he should buy a ULIP or a Term Plan. Recommend the product best suited for his requirement

Based on Prashant's requirement for a Pure Risk Life Insurance cover of Rs 1.5 crore, I would recommend that he opt for a Term Plan rather than a ULIP (Unit Linked Insurance Plan). Here's why: Term Plan:

Coverage: A term plan offers pure life insurance coverage without any investment component. It provides a high sum assured for a specified term or duration.

Affordability: Term plans are generally more affordable compared to ULIPs as they don't have investment-related charges or fees.

Higher Coverage: Term plans allow individuals to secure a higher life cover at a relatively lower premium cost, ensuring adequate financial protection for their family in case of any unfortunate event.

Simplicity: Term plans are straightforward and easy to understand. The focus is solely on providing life insurance coverage, without the complexity of investment options or associated market risks.

Flexibility: Term plans offer flexibility in choosing the policy term, premium payment frequency, and additional riders for enhanced coverage (e.g., critical illness rider, accidental death benefit, etc.).

Financial Independence: By opting for a term plan, Prashant can allocate his resources separately for investments and ensure that his family's financial needs are adequately covered in the event of his demise.

ULIP (Unit Linked Insurance Plan):

Investment Component: ULIPs combine life insurance coverage with an investment component. A portion of the premium paid is allocated to various investment funds (equity, debt, or balanced), allowing policyholders to potentially earn returns.

Market-Linked Returns: ULIPs offer the opportunity for market-linked returns based on the performance of the chosen investment funds. However, this also exposes the policyholder to market volatility and associated risks.

Lock-in Period: ULIPs typically have a lock-in period of five years, during which the policyholder cannot withdraw funds without penalties. This limits liquidity and may not be suitable for Prashant's immediate life insurance coverage needs.

Charges and Fees: ULIPs often have various charges, including premium allocation charges, fund management charges, policy administration charges, and mortality charges. These charges can significantly impact the returns and reduce the overall value of the investment.

Complexity: ULIPs can be more complex compared to term plans, as they involve investment decisions and the need to monitor and manage the investment component of the policy.

Considering Prashant's primary objective of obtaining a Pure Risk Life Insurance cover of Rs 1.5 crore, a term plan would be the most suitable product for him. It provides cost-effective coverage, simplicity, flexibility, and a higher sum assured, ensuring financial security for his family in case of any unfortunate event. Prashant can separately allocate his resources for investment purposes, considering his long-term financial goals and risk tolerance. It's always advisable to carefully read and understand the policy terms and conditions, compare different insurers, and consult a financial advisor or insurance expert before making a final decision.