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Yet another product that defies the basic principle of not mixing insurance with investment.

Most insurance buyers forget one simple thing – they should be buying only life, health or any other cover from insurance companies. Instead they lose their focus and buy products, which are completely different in nature. Here we give you one such example.

Take for instance, HDFC Savings Assurance Policy. The marketing material of this policy reads something like this: “You need to plan today to ensure a bright future for your child, build your dream home and fulfil all your other aspirations. To help you realise your dreams, we present HDFC Savings Assurance Plan.” Interestingly, in spite of being an insurance policy, there is absolutely no mention of life insurance cover at all.

So what does this policy do? It is a profits’ savings policy and has the following features:

* There are simple reversionary bonuses, which are added annually

* On maturity, the policy pays out a basic maturity benefit and reversionary bonuses declared during the policy term.

On death during the first year, a sum equal to 80 per cent of premiums received is payable, implying that if you are paying a premium of Rs 1 lakh, you will only receive Rs 80,000 as the death benefit in the first year.

Further, on death after the first year and during the policy term, all premiums paid to date will be returned with compound interest calculated at 6 per cent a year, subject to a maximum of the sum assured plus reversionary bonuses declared to date.

This basically implies that you get the total premiums paid till date plus 6 per cent compound interest OR the maturity benefit plus any attaching bonuses, whichever is lesser.

Let us understand this with an example. Suppose you buy a policy for a yearly premium of Rs 1 lakh for 10 years and a maturity benefit of Rs 8.41 lakh. If you die after paying premiums for the first two years, your family will get Rs 2 lakh plus 6 per cent compound interest for 2 years, and not the sum assured or maturity benefit of Rs 8.41 lakh.

Also, if you pay 10 premiums, which is Rs 10 lakh and then die, you will get the lesser of Rs 8.41 lakh (plus any attaching bonuses) OR Rs 10 lakh (premiums paid) + 6 per cent.

Generally, endowment plans combine savings and protection. You are given a life cover just like any other insurance product. If you die during this period, your beneficiary will get whatever amount you are insured for plus any bonuses accrued during the period. If you survive the period, then on maturity, you get the sum assured plus all bonuses accrued in the policy. This kind of policy combines savings (because the money is given to you on maturity) with protection (your nominee gets an amount if you die).

However, the kind of life cover that you receive in this policy is quite low. What is the use of paying such high premiums when the insurance cover is so pathetic? Also, if this product is being positioned as an investment plan, then any debt instrument such as the Public Provident Fund (PPF) would give higher returns at 8 per cent.

On survival to the maturity date, the sum assured stated against HDFC Savings Assurance – Maturity Benefit plus any attaching bonuses is payable on the maturity date. This policy, in fact, provides one of the worst covers that we have witnessed in a long time.

Remember insurance is all about ensuring your family’s security in case something happens to you today. When a person could have got a decent cover of Rs 75 lakh by just paying Rs 19,500 annually, why does he have to pay five times that amount for a negligible cover?

The sum assured is just the premiums that you have paid plus some basic level of return. People often mix investments with insurance. This causes them to often look at the sum assured without understanding the death benefits of the policies in detail. At the same time, one gives a lot of weight to amount on maturity rather than on death benefit. Hence, people end up paying high premiums, but get a low cover. Stay away from such afflictions and do not mix insurance with investments.

Source: Business Standard

• Almost two years after the UPA government referred the Insurance Amendment Bill aimed at raising the foreign direct investment cap in the sector from 26% to 49%to a Group of Ministers (GoM), the panel finally paved the way for the Bill to be introduced in Parliament.

Besides increasing the foreign investment cap, other proposed amendments would allow Indian promoters to continue to hold a majority stake in insurance companies. They would also allow public sector non-life insurers to sell a minority stake to raise capital. The proposed revisions would enable foreign reinsurance companies to enter the Indian market as well.

The reforms will require amendments to the Insurance Act, 1938; LIC Act, 1956; IRDA Act, 1999; and General Insurance Business (Nationalisation) Act, 1972.

The area under consideration today is availability of insurance along with mutual funds; and this is likely to remain in the spotlight because of huge attention focused on the area. An investor needs to distinguish the position with respect to other mutual funds that he has experienced. In this entire issue, the question of collection of insurance premium is important and a small distinction can make all the difference.

Regulation In the existing position, the mutual funds cannot collect insurance premium. This, according to many people, puts mutual funds at a disadvantage because unit linked insurance plans (ULIP) offer insurance as well as investment like mutual funds together.

There are schemes that still offer an insurance cover but comply with the main guideline. To understand this one has to look at the fine print of the entire issue.

Offering insurance Presently when a mutual fund offers insurance along with the investment in their specific schemes, the entire situation works in a different way Mutual funds that offer such insurance do not ask the investor to pay the premium.

This means that the funds are offering insurance but are not collecting premium and the later condition is the one that has to be complied with. Currently the funds enter into a tie up with the insurance companies to provide insurance and they pay the cost. This is not collected from the customer. This thus becomes affordable only for those funds that have a strong financial position and this is also the reason why such insurance is offered for specific types of investment.

Collecting premium This can be distinguished from the situation where a mutual fund house collects insurance premium from an individual. This is what has been demanded from several quarters to get the mutual funds back on a level playing field with other instruments in the market.

Once the fund houses start collecting premium, they are effectively giving both the benefits of insurance and investment at a single place and the character of the investment changes. Investors need to look at the fine print because it is this kind of small change that can lead to a different outcome. They need to understand what is happening and how they are getting affected in terms of the benefits received.

PREMIUM DIFFERENCE ¦ Insurance and investments are very popular offer ings in the market ¦ There is a demand for mutual funds to provide insur ance ¦ Currently mutual funds cannot col lect insurance pre mium ¦ So mutual funds offer free insurance to some investors ¦ This is different from a state where they offer insurance too and collect premium for the insurance

Interesting links that caught my attention in the personal finance space are as under:

1. Can we have a Short Fund in India
2. FMP v/s FD: The complete details
3. Glossary of Insurance terms
4. Overview of Indian Markets

As always, feedback is welcome.

Unit linked Insurance Plans (ULIP) provide the twin benefit of providing the benefits of investing in the stock market and covering your risks. It is important to understand that a Unit Linked Life Insurance product is different from the traditional insurance products and are subject to the risk factors.

The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions.

Other than the fact that the investment risk in investment portfolio is borne by the policyholder, let us take a look at the different charges in a ULIP.

There are a few parameters like the flexibility of premium paying term, the amount of cover available for disability, illness and accident which has a wider variation among the Insurers.

I dislike the heavy premium allocation being charged. Out of the Rs 100 you pay to your Insurer, only Rs 70 odd goes to your investments (Rs30 in case of HDFC!!) 

Compared to 5-7% return on conventional products, ULIP looks attractive. But is it for real?

I did some number crunching assuming the stock market growing by 20% and found that in three years the return on principal fund is less than 5%. This is because huge part of the policyholder money is adjusted towards allocation charges.

Maybe with a longer run, the ULIPs will harvest a better return!

Heard of this yaksha question: What is the greatest mystery on earth? Yudhisthir answers, “Every one has to die. But no one thinks that for himself. This is the greatest mystery.”

That, I feel, is the paradox that makes people avoid life insurance!

That also makes agents take the wrong line of selling Insurance as a tax saving and/or Investment product (ULIP).

So what should we do?

Start with calculating your Human Life Value (HLV). A very simple way of looking at it is as follows. Imagine a monthly income of Rs 10000 and the net income provided to the family is Rs 8000 after deducting Rs 2000 for personal expenses. Thus the annual income provided to yr family is Rs 96000. The amount of money which will earn Rs 96000 pa at 8% interest rate is Rs 12,00,000. This is only a representation of the value of HLV. It is not the exact way of calculating yr HLV.

The future income growth, yr income generating assets, liabilities, spouse income, children’s education, etc are also to be factored in.

Right now u can go to this Page to calculate yr HLV from Bajaj Allianz. Another link is from Metlife Insurance

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I’ve hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it’s too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it’s time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation’s economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it’s true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it’s very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it’s total fund under ULIP is approx 40000 crore which is more than UTI’s AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children’s education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.

Any suggestions. And if you are interested why don’t you subscribe to my RSS feed or by email. And tell your friends too. I’ll cover them one at a time. [ I need to learn them and then only I can share it with you ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I’ll tell you my secret. It’s for the website I dream of every day and night!! The site launches in August’07.

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

Hey, I’m not into fashion designing. But could not resist a tantalising title to talk about Insurance!! If you haven’t started a family, an Insurance cover is the least of your priorities. But even though it’s not that cool to be insured, it sure is smart when there are people who depend on you.

Life insurance is a potent tool that not only offers the ability to plan for unforseen events that can affect the family’s financial situation adversely, but is also looked up to as an important tax saving cum investment tool.

One needs to do a certain amount of spade work before purchasing a policy, to ensure the best possible coverage at the right price. Here are some helpful tips to get you started:

Explore As premiums vary widely from company to company and cover to cover, it’s important to look around. One can try internet sites to get instant quotes.

Plot your value The key to purchasing the right amount of life insurance is to have just enough coverage to meet your needs. If you have more life insurance than you need, you’ll be paying unnecessarily for higher premiums. On the other hand, it’s important not to have too little coverage, resulting in you being underinsured.

Health matters the most Healthy people get better rates on life insurance. Higher premiums are quoted for anything that poses a risk for longer life expectancy (smoking, on regular medication, etc). Sooner the better As premium rise with increasing age, the younger you are when you purchase life insurance, the lower premiums you will be required to pay.

Review your cover periodically Any life change indicates the need for an overall review of the financial plans. Make sure you have enough cover for all important events of life.

Focus on annual installments You may not realize it, but you may be paying more for your life insurance if you pay your premium in monthly installments. Many insurance companies charge extra fees if you make monthly premium payments instead of paying the annual premium.

Never conceal facts Though, age and negative health related conditions attract higher premium, don’t think about lying on the insurance application. If your insurance company gets the knowledge of concealed facts they can terminate the cover.

Today I was talking to a friend who was telling me about his Insurance cover. He is a 32 year old guy and has a cover of Rs 7 lacs and pays a premium of approx. Rs 50000. When I told him that I’m covered for Rs 35 lacs with only Rs 20000 premium, he did not beleive me at the first instance.

If you haven’t started a family, an Insurance cover is the least of your priorities. But even though it’s not that cool to be insured, it sure is smart when there are people who depend on you.

A very simple way of looking at your economic value towards your family is as follows. Imagine a monthly income of Rs 20000 and the net income provided to the family is Rs 18000 after deducting Rs 2000 for personal expenses. Thus the annual income provided to yr family is Rs 226000. The amount of money which will earn Rs 226000 pa at 8% interest rate is Rs 28,25,000. This is only a representation of the value of HLV. It is not the exact way of calculating yr HLV.

Right now you can go to this page to calculate your HLV, The future income growth, your income generating assets, liabilities, spouse income, children’seducation, etc are also to be factored in.

Ask your agents about the term assurance plans and he would definitely discourage you from taking one. After all there’s little commission he’s getting there since the premium is so low.

The point is that Insurance is NOT Investment.