Tag: Life Insurance

Do you have an insurance policy? -Read an amazing irony about Insurance

Posted on by Jagoinvestor

Imagine you are 25 years old earning 6 lacs/year, with a family to support financially. A Term insurance policy with some cover (may be 25 lacs) will have premium of 5k per year (for 25 years old) as the premium for this policy.

Almost 99% people need Term Insurance, But most of the people show good amount of reluctance, because they see “wastage of premium” incase nothing happens to them.

The amazing irony about Insurance

Let us try to see what are the reasons for this?

This happens because of some psychological reasons. Some of the reasons and counter arguments are :

1. People are not ready to accept subconsciously that they have equal probability of death like others; everyone assumes themselves to be little safer than others.

Counter Argument : A different case, someone tells this person that he has chances of dying within 20 years somehow explicitly, there are greater chances that his perspective about Term Insurance will change and he may go for a good amount of cover with this premium, the reason is that now he sees these [premiums as risk cover fees and not wastage.

Now he has convinced himself that there are good chances that his “death” is possible and his family needs some good cover, although there has not been any change in his lifestyle or life in general, all what matters is his attitude towards Risk coverage.

2. People do not concentrate on the value provided by Term Insurance and its cheapness, it is taken for granted.

Counter Argument : I did this very small survey where i asked my friends online. See one of them below

manish_chn: if your company says that it will cover your family for 25 lacs, but will cut your salary to some %
manish_chn:what will be the max % you are ok with
manish_chn:just the first number which comes to your mind
manish_chn:no calculation
manish_chn:please
rajagopal: hi
rajagopal: never thought about such things.
rajagopal: probably 5%?
rajagopal: without any calculations

This shows that a person somehow feels comfortable with 5% of his salary getting cut for just 25 lacs of cover for his family; it means that he can pay the price of 5% of his salary per year for 25 lacs cover.

Some people were even ok with 10% or 7%, on the average it was greater than 5%, whereas the real worth of cost is less than 1% of their salary (everyone’s salary is more than 6 lacs/year ). Cost of 25 lacs cover in market = 5k – 5.5k per year.

3. People pay money from their pocket after getting salary, so it feels that they are giving money unnecessarily.

Counter Argument:

If you make term insurance mandatory for everyone and cut 1% from their salary (6 lacs salary, and cut 500 per month for insurance premium of 25 lacs). In this case there are very high chances that almost everyone will feel that it’s a good thing. And they will even appreciate this move (there are always exceptions, but i can’t help those people).

What it shows is that people are lazy, when you do things purposefully; there are great chances that they will understand the importance of something.

So, if you give them 100% salary, they might not take the term insurance.

But if you give 99% salary and 1% is cut as insurance premium, many people will tell others how great there Company is !! (You can also just cut 1% and put it in your pocket and give them 99%, some people don’t even notice these things)

Summary

Understand that a lot depends upon yours perspective about something. When you see things in a different way, its meaning and importance chances totally for you.

Jeevan Astha .. Another idiotic product

Posted on by Jagoinvestor

LIC has introduced another Product called “Jeevan Astha” …

http://licindia.com/endowment_008_benefits.htm

Let me take one by one each line and do some analysis and raise some questions.


A)Death Benefit:

On death during the first policy year: Basic Sum Assured with Guaranteed Addition.

On death during the policy term after the first policy year, excluding last policy year: 1/3rd of Basic Sum Assured with Guaranteed Addition.

On death during last policy year: 1/3rd of Basic Sum Assured with Guaranteed Addition along with loyalty addition, if any

Some points here to consider:- Your risk cover will be 6 times your investment and just 2 times for the rest of the duration + some loyalty addition if any. So, in a nutshell, it as good as saying your Cover is just 2 times your premium …

– What does it mean? you will get double our initial investments if you die after the first year.

This is the case when you die …

B)Maturity Benefit:
On maturity, the Maturity Sum Assured along with Guaranteed Addition and Loyalty Addition, if any, shall be payable.
Maturity Sum Assured shall be 1/6th of Basic Sum Assured.

– Means, if your premium is Rs 1,00,000, then Basic Sum assured is Rs 6,00,000 and hence, Maturity Sum Assured is Rs 1,00,000

C)Guaranteed Addition:
The policy provides for Guaranteed Addition at the following rates:

  • Rs. 100 per thousand Maturity Sum Assured per year for a policy of 10 years term.

  • Rs. 90 per thousand Maturity Sum Assured per year for a policy of 5 years term.

– Means, if your premium is 1,00,000, then your Guaranteed Addition is Rs 10000 (10 yrs) … Means, You will get Rs 1,00,000 as Guaranteed Addition in 10 yrs .. and along with your original capital, you will get back Rs 2,00,000 back after 10 yrs.

D)Loyalty Addition:
Depending upon the Corporation’s experience the policy will be eligible for Loyalty Addition on death during the last policy year or on the Life Assured surviving the stipulated date of maturity at such rate and on such terms as may be declared by the Corporation

This may or may not be there.

Now, let’s take a real like example.

Ajay takes a 6 lacs policy over a 10-year term.

Jeevan Aastha Premium = 96,960
The amount he would get if he dies in the first year: 6,00,000
Amount on Maturity : 97000 + (10*10000) = 197000 (loyalty bonus is not assured , so not adding it)

from what angle do you think this policy makes sense. You are maximum doubling your money in 10 yrs and nothing else. And the best time to die after taking the policy is the first year itself .. then you can get a little benefit (but still at a big cost).

I don’t understand why people complicate things .. LIC plans to collect Rs 25,000 Crores from this policy, and I am sure they will succeed. Because there are many people in our country, who don’t understand the effects of Inflation, compounding and get confused with all those confusing statements.

Now if you are a regular reader of this blog .. then you should be able to utilize Rs 97,000 to generate better returns than Jeevan Astha.

Let us do this …

1. Insurance for the cover of 6 lacs, not just for the first year but for all 10 years .. Simple: Take a term Insurance of Rs 6 lacs for 10 yrs, it’s around Rs 9840 (single premium, SBI life insurance for a 26 yr old ) …

2. After this, you are left with around 88,000, which you should invest in Equity Diversified mutual funds either one time or through SIP for 10 yrs … Even if we take a 10% return. It would be 2,28,000.

When it comes to Investing, just Keep it Simple, Stupid (K.I.S.S) … 🙂

UPDATE (28 AN 2009 ): Shyam Pattabi (writes for HINDU) also shares his similar thoughts on this product at http://www.shyamscolumn.com/2009/01/guaranteed-return-schemeanyone.html ( i am glad I made correct analysis)

Update (Jan 19, 2008): On NDTV Profit, Monika Halan has given comments that “Jeevan Astha” should be the last product you should look for and only if you have cash to put nowhere, They have given “Don’t Buy” rating to this product and they also said that this product has lots of hype got created. Monika Halan is Editor of “Outlook Money” and One of the most mature and best personal Finance advisor I can think of.

 

Disclaimer: The above analysis is based on my study and should not be taken as investment advice or discouragement from advice, use your own analysis to take your decisions. I will not be responsible for your investment decisions.

Happy Investing
Manish

Are you willing to buy term plan? – Here are some important tips you should know before buying term insurance

Posted on by Jagoinvestor

We will today discuss some of the best practices and must do things while taking a Term plan.

Click here to read what is Term Insurance and its Importance

Tips before buying term Insurance

1. Take a policy just before your Birthday.

Term Insurance premium depends on your Age. So if possible try to avoid taking the policy just after your Birth date. What i mean by this is that try taking it before you turn +1 year in age. If your Date of birth is 10/11/1983, and you take the policy on or before 10/11/2008, you will be considered of age 24.

But if you do a delay of 2 days … and you take a policy on 12/11/2008. You will be considered 25 yrs old and hence your premium will increase by 4-5%.

Note : It does not mean that if your birthday just passed by and now you want to take Insurance, then you should wait for another year. that’s not what i am saying 🙂

For example:

For a male with DOB on 10/11/1983 (24 yrs old), the premium for Rs 50,00,000 cover with tenure of 25 yrs, is 10157, if the policy is taken on 09/11/2008 (just 1 day before the birthday). Where as if he takes the policy on 12/11/2008, the premium will shoot up to 10647 (Rs 490 more) .. though 490 is a small amount, but if we can avoid it by taking the policy little early .. always try to do it.

Even a small amount like 490 saved over 25 yrs in a PPF would give 45,000 and in mutual fund with 12% return will give 77,000.

Note : The gist of the point is that try to see this small point while taking the Term insurance, it does not mean that you wait for 8-9 months just to take the policy before a birthday.

2. Try to diversify your Policy

If possible try to diversify your policy amount over different Insurance companies. If you want to take an Insurance of 50,00,000, it would be better if you take 2 polices, rather than 1 single policy.

How it helps?

– If you hold a single policy and the company does not honour the claim, dependents wont get anything, but if there are 2 parts, then there are less chances that both the companies with not honour the policy.

– If your liabilities come down or you have less dependents after a couple of years and ultimately you need to bring down your Life insurance cover, you can simply stop one of the policies and continue the other one.

– It helps in diversifying the risks involved with the Insurance company.

3. Buy a policy early in life and for longer Tenure.

Its always recommended to buy a Term Insurance early in life and for maximum tenure possible. In your early life you are more healthy and hence your premium will be lowest. Also by taking insurance for a large tenure you are making sure that you are covered for a large period, but the premium will be marginally more.

For example : For a cover of 50,00,000

Example - why it is necessary to buy term insurance early

 

You can see here that you have to pay marginally more for an extra cover of 5 yrs. So for example, a person with age 25 will pay 14,000 more than the 30 yrs old, but he will be insured for 5 additional years. So it always pays in long term.

Also taking a 30 years term insurance once will be very cost efficient than taking a 20 yrs term insurance now and then taking a term insurance of 10 additional years after 20 yrs. Because after 20 yrs, the premium you will pay for that 10 yrs tenure term insurance will depend on your Age that time and health that time.

Note : Premiums are from Aegon Religare Life Insurance.

Why buying an Endowment policy is not a good choice?

Posted on by Jagoinvestor

Today we are going to see why Endowment policy should be avoided in any portfolio and how other things are much better than Endowment policy with the same cost .

The assumption is that you understand what are Endowment policies and What are Term Insurance Plans, if you don’t know click here to read about it

endowment policy

A look at the Endowment Policy

An Endowment policy would look like this for a 25 yrs old

Tenure : 30 yrs
Yearly premium : 31,000
Sum Assured : 10 Lacs
Maturity amount : 23.1 Lacs ( this you get when you survive full tenure, It includes the sum insured + Bonus accrued)

This data is from website of an Insurance company.

Q . How much money to be paid every year? How much will the person get in case of Death or Survival? What are the Risk factors?

Ans :

Tenure : 30 yrs
Money outgo : Yearly 31,000/yr
Money received In case of Death : 10,00,000
Money received In case of Survival : 23,100,000
Risk : Virtually no risk (The only risk is when the Insurance company goes bankrupt)

What is the interest earned on this investment? 31,000 per year for 30 years becomes 23,10,000.

Annuity formula is :

Maturity value = Amount paid per year * [ {(1+r)^n – 1}/r ] * (1+r)
Here n = 30 years
and r = rate of interest earned

Putting all these values

23,10,000 = 31,000 * [{(1+r)^30 -1}/r] * (1+r)

The value of r which satisfies this equation is 5.4. Which means that the interest earned by the investment in Endowment policy is mere 5.4%, which is truly pathetic by any standard in India at least. There is no investment product known which is known to pay so badly.

The reason why people feel that endowment policy are so good is that they also get insurance cover ( which is virtually useless because its so less that it does not even cover the financial dependents to even a fraction of what they need in reality)

So can we mix Insurance + investments product which can be better than supremely better than Endowment policies and still cost the same( or even less).

Now let us see that by spending same amount (30,000, 1,000- less than the endowment policy) every year for 30 yrs, can one achieve better than this.

Watch this detailed video in which the difference between Endowment policy and Term plan has been explained from basic concepts

1. For Safe Investor (Let us first see a almost 100% safe way to do this)

Term Insurance of 30 Lacs for 30 yrs : 6k
Investment of 24k in PPF for 30 yrs : 30 Lacs (this is assured returns, as its invested in govt backed PPF, which gives 8% post tax returns )

Amount invested = 30,000 per year for 30 years (same as Endowment policy)
Amount received on death : 30 Lacs + investments done in PPF
Amount received without Death : 30 Lacs (investments)

2. For Aggressive Investor ( A person who can take more risk that the former one)

Term Insurance of 70 Lacs for 30 yrs : 14,157
Investment of 17,843 ( 30000 – 14157) in ELSS for 30 yrs assuming 15% CAGR : 92 Lacs

Amount received on death : 80 Lacs + investments done in ELSS
Amount received without Death : 92 Lacs (investments)

Equity investments for long term are almost risk free.

So, we can see here than in any case term insurance + MF is supremely better than Endowment policies.

#Solution for People who have taken fresh policies

People who have already taken fresh policies and have not completed 3 yrs should just forget there payments and stop there premium payments. The profits of switching from Endowment to “Term + MF” will be far greater than the loss from leaving Endowment policies.

#Solution for People who have completed more than 3 yrs

Either convert your policies to Paid-up or just surrender your polices and take the Surrender value (take your call on what you are comfortable with)

#Solution for people near the Maturity

You have almost paid most of the installment, so better stick with it, but don’t forget to insure yourself to a respectable cover through term insurance

Summary

Endowment policies according to me are totally incorrect and worst product i have ever seen (ULIPS are not far behind). It is structured and presented in such a way that investors are attracted to it. Agents present them in such a fancy way and give judgements which make these policies look like must have products.

Disclaimer : The exact figures can differ, this is just a demonstration of how Endowment policies can not be better than Term Insurance + MF combo. All the Insurance premium are for Aegon Religare Life Insurance and Mutual funds payments are considered monthly (amount/12).

All the view on this article are personal, some people may disagree with it which is totally acceptable.

Aegon Religare Life Insurance – New hope for Indian Insurance Industry

Posted on by Jagoinvestor

Aegon Religare Life Insurance which is recently renamed as Aegon Life Insurance is a new Player in Indian Insurance Market.

This company seems to have clear understanding about the Insurance Market and what India needs exactly, there main focus is on Term Insurance and that makes it respectable in my opinion, its not like other companies concentrating on Endowment and Money Back plans and tag them as Great Insurance products, which is nothing but Saving and investment products with a pinch of Insurance.

aegon life insurance

About Aegon Life Insurance

AEGON : Aegon is one of the largest life insurance and pension groups with market in over 20 countries (Americas, Europe and Asia) with 40 million customers. It has more than 160 yrs of experience.

RELIGARE : Religare is one of India’s leading integrated financial services groups. They have 1550 locations spread across over 460 cities and towns in India.

Products Offered by the Company

AEGON RELIGARE Life Insurance has excellent products as far as Term Insurance is concerned. They also have ULIP plans.

In Term Insurance they have the minimum rates for Term Insurance plans. You can check their Premium Calculator here. They have 3 different plans.

1. Level Term Plan :

In this cover remains same through out the Tenure. Premium for amount Rs.50,00,000 (50 Lacs) for 30 years.

Male/Female (25 yrs) : 9,000 per year
Male/Female (30 yrs) : 12,150 per year

2. Increasing Term Plan  :

Cover increases by 5% every year. Premium for amount Rs.50,00,000 (50 Lacs) for 30 years.

Male/Female (25 yrs) : 13,800 per year
Male/Female (30 yrs) : 19650 per year

3. Decreasing Term Plan :

Cover decreases by 5% per year (Tenure = 20 years max). Premium for amount Rs.50,00,000 (50 Lacs) for 20 years.

Male/Female (25 yrs) : 7,100 per year
Male/Female (30 yrs) : 7,900 per year

One can choose the plan as per there requirement. The best part is that there rates are very very low. This Term insurance is worth a consideration.

Click here to understand why you need Term Insurance and not Endowment or Money Back Plans.

How to calculate Insurance Requirement

Posted on by Jagoinvestor

There are lot of assumptions related to buying life insurance in India, because of underestimating the future non-life threats like job loss, accidents and also the life threats which will have a bad impact on your families future requirements in case of your untimely demise.

Today i will discuss about the calculation of insurance Amount one needs to protect his family even though he will not be there for them.

Life insurance

How much should be the Insurance cover?

You will hear that it must be 6-7 times of Gross yearly income which is good enough estimate. but it does not consider other things like Debts or living style. It may be true for you but not for other. Some people may have simple lifestyle, whereas some other can have expensive lifestyle. So lets answer this question in another way.

This is pretty easy to answer, The life Insurance amount much be enough to –

  • Pay off all the debts
  • Should be able to provide monthly income which is good enough to cover family expenses
  • Any emergency or unplanned needs for future.

How to calculate the Sum Assured?

While deciding the  total sum assured, you need to consider all the factors that may affect to the financial life of your beneficiary when you will not be around. You should understand the expected cost of living for your family in your absence.

Some of the basic aspects that you should take into consideration in order to calculate the total sum assured are listed below:

  1. Calculate the total one time expenses which can be paid in lump sum also, like, Loan, credit card bills etc.
  2. Make a addition of all the assets like mutual funds, stocks, FD/RD, property etc. (Exclude those assets which your family is not willing to redeem or offset with the lump sum amount of liabilities)
  3. Deduct the liabilities from the assets ( or assets from liabilities in case liabilities are higher)
  4. Calculate the annual expenses of your family
  5. Decide the number of years for which you want to provide insurance cover
  6. Consider this amount for as a sum assured for your life insurance cover.

Let’s take an example.

Example :

Ajay is 30 yrs old and earns 40,000 per/month. He is married and has 2 kids. There monthly expenditure is 20,000 per month.

  • His debts and future expenses.(total : 47 lacs)
  • Home loan of 24 lacs (remaining)
  • Car loan of 3 lacs.
  • His children studies expenses. (20 lacs , in future)

His investments are (total 8 Lacs)

  • 5,00,000 in Fixed Deposits
  • 3,00,000 in Mutual funds

He has 47,00,000 worth of Debts and expenses in future and monthly expenses of 20,000 , considering inflation @5% , which will also increase every year. His Insurance money should be able to pay for both of these.

We have to answer that how much money will provide 20,000/month (post-tax) or 2,40,000/year.

Considering 15-20% tax, the family should get 3,00,000, so that after paying tax they are able to get 2,40,000 per year. So how much money will give them 3,00,000 per year.

Fixed Deposits rates are around 9-9.5% per year. Which means 3,00,000 X 100 / 9.5 = 32,00,000 (approx).

So if they have this much amount in Bank which pays interest of 9.5% yearly, they will receive around 3,00,000 per year as interest and after paying taxes, they will be left with 2,40,000, which can meet there monthly expenses.

Also the insurance amount should have 47 lacs extra, which will be used to pay there debt and future expenses.

So total = 32,00,000 + 47,00,000 = 77,00,000

As he has 8,00,000 worth of investments also, His Insurance needs comes down to 77,00,000 – 8,00,000 = 69,00,000 (let’s make it 70,00,000)

This is the minimum amount for the insurance needs.

It should also be considered that the expenses will rise and some emergency may also happen. So insurance can be increased by 10-15%. But for the moment we will not do it. Its in fact not necessary in this case because the money for future expenses can be invested and which will grow .

Tracing Back

So we arrive at the figure of 70,00,000 . Now lets go back again and see that in case there is sudden death of the family head (earning member), how this money helps the Family..

They receive 70,00,000, Out of which they pay 24,00,000 of home loan

Money left = 70,00,000 – 24,00,000 = 46,00,000

They put 32,00,000 in bank or Monthly income plans, which will provide them with monthly income of 20,000 per month (post-tax).

Money left = 46,00,000 – 32,00,000 = 14,00,000

Now this 14,00,000 can be invested in Debt or Mutual funds which will grow to become at least 20,00,000 in some years (considering its needs after 10 yrs at least.

At the end of 10 yrs, when family needs this 20 lacs for there children education, they can use it. And for any emergency needs they have another 8,00,000 in investments.

So in general All the requirements of Family is taken care of. If insurance amount is less than 70,00,000 they will have to compromise at one place or the other.

Why it is necessary to have as life insurance cover?

Life insurance is an important instrument to make your dependents life secure, in case of your untimely demise.

Life insurance requirements

Though there is nothing great in that, but most of the people miss on this part and according to studies, more than 80% of people in India are under insured, which means the amount there nominees will get will not be able to cover them against the financial crisis.

In case you have not read my previous articles on Life insurance, please read them

How much will the Life Insurance cost him per year?

As I write this Article, I can see on https://www.click2insure.in/ that for a 30 yrs old non smoking male for 25 yrs of cover, the minimum premium per year for 70,00,000 Term Insurance is Rs.21,000 per year (taxes extra).

The premium is just 4.4% of this yearly income. Just imagine how cheap term insurance for total peace of mind for rest of the life.

So whats the final formula?

Insurance cover = A + B + C – D

Where,

A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest rate which bank gives in a year , example 9.5%)

B = Future Debts or Expenses.

C = Some money for contingency or emergency.

D = Your investments or Assets (excluding HOME)

If you are under insured, please take extra life insurance and cover your family. You can also buy insurance under MWP act.

Please read my earlier articles on Term Insurance to understand more.

I would be happy to read your comments.

Some of the best investment products I know about

Posted on by Jagoinvestor

When it comes to investment, everyone is conscious and curios to know about the best investment products. In this article I’m going to tell you about few of such products that I know and I thing they will be helpful for you.

Best investment products

1. Term Insurance

Term plan is an affordable insurance which provides a full protection cover for your family at a very low premium cost. One of the best products in Term insurance markets I know is SBI life Insurance Shield Plan.

Before taking any Insurance into consideration, we should give importance to

  1. Premium amount you pay : Premiums are among the cheapest in market
  2. Claim settlement Rate : Next only to LIC

There Shield plan is designed very nicely, have a look at it and you will love it.

2. UTI Gold ETF’s

It is simply an investment in gold which tracks it’s price on day to day basis. It has its own expense ratio which is very high is compared with US market, but it is the price that we pay to invest in gold electronically. You should have a demat account to invest in Gold ETF’s and you can trade these ETF’s through stock market.

If you want to invest in GOLD, try this ETF, search GOLDSHARE or UTGOLD (if you are on ICICIDIRECT).

3. Mutual Funds

Mutual funds are categorized on the basis of its objectives, style and strategy. Investing in Mutual Funds only is not enough to get good returns. You should know about the types of mutual funds and then invest in different funds by deciding your goal.

See here some of the good options of mutual funds to invest in :

ELSS

  • SBI magnum tax shield
  • Principal Tax saving

Equity Diversified Mutual Funds

  • DSPML Equity
  • HDFC top 200
  • Magnum Contra

Balanced Funds

  • HDFC Prudence
  • DSP Balanced
  • UTI Mahila Unit Scheme

Debt or Liquid Funds

  • Kotak Flexi
  • Birla Sun Life Income

(see details of these mutual funds at https://www.valueresearchonline.com/)

All you want to know about Term insurance and Endowment policies with suitable examples

Posted on by Jagoinvestor

One of my good friend had a small argument with me, that she would not invest in Term Insurance, because she will not get any “returns” out of it. I believe investing in a term plan looked a very unprofitable thing to her as she never gets back the money she paid as “premiums”, if she survives.

Endowment plans looked nice to her, because they provide money if you are dead and even if you survive. You get back money as the prize for not dying !!!.

term insurance

 

With respect to Term insurance, she understood the fact that her family will get the money from insurance company in case of her death, but she was concentrating on the fact that she would not get back anything if she survives.

What is the return in that case? Nothing !!! and looked like some one is fooling you with a product called “Term Insurance”, where you are “investing” premiums to get nothing at the end.

Let me now tell why this happens and some give you some insight on this matter.

I have already talked earlier in my last post “Life Insurance and how to go about it”, about Term Insurance. Let me now take more deep dive into it and talk about the reasoning part.

I will first talk about fundamentals of Insurance and then talk about Endowment Policies and why are they popular, and what people don’t realize about them. and how Term insurance is the right thing for most of the people.

Basics of Life Insurance

What happens in a average family :

There is someone who earns and his family comprises of wife, kids, parents. if not all there is a subset of these family members. The head of the family earns and his family lives happily. All the expenses are met from the earnings of this main member, most of the time the husband. Now consider this person dies in an accident or for that matter because of any event.

What happens?

What happens to his family members other than the psychological trauma. If they don’t have money to take care for them selves, either some one from family have to take up the job and start working which may not be possible for them, or They have to decrease their standard of life to maintain the expenses.

They are now totally unsecured from future’s point of view. In short they are totally messed up, which should not have happened. I gave this detailed explanation for the circumstances because i wanted you to understand how bad can happen and proper measures must be taken care for this.

What is the Solution?

Adequate Coverage !!! this cant be compromised… You must have a backup plan which can give your family the same kind of income which confirms that they are not short of money in case the main earner is gone. If there are some debts like Home Loan, or any other tasks which need money apart from regular income, the cover must be good enough to cover that too..

why it is necessary to buy life insurance

For example :

Robert has a family expenses of 25,000 per month and there is a Home loan of Rs.25 lacs to be paid within 10 yrs. He is 27 yrs old. He has a wife, 2 kids and parents. All of them are dependent on him financially. He has investments of 5 lacs. Now in this case. In case he dies, who will take care of Home loan, how will provide them enough money to live life comfortably. They need 25k * 12 = 3 lacs per year.

Which they can get per month if they have 35-40 Lacs of money. If they put this in bank, they will get Rs.25,000 per month as interest which they can use. Considering inflation it will not be enough after some years, but lets leave it now for this example.

Add home loan of 25 lacs to this 40 lacs and what we come to know is that this family must be covered with minimum Rs 65 lacs . Rs 75-80 Lacs is a decent cover for this family. Now if he takes a cover of 80 lacs for his family, from that day he can happily live all his life without any tension , thinking what will happen if he is not there.

He will be attain peace of mind , and not be worried for it.

He must get a lot of internal peace because his Family is protected with a good enough cover to take care for them. And this is what you get in “return” from Insurance. No monitory return can give you more satisfaction than peace of mind.

So before doing anything else, his first step is to give adequate cover to his family and that’s the most important responsibility for him as a Husband, Father, Son. He must understand that this is not an investment for monitory benefit later in his life, but its for his family happiness and future.

Life insurance under MWP act is also one of the better option for married man. One point to remember and not forget is that this is the minimum cover required for family and anything less than this will be taking risk with family future.

Endowment or Money back Policies

Lets discuss the problems with these plans with respect to the above example.

High Premium : For an 80 lacs cover for say 30 yrs, the premium payable will be At least 2-2.5 lacs/year (this is a conservative figure). So now premium so high is not possible for anyone like Robert, so what they do?

They go with a kind of cover for which they can pay premium easily, can then they take cover for 5 lacs, 10 lacs or maximum 20 lacs. And guess who suffers in case of his death : HIS LOVED ONE’s.

It might also happen that they are compromising on a lot of small things which are important at that moment in time, like buying a bike for son, which they cant buy because of the insurance they have to premium, or some vacation they could have gone to with family, but compromise on that because of premium.

Money back at the end of the maturity is like a penny after so many years :

This is some thing most of the people overlook. They just see the numbers, 5 lacs 10 lacs or 20 lacs. And at the time of taking Insurance it looks good figure to them, because they see numbers, they dont see its value after many years, They don’t consider Inflation into account.

In case of above example, if Robert takes a cover of 15 lacs by money back policy, what happens if he survives the tenure. He gets 15 lacs at the end, Great Money after 30 yrs. Isn’t !!!

Lets see how great this money is? His monthly expenses will grow from 25,000 per month to 1.5 lacs per month (considering inflation of 6%). Now this money will help him survive for not more than 10 months … For so many years he pays high premium each year, just to get back money to cover his 10 months monthly expenses? What the hell !!!

Under Insurance :

Because of the fact that people want money back on survival and because of high premium, people end up taking policy for which they have to pay premium under there budget, which means less cover.

Without realizing the fact that they are highly under insured, the reason for this is that they see Insurance as investment product and not a protection cover for there family. When they die, there family get the money from Insurance company, but most of the time its not enough for them and it erodes very soon.

Term Insurance Policies

Lets discuss the features of Term Policies with respect to above example.

Cheap Premium : The premium is very low for Term insurance Policies. For above example. The yearly premium for Rs.75 lacs cover for 25 yrs is just Rs.20,000 yearly or just 1,600 per month !!! .

This is in any way affordable for most of the people. Its providing the fundamental requirement of Good cover and low premium and if you think of returns, Good cover and low premium can themselves be seen as good enough return. You family protection at low cost is the return you get.

Watch this video to learn more about Term insurance and it’s benefits :

Opportunity to invest rest of the money in High return Investments :

With term Insurance you save a lot of money in premium and now you can invest this money as per your wish in high return instruments, anyways in Endowment policies you put money for long term and you get it after so long time. So you can now always put your saved money in things which are long term investment products and return great returns.

One of those things is Equity Diversified Mutual funds and Direct Equity (depending on persons ability and interest). In long term Equity Diversified gives fabulous returns (15-20 yrs) and the risk is minimized because of long term.

And if you consider India growth story , it looks great in long term , hence Equities for long term is the most obvious choice. They will give you return of 15%+ CAGR. (15-20 yrs)

Also it will be flexible , you can not invest for a year or two, if you want to use the money for your family vacation or some important event.

Conclusion :

Insurance is not an investment product, its a Protection instrument for your Family or any one your want to cover. There are other products for your investments.

Let your finances be the way you want your life to be , SIMPLE !!!

Don’t mix Insurance and Investments. There are products like ULIPS(What are ULIPS) and Endowment or Money Back policies which never excited me. They complicate things, confuse people. They can be good if you understand how to make most out of it, but it require knowledge and expertise. They offer some flexibilities, but still they are not worth it.

Read more on Term Insurance at my Old article. I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Disclaimer: All the opinions are personal and shall be taken as knowledge sharing and not as encouragement

Life insurance is an Insurance product not an Investment product – Indian people’s mindset about life insurance

Posted on by Jagoinvestor

Life Insurance is nothing but the insurance covered for your Life. In case of death the sum assured is given to the nominees. Unfortunately in India, people see Life Insurance as Investment Product and not as an Insurance Product.

They don’t understand that insurance gives financial security to their dependents in case of there death, rather they see it as the last benefit provided to them and the most important thing for them it that they get the money-back in case they survive the tenure of Insurance.

life insurance

Common people’s mindset about life insurance

People are ready to pay higher premiums to Insurance Companies for a policy which gives them death and survival benefits like Endowment plans and Money-back plans.

People are not ready to pay premiums if they don’t get any thing in case of surviving the tenure and that’s the reason why Term Insurance never became popular in this Country. That’s also the reason why many people are under-insured because of the high premium, they cant pay for higher insured sum.

Many People even don’t know that Term Insurance exists, the reason for that is their insurance agent never told them about it, because they get a very little commission on it unlike Endowment Plans.

Life Insurance is to provide a good enough cover to dependents in case of death. This is the only target for life insurance.

Watch this video to know the difference between life insurance and term insurance:

Case Study
——————-

Rajesh is a salaried person with a salary of around Rs 20000 per month, He has 2-3 dependents like his parents and wife.

Rajesh can afford a maximum of 10% of his salary as an insurance premium outgo in a year.

So Rajesh takes Endowment plan of Rs 10 lacs for 20 years in 2005.

  • If he dies between 2005 – 2025, his family will get Rs 10 lacs.
  • If he survives till 2025. He will get Rs 10 lacs.
  • Monthly premium = Rs 2,000
  • Total premium in a year is 24,000
  • Cover: Rs 10 lac

There are some points to consider here.

  • He is highly Uninsured, Rs 10 lacs is very less amount to get covered. He needs at least Rs 25-30 lacs as cover, as he has financial dependents.
  • The premium of Rs 2,000 monthly or Rs 24,000 yearly is not a small amount at the moment and adds to his financial burden a lot.
  • In case of survival, he gets Rs 10 lacs but in 2025. Considering inflation at an average of 5%, the current value of that amount will be Rs 3.5 lacs.
  • This means in 2025 the value of that 10 lacs will be very less and considering that after 20 years Rajesh will be earning very good money and Rs 10 lac at that time will be a small amount for him, may be less than what he may be earning in a year.
  • It means It does not benefit him a lot after 20 years.

He could have solved all of his problems if he would have taken term insurance instead of Endowment Plan …

If he takes Term Plan, he can get a lot more cover in very less premium and can invest the surplus money in much better investment avenues like Diversified Mutual funds or Equities.

He can take a term plan of Rs 30 lacs for 30 years, with an annual premium of 9,000 per year. (including service tax, approx).

So instead of Rs 24000 in a year, he can just pay 9,000 can be covered for 30 lacs and that too for 30 years.

He can invest the extra 15,000 (24000 – 9000) in diversified mutual funds with good track record for the next 20 years through SIP every month or yearly lump sum.

Equities in long term outperform all the investment options, In the last 10 years HDFC tax saver has given around 43% CAGR … that’s the magical returns one can expect … SBI MAGNUM Taxgain has done much better …

Let be on the safe side and be pessimistic and consider returns around 18-20% CAGR for the next 20 years.

The investment will be worth

  • Rs 16 lacs at 15% return
  • Rs 22 lacs at 18% return
  • Rs 28 lacs at 20% return
  • Rs 94 lacs at 30% return (less chance)
  • Rs 3.14 crore at 40% return (very less chance)

remember that this is for 20 years and not 30 years. In 30 years it will be much much more … for eg at 20% it will be 1.77 crores and 13 crores at 30%.

If we consider this case :

when he has taken Term Insurance He is in profit at any point of time

– If he dies early his family will get 30 lacs + some investments
– If he dies late , his family gets 30 lacs + his investments which has grown a lot now.
– If he survives , his investments are enough 🙂

The biggest thing to consider is that his Family is covered with good amount in case of his death, which is the main factor and sole idea of Life Insurance.

According to me, Endowment and Money back plans are investment products with a pinch of Life insurance in it. Term Insurance is the best, simple, “pure life insurance” and “must-have” product.

I am not against Endowment policy or Money back Plans, but they have a different motive.

Don’t see what it takes from you, see what it gives you.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Terms and Terminologies used in Finance, Insurance, Tax, Stock Market investment etc.

Posted on by Jagoinvestor

A lot of people avoid investing in shares because of the lack of knowledge about stock market investments. In this article, I’m going to tell you about the important terms and terminologies related to investment, finances, insurance, and tax.

First of all let’s know the meaning of each term.

Terms and terminologies of Stock market investment

Share or Stock: A Share is a representation of the amount of a company that you own. So if you own 100 shares of a company that has 100000 shares you are an owner for 1/1000th part.

Entry Load: Commission paid while purchasing units of a mutual fund from a broker, No Entry Load to be paid if directly purchased from Mutual Fund Office or its Website online.

Exit Load: Commission paid while selling off the mutual funds before a specified time limit. generally it is. 5% or 1% if exit before 6 months or 1 year.

NAV: The current price of each Unit of Mutual Fund, it goes up or down depending on the growth or decline in value of mutual fund investment.

NFO: New Fund Offer, When a new Mutual Fund is Launched, its call NFO of that Mutual Fund.

Different types of funds

Open Ended Mutual Funds: Mutual funds without restriction on Entry or Exit, Anyone can buy or sell the units anytime.

Close Ended Mutual Funds: Mutual Funds having restriction time on entry and exit , there is some particular time duration to buy the units and then its locked for some pre-decided period. For Eg. ABC mutual fund, a 3 years Close Ended Fund.

Growth option in Mutual Funds: Upon choosing this option, a unit holder does not receives any dividend from Mutual funds but the money it is added to investments which helps in increasing the NAV of mutual fund. Its good for people who do not want to receive cash regularly as dividend.

Dividend Option in Mutual Funds: By choosing this option a investor receives the dividend from the mutual funds whenever it is declared. Its good for investors who need regular cash.

Equity Fund: These are the funds which put most of there money in Equity and less in Debt. Equity refers to instruments with high risk and high returns like Shares, and Debt refers to instruments with no risk or low risk and less returns like bonds, Fixed deposits etc. These are high risky and with high returns.

Debt Fund: The funds which put more money in Debt and less in Equity. these are Less risky and with less returns.

Balanced Fund: The Funds which have money in both the categories in a ratio such that it makes it medium risk and medium return Fund. The ratio need not be 50:50 … even a ratio of 70:30 in booming markets can be considered as balanced. and 20:80 in bad situation will be considered as balanced.

Fund House: A Fund House is a company which manages money invested in different kind of mutual funds. Like all the HDFC Mutual funds belong to

Sectoral Funds: These funds put money in a specific sector or a group of inter-related sectors. They have high risk, high return nature.

Fund Managers: These are the experts who manage he Mutual Fund, they take the decisions like, which sectors to put money in, and which company they will pick up, the strategy, the road map, etc …

Watch this video to learn about different terms of the stock market:

Mutual Fund Benchmark: Every mutual fund has a benchmark against which they measure their performance, they perform better than there benchmark it’s considered that they have done good, else bad. For Eg. A lot of mutual funds have Sensex as the benchmark, some sectoral fund investing in Pharmaceutical may have BSE Heath care as its benchmark.

SIP (Systematic Investment Plan): This an investment method through which you can invest in mutual funds every month. Instead of paying 60,000 together, one can take a SIP of 5,000 for a year.

Stock Market: It’s a market that facilitates the buying and selling the shares of companies by connecting buyers and sellers. It can be considered as a mediator between buyer and seller. So anyone who wants to buy or sell shares can do it from the stock market.

Sensex and Nifty: These are indexes of BSE (Bombay Stock Exchange) and NSE(National Stock Exchange). Sensex and Nifty, are indicators of how prices of major stocks are moving at any point in time. Sensex comprises of 30 Shares and Nifty comprises of 50 shares.

They are calculated by a method called “Free Flow Market Capitalization” . When Sensex moves up it indicates that on an average more shares have increased there value and some have declined and vice-versa. It moves up or down depending on the combined valuations of the shares they comprise of.

Market Capitalization: This means how much worth all company shares collectively are. Simply putting:

Market Capitalization = Total number of shares available X Current Price .

Its the total money required to buy all the shares of the company available to the public.

IPO (Initial Public Offer): When a company offers shares to the general public for the first time, its call IPO. The purpose of this is generally to raise funds to finance their future projects and expanding there business.

Correction: It is a sharp increase or decrease in the stock market which was overdue for long. When market goes more up or down than expected because of rumors or for some short term reason, then to average out that correction happens …

Term Insurance: In this, you are insured for a big amount for a very less annual premium, but don’t receive anything when your maturity expires. Its a very cheap form of insurance and considered the best insurance anyone can get.

Endowment and Money Back Plans: In this you get insurance and you get a big lump sum after the tenure expires along with periodic payments in between. The premium is high per Annam.

ULIP’s: These are insurance+investment product, from the premium you pay, some amount is used as your premium towards insurance and rest is invested as per your choice. this product needs a lot of questions to be answered before taking it.

Short Term and Long term Capital Gain and Loss :

In the case of Shares and Mutual Funds, Any profit or loss made within 1 year. Tax treatment will be:

– Short term profits : 15% flat. (2008-2009)
– Long term Profits : Nil

In the case of Land, House, Jewellery, Any profit or loss made within 3 years. Tax treatment will be:

– Short term profits : 20% Flat
– Long term Profits : 30% Flat

Portfolio: Total investments combined are called Portfolio. So if Person ABC has invested Rs x in shares, Rs.y in Insurance, Rs z in PPF and Rs k in Real Estate, it will be combined to his Portfolio.

Trading Account: An account through which a person deals in instruments on the stock market.

Demat Account: An account where shares are stored in electronic format. It’s just an account which stores shares.

Commodities: Commodities are things like sugar, steel, etc … A person can trade in these things also just like shares and mutual funds. Multi Commodity Exchange of India Limited (MCX) is the commodity exchange in India just like BSE and NSE for shares.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.