Insurance v/s Investment v/s Tax savings – agent based business: Finance Trading Times

Insurance v/s Investment v/s Tax savings – agent based business

Let me continue further with Part II of my previous article. In case you’ve not read my previous article, please read it before continuing with this one.

Let’s begin with a question: Who is the biggest investor in the Indian Stock Market? Your options are:

  1. Foreign Institutional Investors
  2. High Net worth Individual
  3. Life Insurance Corporation of India (LIC)
  4. Banks (Foreign or Indian)

The answer is option 3 – LIC. The amount of money LIC collects as insurance premium is huge, so huge that it makes it the biggest investor in the Indian market, beating all big foreign fund houses. Depending upon the policy you take, you may/may not be guaranteed a return. For them to generate a return and pay for their employees and agents, they need to invest the money and make profits. If they promise some specific amount at the maturity, the policy makes sure that the admin charges are big enough to compensate for the returns. Individual Investors end up receiving a slightly better return than what the banks FD offers. That’s a fact. The problem is that individuals don’t know how to calculate the profits on their investments. That’s why the very first article that I’d written, was aimed at giving a brief idea about calculating the profits.

The biggest problem is with the ignorant investors and these agents – neither the investor knows what he wants to achieve (tax benefit, insurance or investment) nor is the agent interested in customer’s benefit. All he needs is a SALE of one such policy, which earns him a commission. Visit the career section of website of LIC India, the eligibility criteria for becoming an agent is as follows:

  • 12th standard pass
  • Age 18 and above

That’s all it takes to become an agent. Same may be true for other insurance companies. It’s true that agents may even have Bachelor’s or Master’s degrees, but the minimum required qualification indicates what kinds of people are suitable for an agent’s work. They don’t even need a basic commerce or economics background – anyone with 12th standard (Maths, Biology, Arts) will do fine. Most of the readers of this blog atleast have a bachelor’s qualification, yet we end up believing these agents, thinking that they know better than us and they can suggest us better solutions.

Last year, a relative of mine celebrated the 3rd birthday of his kid. He wanted his kid to become a doctor like him. After the lunch party, he told me that an agent is visiting him in the afternoon, as he wants to buy some education shield policy, so as to secure the medical college fee. Around 4 pm, an agent walks in with a briefcase which carries a calculator and some pamphlets of investment plans.

Very nicely, the agent explained the benefits of the education shield policy and was continuously attempting to tell my relative how important it is to secure the education money for the kid. He was repeatedly using the sentences like “How will you feel when your meritorious child will secure a seat at the Medical Entrance exam, and then you’ll discover that you are short of money” and “Suppose your kid cannot secure a free seat, and he needs money to take a payment seat or donation seat, that is the time this policy will help”. The investment horizon was 15 long years. During the half an hour of his explanation, I kept quiet, while my relative was getting puzzled with the 3 policies that he had short listed. He finally asked the agent to tell him which one to choose. Nowhere during the conversation did the agent mentioned how much will be the admin charges and what actual profit will my relative make by investing in this policy – probably he doesn’t know how to make the calculations. He finally suggested one policy, claiming it to be the best. My relative finally nodded and said, “OK, on your words, I’m taking this policy”.

Till that time, I was sitting quite. I could not understand why did my relative asked me to wait when he had to take the decision on his agent’s will. However, the deal was finalized. My relative committed a certain amount of money each month, for the next 15 years, to get an assured return at the end of the 15 year horizon.

This situation is quiet commonly observed in our daily lives – at home, shop, office, sometimes even at coffee shops. We see/hear about such policies, call/meet the agents and end up purchasing something that we don’t really understand or better to say we may not even need it. Agents will be after you for everything, for tax planning, for insurance, for policies giving death benefits for your loved ones, for hospitalization, for education for your cute little ones. People call it investments and savings, I call it PSYCHOLOGICAL BLACKMAILING.

I’m NOT against these policies or these agents – It’s a business, someone has to do it. But I’m against the ignorance and faulty decision we take based upon the agent’s advices. Some policies are really good, but our decisions are influenced by what the agents want to sell, and obviously they want us to buy somethings that earn them more commission, not the ones that are right for us.

One of the professors during my lectures at Rotterdam School of Management described the working principle of these agents in the following way:

If I am not gonna sell my crap policy to this customer, some other agent will sell other crap policy to this customer. So let me sell my crap policy to him and earn my living (commission)

My Professor later continued with the following - “The same can be carried on for the following phrase on similar lines”:

If I am not gonna rob this person off his money with my gun, someone else will rob this person off his money with his gun. So let me rob this person with my gun, and earn my living

In essence, the person will be robbed, either by this agent (robber) or the other.

I know, and I agree, that this was something really at an extreme end :- ). However, this shows the truth about the world of brokers and agents. In all my articles, I’ve always talked about the HUGE size of the market. It’s equally true in the world of agents. People are just waiting for profit making opportunities, and the same goes for the agents and brokers as well.

Once the agent left, the reaction of my relative was as follows: “Bahut dino se kuch to lena tha, so le liya (I was waiting to take some policy since a long time, now I’ve taken one)”. Even after paying, he didn’t know what he had bought.

I picked up the visiting card of the agent that he had left. It had 4 logos - LIC, ICICI Insurance, Sundaram Finance & Bajaj Alliance. He was in the business of selling anything and everything – same is true for other agents as well. The next day, I called up on his cell phone. I asked him for a similar education policy that my relative had bought. He insisted on meeting me personally, but I continued the discussion on the phone. I asked him how much will be the cost of medical education 15 years down the line. He had no answer. I asked him what is the cost of medical seat (free, payment, donation) as of today, he gave me a vague range (“Sir, I don’t know but it can be anything from 1 lakh to 8 lakhs). Continuing further, I asked him, “If it’s such a wide range, which policy should I buy and for how much?” His answer was, “Depending upon your budget, you should invest. I’ll help you once we meet”.

The conversation stopped there. The agent had no idea of medical education fee even as of today, yet he’s willing to sell the products for 15 long years. Now let’s look at this real life case in detail:

Purpose: What does my doctor relative want: Security for his kid’s education fee.

How much will be the education Fee 15 years down the line: UNCERTAIN

How sure is the choice of career path for the kid: UNCERTAIN

Returns of the selected policy: CERTAIN sum of money depending upon how much you CONTRIBUTE. YOU have to decide HOW MUCH to contribute. Does this serve the purpose of education shield policy & will that be sufficient at that time?

Right from the purpose & investment of this policy to the career path that his kid will finally choose, nothing is certain. Even after buying the policy, a doctor himself does not know whether he did right or wrong, though he is from medical stream and wants to serve a purpose for a similar stream. What he gets is a RUPEE VALUE of money, which may or may not be sufficient to fulfill the purpose. Depending upon the budget, he has to decide how much he should invest and for how long. He has to make the prediction about the cost of medical fee. And he is the one who is most ignorant about the risks, uncertainties and the products. I made the time value calculations for his investments. After investing so much and for so long, he got nothing better than the return offered by Bank FD.

My readers have been complaining that I’m too pessimistic with investments. So let’s also have a positive outlook now. Suppose that my relative made investments predicting the cost of medical education to be 1 million (10 Lakh Rs) at the time when his kid is eligible for college admission. So he invests x amount of money each month, to get 10 lakhs at the end of 15 years. However, the meritorious kid manages a scholarship and he can complete the MBBS course with just a living cost of 1 lakh. My relative will definitely feel happy as his investment saved him enough money (9 lakhs). But even though he saved money for the future, it comes at a cost. To invest in such a policy, he may have to cut onto certain other expenses for today. May be buying a better car is foregone today, may be moving to a bigger apartment is foregone today, may be a world tour is postponed today, so that his investment for his kids future is secure. Everything comes at a cost. At the time when his kid will be eligible for admission, my relative would cross 45. At that time, despite saving money on his investment, he may repent foregoing a luxury car, a better apartment, a world tour – for which he may not be excited after the age of 45. Be it investments or anything, everything comes at a cost in the present.

If something is not understandable by me, and I’m not able to identify whether my long term investment will suffice my purpose, should I invest in such a policy? Well, atleast I will not do it. I’ll prefer continuously investing in ETF’s or IF’s, as monthly systematic investment plans. If my investments with such policies are “Subject to Market Risks”, I’ll better take market risk on my own by investing in low cost ETF and IF. The fact is that everything is uncertain. If you like to take risks, take it in a systematic way, which does not attract any commissions or high brokerage. Don’t get trapped with the jazzy titles of policies – they are not designed to serve your purpose. If you are risk averse investor, go for bonds, Bank FD’s or PPF account. The choice is left to you, depending upon your risk appetite.

If you fear that your death will cause a calamity for your family and want to buy insurance, buy a death benefit policy. Don’t club it with returns – better take a policy with benefit/returns only in case of death/accident. It’s like throwing your money in the sea and not expecting anything. What we end up doing is taking a mix of policies – clubbing death/accident benefits with returns or tax savings. That is what takes us to the wrong path. Tax-saving buzz word adds to it. It is important to know that insurance should be taken as insurance, not as investment. If you want to invest, invest in investment products (Stocks, Bonds, ETF, IF, PPF, etc). Avoid clubbing the two. Once you start looking at a combined mixed policy, you end up focusing on returns. What you forget is the admin charges and commissions.

After reading my articles on ETFs and IF’s, some readers have asked me to recommend which ETF or IF is better. Well, I am criticizing agents, brokers and their recommendations, and I don’t wanna be categorized as one of them :- )

I am writing with an aim to tell you what’s good and what’s bad in a particular product or strategy. Which brand do you want to buy is left to you.

Keep watching for further content.

Have Comments or Questions? Please post them as comments using "Post our Comments" link below. Your queries will be responded for free in 24 hrs!

41 Comments: Post your Comments

Martin said...(on 10 July 2007 at 03:59 )  

Dear Shobhit Sir,
I want to thank you for writing such wonderful eye-opening artciles. You are doing a wonderful job.

Sankar Rao said...(on 10 July 2007 at 04:39 )  

Hello Shobit,

Thanks for the great article. I just wanted to continue this discussion.

Do you put money in LIC (Forget ULIPs. There I accept you aregument) as an Investment or as a need? You are paying premiums because you would be sure that when a untimely death occurs your family is paid an amount that will help them earn living. If you have invested that amount in any stocks you are going to get stocks worth day?

Shouldn't it be a need where you are ensuring the well being of your near and dear ones for some amount of money. In my view Life Insurance should be there in every individuals expense since its not a investment that you are making for a return but as security for your family in your absence? Your comments?

Investment n Trading Advisor said...(on 10 July 2007 at 23:04 )  

Sankar,

I'm not able to get your question. If you are asking me about my personal life insurance, then I have only one policy. It is a NEED, NOT an investment. I pay x amount of money to LIC each year. No returns, No maturity date, No risk. The only benefit is that in case of an untimely death or permanent disability, the family members will get a lumpsum amount. I'm throwing the money (LIC Premium) in a well, because it does not guarantee any returns to me - as long as I live and able to work. Benefit will come only in case of death or permanent disability. That's what I've advocated in my article, Buy PURE INSURANCE for insurance, and BUY investment products for Investments. Dont club the two.

Does this answer your question?

Suresh said...(on 11 July 2007 at 00:18 )  

Hi Shobhit, Tnx once again for bringing in that clarity. What about a no frill (no return, no maturity) mediclaim policy? Is there something like a pure insurance cover in the market?

Sankar Rao said...(on 11 July 2007 at 20:08 )  

Shobit,

That answers my question. The point that I was trying to argue was Insurance itself is not a bad thing to have but using it as a Investment vehicle is bad.

Thanks

prasad said...(on 12 July 2007 at 02:07 )  

Hi Shobhit, you have given a wonderful article differentiating between Insurance and Investment. Its better to take a Pure Life Insurance as TERM Insurance. Thanks agin for good article.

shashi said...(on 12 July 2007 at 08:12 )  

I want to draw your focus to insurance policy like New Unit Gains Plus- Single Premium of BajajAllianz where allocation is 98%and investment is in euities. It comes with lifecover for which premium is deductible from income generated rom the units allocated.Does it make sense to invest in such a policy.

Investment n Trading Advisor said...(on 13 July 2007 at 00:22 )  

Shashi,

I've gone through the PDF document of the Plan (http://www.allianzbajaj.co.in/lifeinsurance/Products/UGPlusnew.pdf)

In essence, this plan is nothing better than any other insurance policy. Have a look at these fine prints:

Carefully look at the Bottom Left corner of page 2 of the document:

First Year Allocation: only 76% ( that means 24% charges are deducted in the very first year - is it worth it??)
Second Year onwards - 97% ( means 3% charges from 2nd year onwards. Does it make sense to pay 24% straightaway in the 1st year itself, and later 3% each year?).

Assume that I take this policy for 10K investment each year. My first year investment will be only 7.6K.
Then there are other charges as well - Another 240 Rs. charged annually in the name of administration, and this will keep on increasing at 5% each year. Fund mgmt charges are seperate - with equity investment attracting 1.75% per annum.

Another thing is that this policy only assures a 5 time death benefit amount. If someone takes this policy for 10K annual premium, then on death he's assured only 50K max. Does this serve the purpose?

Compare it to LIC's no-frill policy (throwing money in a well). For 10K each year, I will be able to secure a death benefit of 50 Lakhs (plus additional accident benefit). If you just want the death benefit of 50K, you may get it for as little as 100 to 200 Rs. as annual premium.

It ultimately depends on what is the purpose for which you are taking the policy. The point i'm trying to make in my article is that insurance policies should be taken as pure insurance - expect no returns, just death/disability benefits -throw the premium money in dustbin. The moment you club it with returns, you'll have to start worrying about admin charges, maintenance fee, etc. and you end up focussing on returns.

The 1st page of the document begins with this sentence - “IN THIS POLICY, THE INVESTMENT RISK IN INVESTMENT PORTFOLIO IS BORNE BY THE POLICYHOLDER”.

Have you already taken this policy?

Mohan said...(on 13 July 2007 at 04:35 )  

Hi Shobit,
Thanks for the article. A relative of mine gifted me with a Child Career Plan for my daughter on her naming ceremony. Though i had my doubts about the plan, i simply went ahead as its a gift given with noble intentions.

I'll be paying a premium of 10k at the start and i believe the premium will go down as the years go by (correct me if i am wrong). The issue i had was at the time of her turning 18, LIC is going to pay 93K which i feel is a small amount if she intends to go for an engineering/medical education.

I am sure i'd get much better returns if i simply start investing say 10k in a PPF account for 15 years at ~ 8%. The total returns i am getting on the LIC career plan is around 5.5 Lacs by the time she turns 28.

The LIC agent was trying to sell Pension plans as well in which i didn't show much interest. Do you think Pension plans are any better?

The agent was pyschologically blackmailing ( as you mentioned...:) us into the plan by assurring us of monthly payment when i turn 55/58 till i am alive.

I agree with you in the sense that insurance should be taken only for insurance and not investment. Its only when the agents start talking about investments and returns, our eyes perk up and we fall in to the trap.

Keep up the good work.

Regards,

Mohan.

shashi said...(on 14 July 2007 at 22:45 )  

Dear Sobhit. The policy I requested you to see is New Unitgains Plus-Single Premium.
Premium is to be paid only once and allocation is 98 %.
2 lakhs paid once gives life cover of 10 lakhs and lockin is 3 years.
If allowed to remain , the money keeps growing and part money withdrawal permissible after 3years. Therefore if invested in name of son of 24 years , it can remain as a pensin like source of money to be withdrawn as and when requird for as long as 46 years. Please give your valuable comments

Anonymous said...(on 15 July 2007 at 06:06 )  

its good article but i have doubt i am the person i will make insurense policy bcz of tax savings in this case wich one i have to choose eitheir Insurense or SIP

Anonymous said...(on 15 July 2007 at 06:06 )  

its good article but i have doubt i am the person i will make insurense policy bcz of tax savings in this case wich one i have to choose eitheir Insurense or SIP

Investment n Trading Advisor said...(on 15 July 2007 at 20:49 )  

Shashi,

I'm not able to locate the policy details on the website of allianz bajaj.
Could you please post the link address of the same?

shashi said...(on 16 July 2007 at 08:02 )  

website address is

www.bajajallianzlife.co.in and name of product is New Unitgains Plus-Single Premium.

http://www.bajajallianzlife.co.in/lifeinsurance/products/individual.asp#nugpsp

Thanks.

shashi said...(on 16 July 2007 at 08:08 )  

Please comment on
New UnitgainPlus SP
SP stands for single premium.

Investment n Trading Advisor said...(on 16 July 2007 at 21:36 )  

Shashi,
I've gone through thsi document: http://www.bajajallianzlife.co.in/lifeinsurance/products/UGPlusSPnew.pdf
Seems a good policy to me, for someone who does not want to get into the hassles of understanding the nitty-gritties of Insurance terminology and charges.

You mentioned that you plan to buy this policy for worth 2 Lakhs - You're assured sum is 10 Lakhs, which is good in case of death.
But the same cover of 10 Lakhs can be gained by a no-frill policy for around 2000 Rs. per annum. Time value calculations @ 5% rate for paying 2000 per annum for 36 years (from age 24 to 60) show that the total net value you'll pay is approximately 33,100 Rs. But the problem here is that you will not receive any returns for this amount of 33,100. Increase the interest rate from 5% to 10%, the net vale comes down to only 19,353.

However, if you take the above no-frill policy putting in a net 33,100 over a period of 36 years - you are assured a death benefit of 10 Lakhs. The remaining 167,000 Rs (2 Lak - 33,100) can be put in ETFs or IFs, with low admin charges (just one time brokerage in ETFs) and forget it. Let it grow as it is for next 36 years. Even if ETF grows at a meager rate of just 2%, then your 1.67 lakhs (compounded at 2% for 36 years) will become 89,213,558,906.11. If ETFs grow at 5% or higher, then "Sky is the limit".

Probably, you may say that the same can be achieved with the Equity fund in this plan. However, Once again, have a look at the policy charges on the 2nd page (bottom left corner).
-Policy Administration Charge: Rs 600 per annum deductible monthly through cancellation of units, inflating at the rate of 5% per annum.
What this means? Though your invested amount will be 98% of 2 Lakhs, they will recover the admin charges by first investing your 98%, and then cancelling some of the units equivalent to 600 Rs. per annum. Moreover, this charge will keep on increasing at 5%, meaning, each year the admin charge will keep grwoing at 5%. Another problem is that the charges are deducted each month. Which means that the compounded value of your investment will suffer severly.

-Fund Management Charge: The fund management charge would be levied on NAV and the rate is as follows: Equity Growth Fund 1.75% p.a., Equity Index Fund II 1.25% p.a., Liquid Fund 0.95 % p.a., and Bond Fund 0.95% p.a.
Now what's the point in paying 1.75% charges each year in the name of fund management? All charges deducted by cancelling the Units.

This policy is doing nothing but making a fool of the investor (as other policies do too) by disguising the charges. First they say that 98% of the money is allocated and you get units worth 98%. Then they deduct their charges by cancelling the Units that too on a monthly basis. Smart People, Smart Way of Charging.

Have you already bought this policy??

-Shobhit

Vishal Raina said...(on 16 July 2007 at 22:08 )  

Dear Shobhit,

Thanks a lot for continuing the good work.
I've been reading each single article by you and the comments left by reader along with your responses. I've never seen such clarity in explaination and the right justification of the the financial investment products.

I just dont know how to express my thanks to you for these eye-opening articles.

Thanks a lot.
Vishal

Vidisha Apte said...(on 16 July 2007 at 22:52 )  

Hi Vishal,

Like you, I'm also a big fan of Mr. Shobhit.
I've been a silent reader of this blog with regular visits - atleast once per day. This is my second comment on the blogsite of Mr. Shobhit. The first one I posted was when one of the individuals left a nasty comment for Mr. Shobhit.

I really appreciate his efforts for putting in all the great articles.

As far as thanking him is concerned, I just make sure that after reading the blog, before closing my browser window, I click on one advertisement link. I know it is nothing worth as one hit will hardly generate only a few cents and it is nothing worth the knowledge Mr. Shobhit is giving us. But atleast I feel satisfied that as an acknowledgement of his service, he gets a few paisa. I think each visitor should do the same. Visitors have nothing to loose or put any extra effort, but it will be a simple way of our acknowledgement to his services.

The site count has increased to 16,000 plus. It shows the popularity this blog is gaining. Obviously it has not come from any general article, it has come only from top quality knowledgable information. I also admire his efforts in answering the quesries of every single individual through his comments. For e.g. he is regularly responding to queries from Shashi and others, after doing all the research work.

Another way of thanking him is what is followed by my colleague, Rahul Golash. He keeps posting the links to this blog on message boards of sites like rediff, moneycontrol, etc. - so that people atleast know that there is other dark side of agents, brokers, investments and trading. I also keep forwarding there articles to my friends.

Dear Mr. Shobhit, please keep up the great work. We are all for you.

Regards,
Vidisha

shashi said...(on 17 July 2007 at 11:21 )  

Thanks very much for the critical analysis of one policy which i have been seriously contemplating fom the time you had begun to post your postings. I was actually waiting to read your point of views. I feel that the various readers of this blog come from various age groups with varying lifestyles and therefore have different approach towards nvesting and trading .The needs also vary tremendously.
In your reply you mentioned that 2%compounded for next 36 years would yield the mindbogglingfigure of something like 89213558906.11
Do you mean indexfund can give returns of 2% compounded growth per month which means more than 25%plus per year???
If that be so, how come the NAV of one such index fund of UTI as on today is around 28.82 for 10 Rs unit after it was launched on 27 march 2000 and touched a low of 7.5 on 24 may 2000. Therefore money has multiplied only 2.8 times after 7 years. Where do you expect the NAV after another 10 years, 20 years and 30 years in this scheme.
Can you suggest some better examples of Indexfunds?
Please give one or two proper examples of ETFs for better understanding.
Thankyou very very much for enligtening us on this very tricky subject of investing.
We are looking forward to your further articles giving us some more ideas on various strategies on proper investing for fuller and more secure gains.

shashi said...(on 17 July 2007 at 11:28 )  

I have quoted figures of UTI Nifty Index Fund

Investment n Trading Advisor said...(on 17 July 2007 at 20:45 )  

Oops!
I made a mistake in copying the figure from my excel sheet. For 2% annual return of ETF, the return would be 340,661.19.....not the big no. i quoted mistakenly (89,213,558,906.11).
Here is the list of compounded sum for 36 years at different return rates.
2% - 340,661.19
5% - 967,233.29
10% - 5,162,417.65
15% - 25,576,359.27
20% - 118,369,913.12

Anshul said...(on 20 July 2007 at 04:58 )  

Thanks for opening eyes of so many people (including me) who have no idea about investments
I have gone through all articles just now and couldn't stop myself writing this mail to you.

Some days back i have realized the same mistake which you had highlighted in your articles - ULIP plans

I bought HFDC Standard and AVIVA in 2006 with annual premium of 25K each and that's too one time in a year

Purpose - Tax saving and Insurance Coverage

No where in my distant dreams i had ever imagined its cost of administration and fund management until i saw my unit statement after one year. I bought and was very happy thinking i had covered myself with adequate cover and good returns.

Now i have been trapped for at least 3 yrs , now i can only consolidate myself from tha fact that returns from these policies are very handsome as on date ( AVIVA is showing me 50k fund value - same as total premium paid , HDFC - 5k less than 50K)

Before i pose my question to you, i would like to inform you , AVIVA plan is Life Long Plan and HDFC is 15 yrs plan

My question - Should i surrender these policies after 3 yrs or continue and that's too for how many years..?

Yet again ,if i asked agents about this question , they simply replied, "These are long term investments plans you should carry them for min 30 yrs".

My second question will be performance of ELSS Funds . I am a regular reader of rediff columns. All i can extract after reading more than 6 months on rediff (Experts Columns only), we should go for ELSS funds (Growth Plan) instead of FD,PPF or NSC.

Again i did same, just 2 days back i have invested 2500/- each in HDFC Tax saver and SBI ELSS funds , both as SIP on monthly basis ( Annual 60K) for my wife .

Once again i am not so sure whether i am right or wrong...pls let me know

Third, i am already paying monthly EMI of Rs 15452/- towards my Home loan which i bought in Jul 2006 . I am already availing its Interest and principal repayment benefits for tax calculation. As you know, ROI has touched 11.25%, so i am planning to prepay my principal amount asap.

A few days back , somebody on rediff suggested to invest monthly Rs 2000/- in RD and after 12months repay your Home Loan after withdrawing money from that account which seems to be a good option for someone who wants to save tax under 80C.

But i would like to know whether i should go for such option or there is any Mutual Fund scheme which can fetch higher returns in a year than RD

At last once again thanks for your advise .keep posting such articles and we will keep writing you like this :-)

Anonymous said...(on 23 July 2007 at 23:34 )  

Hi Shobit,

Great job. Good work.

Keep writing and throw us more lights on Options and Futures.

Regards
Senthil

lakshmi said...(on 24 July 2007 at 03:49 )  

hi shobhit,
I am one of those who has done this mistake of taking a policy(LIC) with a very high premium. it was mainly taken with tax savings in mind. Could you please let me know whether it would be a good idea to quit the policy after 3 years of premium payment or after 5 years (where i can acquire the bonus along with the surrender value). Please reply back.

Abhijit said...(on 24 July 2007 at 04:56 )  

Hello Shobhit,

Firstly,Thanks a lot for the wonderful/eye-opener articles! I could not stop thanking you from the wonderful and great job you are doing!!

I have a question: I bought an Endowment Policy of Rs.10 Lakhs for TaxSaving purpose in 2002 December.At the end of 21 years,maturity is Rs.10lakhs(sum assure)+Bonus.I think I made a mistake here, I am already paying a hefty premium of approx.Rs46340 per year towards this policy.

Could you please suggest me what to do in this case, can I exit this policy and go for one just plain insurance policy(as you said,nominal premium and no expectations) and plan elsewhere in SIPs.

Could I still get back all my premiums(already paid)with compounded interest for last 5 years.

Will be great to read your inputs/feedback.

Thanks & Best Regards,
Abhijit

Vinay said...(on 25 July 2007 at 02:42 )  

Hi Shobhit,

I have been researching on the Insurance Vs Investment for a little while now (after I was tricked into a ULIP of course) and I can say that your blog spot is "one stop shop" for all Insurance Vs Investment queries.

I am curious to know if you have indeed stopped (or planning to stop) your ULIP policy after 3years. If you stop your premium payments after 3yrs it means that you have basically given into the AGENT's trick.

I would like to hear (basically read) your views on the point or stopping your premium payments after completing 3yrs.

Thanks
Vinay

Investment n Trading Advisor said...(on 26 July 2007 at 00:35 )  

Anshul

Over the past few days I was looking for historical data for the policies that you've bought. But unfortunatley, I could not find the historical data.
Could you send me the exact dates on which you;ve taken these policies.

Lakshmi & Abhijit,

Please reply back with exact amount of money, the name of the policy and dates when you've entered these policies

Anonymous said...(on 26 July 2007 at 06:20 )  

Hi Shobhit,

Here are the details:

Policy Name: Endowment Policy
Sum Assured Amount: Rs.10Lakhs
Duration of Policy: 21 yrs
Premium Payment for: 21 yrs
Premium amount(yrly):Rs.46340/-
Policy Starting Date: 27th Dec,2002

Immediately after I entered this policy LIC brought a new product Jeevan Anand(in the endowments category) in the market,in early 2003.

I found that Jeevan Anand is much better than the previous old Endowment one..

Please let me know your comments.

Thanks & Regards,
Abhijit

lakshmi said...(on 27 July 2007 at 02:05 )  

Hi
here are the details..
Name : Money back policy
duration :25 years
Years paid : 3 years
premium amount :35000

please let me know if its a good idea to stop it right now or after 2 more years...where in i acquire the bonus amts too.

i just want to have a comparison as to when i wud receive a better off.... by surrendering the policy and then investing in FD's or by continuing it for next 2 years and getting the bonus along...

Please do give ur suggestions..
Thanks
Laxmi

Investment n Trading Advisor said...(on 30 July 2007 at 00:11 )  

Abhijit,
IN Simple terms, you are paying 46340 * 21 years = 973140 Rs., and you are assured a sum of 10 Lakhs. So your profit is only 26860 which means a mere 2.76% over the entire 21 year period.
However, this is not the right way to calculate.
We take the Discounted Cash Flow (DCF) Analysis, basically taking time value of your investment - How DCF works, I'll explain in a following article. But if you do not know DCF, then for the moment you will have to believe me :-)
So 46340 at the interest rate of 5% for 21 years comes to 623,838 Rs. WHich means that the actual value of your invested money is 623,838 Rs. over the 21 year period and not 973140. So your net profit from this policy would be 10 Lakh - 623828 = 376162 Rs. Over your investment value of 623838, it becomes a 60.3% returns - But over 21 year long horizon. Hence SIMPLE average return = 60.3/21 = 2.87% per year ONLY.
However, if we take the compounded annual growth rate CAGR calculation, basically meaning investing 623838 at begining and then getting 10Lakhs at the end of 21 years, the CAGR comes to around 2.27% only.
You took this policy on 27th Dec 2002. The Nifty closed at 1098. Today Nifty is around 4500 which means a return of 4500-1098 = 310% returns. Simple Average for 4.5 years = 310/4.5 = 68.85% annual returns. Compare it to what the policy offers - only 2.87%. So from the investment point of view, ETF would have been a better choice. Even if you take the tax benefit into consideration, ETF would still be better.

However, this is endowment policy running for long period. You will get additional cover and benefits in the policy which will not be available in ETFs. ETF is dependent on market returns, so there is a risk. The long duration and Systematic investment will ensure that you dont get hit by Market falls.

Ultimately it depends upon your purpose. Invest for Investment returns, Insure for Insurance Products. Tax saving is nothing but fooling yourself. Instead of just saving on tax by buying policies, better buy ETFs and let them grow for long term.

Anshul said...(on 31 July 2007 at 02:33 )  

Hi Shobhit

Policy details are as follows :

AVIVA - Life Long Policy
Commencement Date : 21st Feb'06
Annual Premium - Rs 25k
Premiun Invested till date in
Growth Option - 75%
Balanced Option - 25%

HDFC- Unit Linked Young Star 2
Commencement Date : 17th Feb'06
Annual Premium - Rs 25k
Premiun Invested till 30th Mar in
Growth Option - 50%
Diversified Management Fund - 50%

Premiun Invested till 20th Jul in
Growth Option - 50%
Balanced - 50%

Premiun Invested after 20th Jul in
Growth Option - 85%
Balanced - 25%

Pls let me know when its best time to surrender these ULIP plans

lakshmi said...(on 2 August 2007 at 02:06 )  

shobhit,
could u plz give ur opinion. i have posted the details of my policy and eagerly waiting for ur reply

Anshul said...(on 6 August 2007 at 00:56 )  

Hi Shobhit

Same like lakhsmi pls let me know when to surrender ULIP plans

Investment n Trading Advisor said...(on 6 August 2007 at 03:42 )  

Lakshmi and Anshul,

You have not given the complete info.
What is the sum assured for your policy?
What are the conditions for withdrawal and minimum holding period?

Please post all the details for a better response.

Thanks,

lakshmi said...(on 6 August 2007 at 21:26 )  

Hi shobhit,
Name : Money back policy
duration :25 years
Years paid : 3 years
premium amount :35000
Sum assured is 6 lacs

Conditions on surrender :
Dont get anything if u have not paid for atleast 3 years(premium)

20% of premiums paid excluding the first year premium and other riders.
Let me know the right time to surrender !

Anshul said...(on 10 August 2007 at 05:19 )  

Hi Shobhit

Details are as under :

Plan -HDFC Young Star
Duration: 10 Yrs
Years paid - 2yrs
Premium Amt - 25000
Sum Assured :
On Maturity - Fund Value
Death Benefit - 5 Lacs

Surrendering Charges:
Before 3 yrs : 25% of outstanding premium due for first 3 yrs
After 3rd year : No charges

27% of Premium goes towards other charges for first 2 yrs
99% goes to actual investment 3rd year onwards

Fund Management charges : 0.80% of fund/year

Aviva - Life Long Plan
Details mailed to you as this case is really very complex to understand.As per their illustartion i need to pay min 30 yrs to get same fund value

Pls got though it and let me what to do for such case.

Thanks

Anshul

lakshmi said...(on 26 August 2007 at 21:20 )  

can i get a good reply please !!!
i have paid the premium (3rd premium) last week.. if i surrender the policy now, will i get the 20% back ?

When exactly is it a good time to surrender ?

Please reply back soon.
Thanks

Chandan said...(on 9 November 2007 at 23:31 )  

Hi Shobhit,

I have been reading your blogs for quite some time and looks like you have done a real good job in educating us. Keep up the good work.

I do favor Pure Term insurance - because thats the thing you want ur insurance to give you. A high cover in case of any casuality. I have 25 lakhs term insurnace for 35 years for which i pay 7k per year.

The rest is invested in ELSS mutual funds covering hdfc taxsaver, hdfc lt, principal tax saver,Sundaram tax saver,kotak tax saver. SBI nagnaum taxgain and Reliance taxsaver.

What are your thoughts on this?

Regards
Chandan

ulip agent said...(on 15 December 2007 at 03:47 )  

sir, good work indeed,
you may also aware the various hidden charges like allocation(max 70%). no customer is aware of these charges which takes away your units.
dear all,
i am also a life insurance agent for a living. please check all details from other companies also before closing a policy.
thanks for this service

MAYA said...(on 19 March 2008 at 07:26 )  

Hi Shobit

I would like to have your opinion on the following investment product which is a regular savings plan linked to investment - [various funds]. we can select the funds and we can switch to different funds after 18 months. min tenor 5 yrs..and there are several other conditions and benefits. various charges and fees.

http://www.csmltd.com/Zurich_International_Life_New_Vista_Plan.htm

http://www.zurich.com/international/asia/products/Individual_products/Vista.htm

ashwani said...(on 25 July 2008 at 06:59 )  

Dear sir

i highly appreciate for your such a kind work for all investors.
I am also sone of them as i have invested in same policy for 3 year lockin period but when i enquired aafter two payments they have deducted lot of cash in the name of various charges.
Now i want to terminate the policy and want all my deducted money back. what is the procedure can i follow.
Pls mail me at amelectrical@gmail.com

Wish you all happy and fruitful trading and investing activities with safety! = = = Post a Comment

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