- You have to work
OR
- Want to work
Send your answers on 9029868078 (WA) or mail me on kaustubhd.1984@gmail.com
We all learn from experiences life gives us
One of my friend (Akshay) asked if he can buy car on Loan?
Car value = 10 lacs
Down payment = 1 lac
Loan = 9lacs
Monthly EMI = Rs 20,000 for 5 years
Akshay asked if his decision is right in buying car in above calculated approach
I said, You are buying a liability on another liability
Akshay – How, please explain.
I – Car is a liability, we need to keep spending on car monthly for fuel and maintenance and its value decreases over time.
Akshay – Acha Ok.
I – And you are buying a car (liability) with a loan (another liability), which is not a good approach.
Akshay – Ok, but my wife started working last month and she is earning 20-25k approx monthly and we thought to buy car with her salary.
I – So, when your income increases, you buy things which you dont need on loan?
Akshay – No, but we want Caaaaar.
I – How much will be your daily usage of car?
Akshay – We will not use it daily, may be monthly twice or thrice during weekends or holidays.
I – Ohh, then you can make use of cabs like Ola or Uber.
Akshay – Yes; but it doesnt give feel of owning a car.
I – Oh, I think you dont know, until loan is cleared CAR will not be yours’.
Akshay – Hmm yes, but it will be with us 🙂
I – You are getting emotional.
Akshay – Please tell me if my logic is correct, shall I buy car with calculations mentioned above?
I – As I said earlier, it is not a wise approach to buy car on loan. By the way, bank will not give loan to your wife as she just started earning and also nobody will give loan upto 80-90% of income going as EMI.
Akshay – I thought about it, so what I will do is, I will take loan on my name and pay emi from my account and will adjust with my wife salary.
I – Ok, what if your wife stops working after couple of years?
Akshay – Why will she stop working?
I – Consider for suppose
Akshay – It may become tight for me to pay EMI, I dont have much emergency fund also.
I – Hmm…thats risky.
Akshay – Please tell me if my decision is fine?
I – I have been telling since beginning, that this decision is not wise, but what are you expecting from me?
Akshay – I want you to tell me that my decision is right.
I – Then; why are you asking me if you have pre-decided?
Akshay – I want to confirm with you.
I – I can give opinion if you can listen open-mindedly. If you have pre-decided then whatever I say doesnt’ matter to you.
Above discussion happend about 8 to 9 months ago with one of my friend (name has been changed for privacy reasons) and no conversation happend after that
Today he pinged me and asked if we can meet over coffee and when we met;
Mr. Akshay looked unusual and was uncontrollable with his emotions. Upon discussing with him, following is the summary,
He bought the car on the loan, then after 4 months his wife had to stop working as it became difficult for her to manage work at office and son (2yrs old) at home as Akshay’s mother went back to their hometown who used to take care of his little son.
Akshay, in his words whatever you told became reality. After my left to hometown, We have decided and asked my wife to stop working and car EMI became a big burden now. I thought of informing you at that time itself but I did’nt know how to show my face to you, all these days that’s why I did not communicate to you.
Today I thought, Kaustubh was able to analyse and tried to advice me not to buy car at that time itself but I did’nt listen to him.
I dont know how many more mistakes i m doing which I did’nt ever thought of, so I kept my ego, shyness aside and messaged you. Now, I want your advice on all my financials and tell me what actions should I take to ease out my financial burden.
Kaustubh – My Final words – Financial Planning is all about managing RISK and ensuring we achieve our Dreams and Aspirations by not falling as trap to RISK by avoiding / mitigating it
Long real life story, please read at your convenience. Hope you all learn out of it 👆🏾👆🏾👆🏾👆🏾
#Metoo
Let’s start a Positive #MeToo for Investing
Have you invested your Savings? #MeToo
Have you invested for the Long Term? #MeToo
Have you done your Asset Allocation? #MeToo
Have you invested in Equities? #MeToo
Have you invested via Mutual Funds? #MeToo
Have you started an SIP? #MeToo
Finally
Have you consulted a Financial Planner for all of this? #MeToo
And if any of the above replies are in the negative…
God will help you!
#kaustubhdeole
#theequitylearners
#artharthifinancialservices
Automobile Atrocities
Recently I purchased a Verna from a Hyundai dealer. The cost came about 15.20 lakhs. When I checked the invoice, the insurance component alone was 73K. I found that it was on the higher side.
When I checked with one of my friend in the Insurance industry, he said he can do it for 53K for 12 Lakhs IDV (Insured declared Value), with the same insurance cover, which includes bumper to bumper with consumables.
If the difference value was 2K or 3K, I could have gone with the dealer itself. But when the difference value was about 20K, I was not able to digest.
I inquired with the Sales Manager of the showroom, why there’s a huge difference between your insurance with the other insurance companies.
He said, we will cover everything boss including consumables whereas other insurance companies will not cover those. Since this insurance comes from Hyundai; you will not have any problem in the claims.
I was little confused, again and went back to my close friend and inquired about that. He told that, the Sales will get a kickback from their company for promoting their own insurance. Hence they will say all cock & bull stories. If you are ready to fight it out, I will back you for getting the insurance.
Still I was not convinced. I thought it was prudent to clarify this issue on my own. I googled it to find out the truth, the motor vehicle insurance act, the law clearly says that, one cannot force the buyer to buy the insurance from them. It’s absolutely the discretion of that individual to choose the insurance company.
I decided to speak with CRM of Hyundai. Got a reply stating that, since you are buying the car from us, you need to take the insurance from our company only? The moment when I talk about the Motor Vehicle Insurance Act, she kept quiet and said, I will ask the concern person to speak with you sir!!
Since there was no revert for my calls, I wanted to document the same and I wrote couple of mails, but it remained unanswered. The delivery date was scheduled; the sales manager was pressing me for the remaining payment. The situation was forcing me to take decision. The difference amount of 20K was still stitching my mind continuously.
I called the Hyundai Customer care number in New Delhi. The executive who spoke to me was very clear in her statement. We will not force any customer rather we cannot force any customer to buy insurance from us. He requested me to take the Sales Manager on con-call.
I called the Sales Manager; I once again started the story from the start. Because I wanted them understand the entire story. I allowed him to talk more; he went on to say, as per Hyundai Policy, the new customer has to take the insurance from the dealer only. Otherwise the customer would face a problem if any claim arises in the future. The Sales Manager not aware that, the customer care executive is over hearing the entire conversation.
Suddenly the customer care officer, interrupted the conversation and asked the Sales Manager, gentleman can you please quote where it was mentioned in the policy.
The Sales Manager was bamboozled with that intervention of Hyundai people. When he understood that it was Hyundai people, he assured that he will do the best to satisfy the customer.
I must appreciate the courtesy and professionalism with the Hyundai customer care people.
Later the dealer accepted to take insurance from outside and I saved about 20K for myself.
On the following day, the Sales Manager had called me and gave a nice compliment in a sarcastic way – I never seen a customer like you sir!!
Jokes apart, with a little rigidity, I saved my money.
When I shared this information with my friends, surprisingly no one aware of that, we can take the insurance from outside as well, this made me to dig deeper about this insurance fraud.
Since I live in a large gated community; I get an opportunity to see all brands of cars, every week I use to see a newly registered car in our community. Out of curiosity, I started checking with new car buyers about this. Shockingly no one was aware of such things. They all told me, we thought it was a package.
So next time, if your friend or relatives buy a new car for themselves. Please share this info with them, help them to save their money and demand for a big treat.
For a matter of fact, it’s happening with all familiar brands. The awareness has to come from the people.
In 2017, over 32 lakhs of car were sold in India. Even if you keep the insurance margin to 10K per car, you may need a calculator to calculate the swindled money from the public. It was staggering 320 crores of money has been looted from our pocket.
Every month, the corporate is pocketing 26 crores of rupees from us. This is only the car segment alone. There are some other segments like commercial vehicle, Agri-vehicles, two wheelers and many others.
We can keep this atrocity in one side and we talk about another atrocity which people are doing to themselves.
Only 4 out of 10 people take the car on every day basis. Which directly translates around 60% people is not doing any justice to the EMI they are paying.
For a 12 lakhs car, you pay an EMI of Rs. 25K per month, which translates about 3 lakhs per annum. Apart from that, you have fuel cost, insurance cost, depreciation cost and service cost.
For 20,000 kms, let’s take average mileage of 12 km/per litre. Which directly translate into Rs. 1,33,000 (11K per month), then insurance amount of Rs. 40K (3333 pm), then 10% depreciation of 1,20,000(10k p.m.) and service cost of 20K (1600 pm)…. Which all adds up to Rs. 25933.
And it doesn’t stops there; you add up your EMI of Rs. 25,000 then add the other component of Rs. 25933 = 50933.
Hence your spent per month is Rs. 50933.
Based on your car value, you can calculate it accordingly.
If you are not driving anything less than 20,000 kilometres, we can charge a criminal case against you.
Now again who is helping the corporate, the same ignorant people. My request is, if you are going to drive less than 20,000 kilometres per year, please don’t buy a car. Instead hire a Merc, wherever you go. It works out much cheaper than owning a car.
Per annum spent Kms ran Rs spent per km
635196 30000 21 Rs.
635196 25000 25 Rs.
635196 20000 31 Rs.
635196 15000 42 Rs.
635196 10000 63 Rs.
635196 8000 79 Rs.
635196 5000 127 Rs.
** Per annum spent derived from 52933*12
** Rupees spent was calculated kms ran / pa spent
I can keep adding another atrocity by the consumer. Only 50% of the car owner washes their car everyday. Out of which only 10% cleans the interior.
I have seen many people were driving their NEW car with the polythene cover in the seat. They are trying to safe guard the seat. The R&D team works very hard to give a comfort for the car owners to give a pleasant experience to drive their cars. But we are not enjoying it, in spite of paying money for that car.
Author: Unknown
Source: Facebook
How to Be a Well Informed Investor
प्रतिकात्मक रुपातील रावणाचे दहन करण्याची प्रथा अाज पार पाङली जाते. अापल्यातील दोष, अवगुण हेच अापल्यातील रावण असतात.
चला तर…पुढील १० गोष्टी अंमलात अाणु या व अापल्यात जर खालील रावणरुपी दोष असतील, तर त्याचा नाश करुन एक Well informed investor होण्यासाठी प्रयत्न करु या.
१) अापल्या गुंतवणुकीबद्दल तटस्थ राहायला शिका. त्याच्याशी भावनिक नाते जोङु नका.
२) अार्थिक सल्लागारावर सतत अविश्वास दाखवु नका. त्यामुळे तुमच्या बाबतीत गुंतवणुकीचा निर्णय घेताना तो चुकु शकतो. तुमची जोखिम घेण्याची क्षमता कमी अाहे अस समजुन तो कमी जोखिम असलेली योजना तुमच्यासाठी निवङु शकतो. परिणामी तुमची पाञता असतानाही परतावा कमी मिळु शकतो.
३) बाजारात पङझङ झाल्यावर संयम न दाखवता अस्वस्थ होत असाल, तर तुम्ही अजुन परीपुर्ण गुंतवणुकदार झाला नाहीत अस समजा. तुम्हाला या साठी अधिक मेहनत घेण्याची गरज अाहे.
४) अर्धवट माहिती असलेल्या नातेवाईक, मिञांच्या सल्ल्याने गूंतवणुक करत असाल, तर अापल्या गुंतवणुकीचा अॅसेट क्लास चुकण्याची खुप जास्त शक्यता अाहे.
५) गुंतवणुक करताना ध्येयाकङे लक्ष न देणे म्हणजे प्रवासासाठी गाङी मध्ये तर बसलोय पण कुठे जायचे हेच माहित नसल्यासारखे अाहे. शक्यतो प्रत्येक गुंतवणुकीला एक ध्येय द्या.
६) करप्रणाली, महागाई दर समजुन न घेता बॅंक एफङीत तथाकथित गुंतवणुक केली. बॅंक एफङी करुन सुरक्षित पण अल्पसा परतावा तर मिळाला पण नंतर कळाले की, जेवढा मिळाला त्यातला अाधी टॅक्स ने खाल्ला व उरलेला महागाईने गिळाला अाणि हाती धुपाटणे राहिले.
७) गुंतवणुकीबाबत सतत धरसोङीचे धोरण स्विकारणे. बरेच वर्ष गुंतवणुक ठेवली अाणि नेमका परतावा मिळायच्या अात काढुन घेतली. ८०% लोक या एका दोषामुळे शेअरबाजारात पैसा बनवु शकत नाहीत ही वस्तुस्थीती अाहे. त्यामुळे परतावा मिळेपर्यंत सल्लागाराच्या सल्ल्याशिवाय शक्यतो त्यातुन बाहेर पङु नका.
८) भांङवलवृद्धीचा विचार न करता केवळ “करबचत” साठी गूंतवणुक करणे. यात पीपीएफ व इंशुरंस (आयुर्विविमा) पाॅलीसीज् , ५ वर्षाची बॅंक एफङी, टॅक्स फ्री बाॅङ इ. मध्ये प्रामुख्याने गुंतवणुक केली जाते. यातील दिर्घकाळासाठी इंशुरंस (आयुर्विविमा) मधील गुंतवणुक म्हणजे १ लिटर दुधासाठी म्हैसच दारात पाळण्यासारख अाहे. जी चारा तर तुमचा खाते पण दुध मात्र इतरच पितात.
९) विशेष लाभ पदरात पङण्याची अजिबात शक्यता नसताना अापला पैसा खुप जास्त लाॅक इन असणार्या साधनामध्ये गुंतवणुक करुन लिक्विङीटी गमावणे. यात साधारण रियल इस्टेट मधील गुंतवणुक, अाणि परत एकदा इंशुरंसची (आयुर्विविमा) युलीप व एंङोमेंट पाॅलीसी असु शकते. या सर्वात तुमची लिक्वीङीटी नष्ट होते या ऐवजी म्युचल फंङाचे रिटायरमेंट प्लॅन अधिक उपयुक्त अाहेत. कारण अगदीच गरज पङल्यास ५ वर्षांनी पैसा काढता तर येतोच शिवाय नफाही करमुक्त मिळतो.
१०) पैशाला अाळशी करुन अापल्यासाठी कमाई न करु देणे म्हणजे म्हणजे हुशार विद्यार्थ्याला शाळेतच न जावु देण्यासारख अाहे. पैसा हा तुमच्या मुलाप्रमाणे असतो. त्यामुळे प्रसंगी त्याचे लाङ करत त्याला कङक शिस्तही लावणे अावश्यक अाहे. तरच त्याला जगरहाटी कळेल. त्याच्यातील क्षमतेला पुर्ण वाव द्या. एकदा पङेल, काही वेळा अपयशीही होईल पण एकदा का त्यातुन सावरला कि, जन्मभर तुम्हाला सांभाळेल. तो पर्यंत धीर तर धरायलाच हवा! हो ना…
#artharthifinancialservices
#kaustubhdeole
म्युचल फंङ अापके लिए सही नही है…अगर
‼अगर अाप बिना सलाहगार के इन्वेस्ट करते हो तो…
म्युचल फंङ अापके लिए सही नही है…
‼अगर अाप रोज फंङ के एनएव्ही देखते हो तो…
म्युचल फंङ अापके लिए सही नही है…
‼अगर अाप रोज उठकर सेंन्सेक्स देखते हो तो….
म्युचल फंङ अापके लिए सही नही है…
‼निचे गिरते बाजार में अगर अाप एसआयपी बंद करवाने कि सोचते हो तो…
म्युचल फंङ अापके लिए सही नही है…
‼मिङीया में अायें हुए समाचार से अाप विचलीत होते हो तो…
म्युचल फंङ अापके लिए सही नही है…
‼बिना किसी वित्तीय ध्येय के अाप निवेश करते हो तो…
म्युचल फंङ अापके लिए सही नही है…
‼बिना किसी ठोस वजह से अाप अपने सलाहकार को स्किम बदलने को कहते हो तो….
म्युचल फंङ अापके लिए सही नही है…
‼शेअरबाजार १-२ सालो में ही १५-२०% रिटर्न पाने कि ख्वाहीश रखते हो तो..
म्युचल फंङ अापके लिए सही नही है…
फेसबुक से साभार
कौस्तुभ देवळे
9029868078
Wisdom from Ganesha
Kaustubh Deole
9029868078
Behaviour
A man had to go on a long journey.
Before embarking on his journey, the man walked up to God and sought his blessings.
God offered him a choice.
“Take along with you 5 litres of water or 10 litres of ice”.
Greed nudged the man to choose the latter(10 litres of ice).
The journey commenced. The weather was cold. The man walked on and on with an air of contentment and joy that emerged from his choice; the 10 litres of ice that he had chosen.
Soon he grew thirsty. He looked at the ice block. It was rock solid.
He walked on with the conviction that the weather would soon them warmer and the ice block would start melting and he would be able to quench this thirst.
But the weather wouldn’t relent and the ice wouldn’t melt.
His thirst by now grew by gigantic proportions and he felt miserable and grew desperate.
His 10 litres of ice which had once made him feel comfortable was now seeming like a hard rock of solid weight ; a white elephant which instead of providing comfort was causing him severe stress.
How now wished he had chosen the 5 litres of water instead.
Realisation soon dawned upon him that although ice and water both had the same chemical formula they were not same.
What mattered most was the state of their matter ( liquid vs solid)
This story is the story of scores of people who have amassed huge amount of real estate and who believe they are wealthy.
But the fact is quite the contrary. Their wealth is just a mirage ; a state of mind and a false belief. Their wealth is like the ice that wouldn’t melt.
Unless and until you can liquidate the asset by converting its form into liquid cash what our the purpose of that wealth which you believe belongs to you?
If your asset cannot meet your immediate need of security, education, health, holiday, etc etc then what is its purpose?
Real estate is largely like this. It is illiquid.
Try selling your house in an emergency and you will realise how difficult it is to find a willing buyer.
By the time you can sell your house more often than not it is a little too late and your need would by then have transformed into a lost opportunity.
Investments & Thali Connection
What are the different varieties of food in a thali?
We all would have tasted at least once any thali’s.
As thali has different food like pickle, papad & rice, your portfolio should also have different assets.
All food proportions are different. Rice is more, cucumber & pickle is less, similarly, risky assets should be less & quantity should be checked.
Our diet changes depending on the age & ability to eat. Similarly, our investment portfolio should also change with age & needs.
Kaustubh Deole
Why Term Plan? & Basics of Insurance
Recently, one of my friends died due to accident. Hemant was just 33 and was heading family owned business in Mumbai. He is survived by his home maker wife Rohini aged 30 and 1 kid aged 7.
He used to contribute 1 Lakh per month for the family. His monthly cash flow was as follows.
EMI for the Business Loan – 30,000
House hold expenses – 28,000
Parents’ Support – 20,000
Life Insurance premium – 5000
Mutual Funds Investments – 17,000
He was staying in own house which was a ancestral property and were leading a quality life. Kid is studying in good school.
He was paying an insurance premium of 5000 per month for a life insurance policy of 12 Lakhs. The insurance company settled the claim of 12 Lakhs.
Rohini has deposited this amount of 12 Lakhs in a bank. She is getting around 6,000 per month as interest on it. Now the family is living on this. But she finds it difficult to manage the schooling of the kid with this income. She is planning to shift the kid to another school from next academic year.
If they want to maintain the same standard of living, there should be an inflow of 28,000 per month. Instead of 12 Lakhs, if there were 44 Lakhs in bank, she will be getting 28,000 as monthly interest.
In simple words, Hemant should have insured his life for 44 Lakhs.
Is it sufficient? In the above calculation, I have not considered the effect of inflation, possibility of reduction in interest rates etc. Assuming these 2 factors into consideration, the amount required to ensure an inflation adjusted withdrawal of 28,000 per month for the next 50 years (till she is 80) is around 1.3 Crore. Here I have assumed that the amount of 1.3 Crore will generate a return of 1% above the inflation.
So, this is the amount Hemant would have looked at instead of 44 Lakhs. He was planning to provide for 10 Lakhs in today’s cost for the higher education of his kid when she reaches age 17. For that he was investing in mutual funds. If you consider this goal also into account Hemant would have insured his life for 1.5 Crores.
Had he insured his life for 1.5 Crore, now his family will be getting 1.5 Crore as death claim. Rohini can invest 20 Lakhs for the children higher education needs and use the balance 1.3 Crore to ensure same standard of living till she is 80.
Now, let us check the premium for a 1.5 Crore policy. He was paying a premium of 5000 for a 12 Lakhs policy. Going by that rate, the premium for a 1.5 Crore policy will be around 62500 per month, which is not affordable to him.
Is there any alternate to insure life at a lesser premium? Yes. He could have opted for a term insurance policy.
What is Term Insurance?
In this policy, there are no maturity benefits. In simple words, you will not get anything at the end of the policy. But if you die during the term of the policy, your nominee will get the policy amount immediately.
If you are 35, the annual premium for a 1.5 Crore policy will be around 18,000. If you pay this premium every year from 35 to age 60, your family is sure about the payment of 1.5 Crore in case of your death. But if you live upto age 60, nothing is payable from this policy. You will be losing the premium of 4.5 Lakhs paid during these 25 years.
This is the only way to ensure adequate life insurance for a person. The amount of 18,000 per year (1500 per month) is to be considered as the price you are paying for the peace of mind you are getting in ensuring a decent living for your spouse and kids in your absence. After all, this 1500 per month is just the cost of a weekly outing.
Precautions while purchasing term policy
Insurance is based on the concept of ‘Utmost Good faith’. You are supposed to disclose your health/habits etc correctly while applying for an insurance policy. For example, if you are diabetic, or having hypertension don’t forget to mention these in the proposal form. Similarly if you are a smoker or consume alcohol, mention these in the proposal. The insurance company may charge a higher premium depending on your health/habits. It is called loading. This prompt disclosure is important to avoid confusion later. If you are hiding these details at the proposal stage, there is a possibility of claim rejection in future. Be 100% honest while purchasing the policy.
Claim Settlement Ratio
This is the ratio of clams settled out of claims reported. The higher the ratio, the better it is.
Some companies are claiming that their claim settlement ratio is highest in the industry. Suppose the claim settlement ratio of company A is 98% and for company B it is 90%. As a heart patient, if you purchase a policy from company A without mentioning this issue and die after 2 years the claim will be rejected. So, you will be within that 2% rejection of company A.
But if you are purchasing the policy from company B with prompt disclosure, your claim will be settled. This is because you will fall under the 90% of company B.
More than claim settlement ratio, prompt disclosure from your side is more important in insurance. You may purchase the policy from the company of your choice with prompt disclosure.
If the claim is rejected, there are many options for the claimants to represent the case. They can approach the grievance cell of the insurance company, insurance ombudsman or consumer forum with appeal. Normally all genuine claims will be settled.
Ensure Prompt Nomination
While purchasing the policy, ensure that you are nominating your legal heir as the nominee. If you are purchasing the policy before marriage and nominate parents as nominee, it is better to change the nomination in favour of your spouse after marriage. Remember, you can change nomination anytime and the nominee has a role to play only in case of your death.
Inform the nominee the following
I have purchased a policy for Rs. X from company ABC and as a nominee you are eligible to get Rs. X after my death.
The policy number, premium amount and the due dates of premium.
Where you are keeping the policy document
The contact details of company ABC to be contacted in case of your death.
Why term policies are not popular in India?
We feel that we are losing the premium in term policy because there is no maturity benefit. But see the large benefit in case of death of the bread winner! This is the only way to ensure a decent life insurance cover for a person at an affordable premium. If you really love your family, purchase a term policy of decent value when you are alive and healthy.
The main reasons for the low popularity of term policies are
1) Agents are not interested in selling this policy because of the low premium and the small commission involved.
2) Low awareness about the real benefit of term policy.
3) Feeling that you are not getting anything on maturity and losing the premium paid.
4) Emotional issues like wife saying – I don’t want any amount because of the death of my husband.
5) If every wife knows what a widow feels, no husband will remain uninsured.
It is high time that you should purchase a term policy and ensure all earning members in the extended family and friends circle are insured for a decent amount. Infact government can think of making it mandatory as a social security measure so that no family will suffer in case of death of the breadwinner.
Savings linked life insurance policies
The aversion to term policies by Indians motivated life insurance companies to innovate and come out with policies with maturity benefits along with death benefit.
Let’s understand this with an example:
If you are aged 35 and purchasing a 20 year endowment policy of 10 Lakhs, the annual premium will be around 50,000 per year. You have to pay 50,000 for the next 20 years and you will be getting the following at age 55.
Sum assured – 10 Lakhs
Bonus – 8.4 Lakhs
Total – 18.4 Lakhs
Bonus is declared by the insurance company every year based on its profitability and claim experience. In the above calculation, I have assumed a bonus rate of Rs. 42 per thousand sum assured. Since it is a 10 Lakhs policy, the bonus for a year will be 42,000. If you are getting the same bonus for the next 20 years, you will get 42,000 x 20 = 8,40,000 as bonus.
Let’s calculate the rate of return on this policy. It is around 5.5%. This is a pathetic return for a long term investment.
Please note that the bonus is not guaranteed and it can change every year. Since the interest rates are coming down in India, there is all possibility of a reduction in bonus rates in the near future.
Now, let us understand the benefits from this policy in case of your death. Your nominee will get the sum assured of 10 Lakhs and bonus accrued till date of death. Suppose the death happens at age 40, your nominee will get the following
Sum assured – 10 Lakhs
Bonus for 5 years – 2.10 Lakhs (42,000 x 5 = 2.10 Lakhs)
Total – 12.10 Lakhs
Will this 12 Lakhs is sufficient for the family in your absence? No.
This policy is not good as investments due to poor returns and not good for risk cover due to the low insurance cover it offers.
Who benefit from this policy?
When you are paying 50,000 as the first year, premium, your agent is getting around 25-30% of it. 12,500-15,000/- is going to his pocket. From second year, the commission is around 5%. The agent is getting 2500/- every year as long as you pay the premium. In the 20 year policy, the agent is getting 65,000/- in total!
This is the reason why agents and banks are trying to sell insurance policies.
What you can do?
Instead of paying 50,000 premiums under such policy, you can purchase a 1.5 Crore term policy by paying 18,000 per year. The balance amount of 32,000 can be invested in a mix of equity & debt as per your risk taking capacity. If you are investing 32,000 per year in an equity mutual fund, you can expect around 23 Lakhs assuming 12% returns. Please note that many good mutual funds have given 20% returns in the past 20 years.
In case of unfortunate death, your family will get 1.5 Crore immediately. This amount can really help your family in maintaining the standard of living in your absence.
This combination of term policy & mutual fund is beneficial both in case of death and maturity.
Different types of savings linked policies
To make it attractive, insurance companies are offering many types under this category. The most popular ones are the following:
Endowment Policy
In this policy, the sum assured and the bonus is payable at the end of the policy term. In a 20 year policy, you will get this at the end of 20 years as explained above.
Money back policy
In this policy, you will be getting certain percentage of the sum assured at different intervals. A typical 20 year money back policy will give you 20% after 5 years, 20% after 10 years, 20% after 15 years and 40% along with bonus at the end of 20 years. In case of death in between, the nominee will get the full sum assured irrespective of the payments made already. The premium under money back policy is high compared to endowment policy.
Children policies
This is sold in bulk on emotional appeal. The benefits under this policy are paid in instalments during the higher education of the child. In some cases, there is an option to waive the premium in case of unfortunate death of the parent proposer.
Pension policies
In this policy, the benefits are paid out as pension during your retired life.
Unit Linked Policies (ULIP)
In this policy, the insurance company is investing your premium in a mix of equity & debt instruments as per your mandate. ULIP policy can give better returns compared to other types of policies discussed above.
But there are many charges which are deducted from your policy, which will reduce your effective return.
Draw backs of savings linked policies
The main draw backs of savings linked policies are:
Lack of flexibility
Once you join for a 20 year policy and later, if you are not happy with the policy, exit options are limited. If you stop paying the premium in the first 3 years, you will not get anything back under most of the traditional policies. If you surrender the policy after paying premium for 3 years, then you will get only 30% of the premiums paid. After paying 50,000 for 3 years (1.5 Lakhs), you can exit the policy with just 45,000 as surrender value.
In ULIPs, you will not lose the premium paid, if you stop paying the premium within 3 years. The fund value will be moved to discontinuance fund and it will be payable to you on completion of 5 years from the start of the policy. During this period, you will get around 4% returns on the fund value.
If you want to surrender the policy after 5 years, you will get the fund value immediately.
If your fund is not performing the only option for you is to surrender and take the money out.
In both these cases, you can understand that there is no flexibility. But if you opt for a combination of term policy & mutual funds, you have 100% control on your money. If a new insurance company is offering a term policy with lesser premium, you can opt for that and just drop the existing policy (subject to your good health at that time). If your mutual fund is not performing, you can just sell it and reinvest in better funds without any difficulty.
Lower returns
In traditional policies, the returns will be in the range of 4-5% only. This is because the investment is happening mainly in debt products and a good amount is going towards commission and other expenses of the insurance company.
In ULIPs, there are many charges. When you pay Rs. 100/-, full amount is not invested in your account. The company deduct premium allocation charges from your premium and only the balance is invested. If the allocation charge is 10% only Rs. 90/- is invested in your account. There are other charges like policy administration charge, fund management charge and mortality charge etc. These charges are deducted by way of cancellation of units from your account. You will not understand it unless you verify the fund value statement carefully.
If you just check the percentage return on your Net Asset Value, it will not reflect the reduction in number of units due to various charges. Even if the fund is performing well, your actual return will be much less due to the cancellation of units.
Conclusion
The only policy you require from a life insurance company is a basic term policy. Buy it online to get the advantage of lower premium. All other policies are not beneficial to you. It will help only the insurance company and the agent.
Artharthi 