Friday, 30 March 2012

Re: [www.keralites.net] Investments and insurance should be kept separate

 

Dear Deepak,

You are absolutely right in saying that we are still thinking interms of average mentality. The fact is that we can never divert & analyse anything positively from our old and trusted emotions. What Mr P Nair has said is to keep the insurance and investment separately which is correct in terms of financial literacy. I am sure he is absolutely right. Take in the case of a vehicle insurance, where one is not going to get anything unless and until some accident occurs. Consider the same logic before taking a term insurance.

The internal rate of return of an insurance product is never more than 6.5%. It can never beat the inflation which is running very high. Thefore it is always good for a person to take term insurance and keep the investment part separately to achieve a return positive to inflation.The lowest return of ELSS-MF scheme (where in there is lock in period 3Years) reported more than 12.5%. There are a some ELSS-MF gives more than 25%.

Anyway the choice is left to the individual. Mr P Nair has done his job in educating us.

With regards

Krishnakumar
Baroda.

On Fri, Mar 30, 2012 at 8:07 AM, MK Deepak. <mkdeepak1@yahoo.com> wrote:
Hi,
I disagree with u on certain points..
1) Insurance is the indispensable 1st man,not 12th man..Every circus player first get a net under him,right?
That is why some financial experts classify income into 1st class,2nd class and 3rd class money..Where 1st class is the money 4 insurance,2nd classes is 4 contingencies and 3rd class is the remaining which is 2 b used 4 living
2)Everybody is advocating term insurance.Well and good but there are 2 points these wizards do neglect..1)An average Indian's psychology is that he must get his investment back.What ever classes he is given he wants something back.This is the case with even highly educated. 2)Can any insurance company survive just by selling term insurance? It is actually subsidized by many other products..at least the running expense of the company is contributed by other products.Even in most developed nations no insurance company exists by just selling pure term insurance
3)Insurance and investment r surely 2 different aspects.But you can certainly blend these into and form products that cater both the needs.Excellent products for this are available in Indian market.
Your efforts for customer education are really good...my appreciations..
Rgds,
MK Deepak,
Kannur

From: P Nair <pnair1966@yahoo.com>
To: Keralites <Keralites@yahoogroups.com>
Sent: Thursday, 29 March 2012 10:25 PM
Subject: [www.keralites.net] Investments and insurance should be kept separate
 
All our financial goals have two main themes: protection and returns. Term Insurance is the only pure protection product while insurance products like endowment, whole life, money back or Ulips are a combination of insurance/ protection and investment/ returns. Essentially, we have to determine whether the convenience of a multi benefit product justifies its additional costs.

For a 40-year old, Rs 1 lakh of pure protection could be bought for Rs 350. If he buys a Ulip with Rs 1 lakh annual premium and a Rs 10-lakh insurance cover, we know that Rs 3,500 is being utilised for protection. Anything less than Rs 96,500 invested to buy units is the cost which insurance companies levy and give it varied nomenclature of administration, allocation, commission or marketing. The same benefits can be replicated by buying term insurance separately for Rs 3,500 and units of a good mutul fund, where the entire Rs 96,500 is utilised without any deduction, since entry load is zero.

Old Ulips had very high charges, especially in the first 3 years, ranging between 20-30%. Effectively, only Rs 70,000 was invested out of Rs 1,00,000 in the first 3 years. This has severe negative consequences because of the immense time value of money and compounding, and insurance policies are long term. Rs 10,000 invested every month for 20 years in the growing Indian economy should count for Rs 1 crore. Whether the investor achieves his goals or not, he contributes significantly to the Ulip seller's comfortable retirement. Even the argument that insurance plans have less fund management charges and therefore, recovery in the long term does not hold water since NAVs reflect these costs and Ulips, in general, have not demonstrated NAVs higher than comparable mutual funds.

Irda's recent amendments include increasing the lock-in period to five years from the current three years. Additionally, charges are reduced and evenly distributed, resulting in lower commissions for agents around 5% in the first year and 2% subsequently, instead of 15-30% earlier. Discontinuance charges are less with an absolute ceiling of Rs 6,000. Besides, minimum insurance cover is higher.

The impact of these changes is good for the investor. They focus on protection and the long-term nature of the product. Earlier, Ulips were being sold as short-term investment products with an insurance veil and taxation benefits. Costs are less and their structure is standardised, making the comparison of products easier. Also, exitss are cheaper, though lock-in periods are longer.

Nonetheless, it is still better to buy term insurance and mutual fund separately. For new Ulips, insurance companies are levying 5-7% as entry charges in addition to term insurance rates, and are therefore, unattractive. They are also responding in a wrong manner by pushing traditional insurance products with high costs and low returns.
However, insurance companies have an opportunity to innovate by reducing the implied term insurance price in the Ulip. They can achieve price reduction by using group insurance rates and 5-year lock in. Investors will have a compelling product in a systematic insurance plan, through which he saves for a specified goal, combined with life insurance at competitive rates. Additionally, under the DTC, a product will qualify for EEE if it offers cover of at least 20 times the premium. Such a product with competitive insurance cost, taxation benefit and effective investment can dramatically improve the insurance industry's positioning.

Hence, the investor should keep investments and insurance separate. Insurance, as I had written in my book Winning the Wealth Game, is the indispensable 12th man important for protection but is not a part of the team because of inadequate batting prowess. However, the new rules ensure a chance for it to get into the playing eleven.
Source: Yahoo Finance
Best Regards
Prakash Nair
www.keralites.net

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