Thursday, September 27, 2012

Unprofit Plus

Four years ago, I purchased a ULIP plan from Life Insurance Corporation of India. Maturity is 10 years, and policy payment term is Five years. That means, as explained by my insurance agent, I need to pay the quarterly premiums for Five years, and next Five years, I will get coverage without paying the premiums. Great.

In layman's terms, a ULIP is a type of insurance, where the insurer (here LIC) invests the money in equity (Stocks) or debt funds. The value of the policy is determined by the NAV (net asset value) of underlying assets.  For an example, if I pay Rs 1000 as premium, and if the NAV is Rs 10 per unit, they will purchase 100 units on each payment. In fact, they will purchase less than that because, from the premium, allocation charges are reduced. In initial years, they will charge up to 20%, that means they will purchase only for Rs 800, so you will get only 80 units.

In this scheme the risk is borne by the policy holder. That means, if the NAV goes down, we will lose money. But that seldom happens in long term, told by my agent.  

Why did I join this ULIP? Answer is simple. To invest money. I know this is the same reason most Indians purchase insurance policies. Your agent will never tell you the difference between insurance and investment. And of course, it was long before I turned money conscious.

The advantage of ULIP is that it is both insurance and investment at same time. However, financial experts say that ULIP will serve neither as insurance nor  investment. Let's examine one by one.


When I joined this ULIP, the sum assured was two month's my salary. After four years now, the sum assured is less than my salary. That means in the unfortunate event of my death, my family will receive less than month's salary as insurance.  The purpose of life insurance is that in the event of the death of the insured, his family should be able to continue their lives in the same life style. Is it possible with this coverage? No.

The recommended insurance coverage of a person is 10 to 12 times of his/her annual income. Again this depends on many factors, like your life style, number of dependents, etc. If you have no dependents, or your dependents can support themselves, you don't need an insurance coverage. To get 10 times of my annual salary as sum assured, I will have to pay nearly 25% of my salary as monthly premium. This means as an insurance plan, ULIP is very expensive.

This explains my insurance seldom covers my needs.


Let's come to the second part, Investment. For years, I was happily paying the premiums without analyzing the performance of the scheme. Anyway, my agent told me that the returns will be good only in long term. Long term means Five to Ten years. Initially the allocation charges are high, so it will take more years to make up these allocation charges. (some one may ask, why should you pay these allocation charges in the first place, and wait for all these years to make it up. I have no answer). Once I started to learn about financial management, I started to monitor the performance of this ULIP.

LIC website does not show you the historical NAV of any of their ULIP schemes. Well, they designed their website for traditional insurance policies, and it will take time to update it. The websites like allow you to view the historical NAVs. Once I checked the NAV, I shocked to find that the value of the NAV is in the same range as what was it four years ago. In the history I can see the NAV is gone 20% up during year 2010, but then it came back.

During this four years, the prices of virtually every thing went up by at least 50%. Even my salary is doubled. Then why this NAV is not increased even by 1%? With all the allocation charges, I am at losing end. I wish I had gone with bank recurring deposit instead of this complicated ULIP. But honestly I was not aware of the bank recurring deposits at that time and how simple it was to start one.

But, it was not over. As I started periodically monitoring my ULIP account, I found that a few of the units are missing every month. Like today I have 1000 units, and if I check after one month, it is only 998. With my experience with Mutual Funds, I knew that once I purchase a few units, no one can take it away from me without my knowledge. Then where have these missing units gone?

I wrote to them through the LIC online website. Within 30 minutes I received a call from the local branch. They are very fast. The lady over phone explained to me that the units are utilized for my insurance coverage. That means they reduce 2 or 3 units each month, which will be utilized to cover my insurance coverage. Again, I am on the losing end.

So it did not serve as an investment either.


Neither of the above facts are my invention. I can find these information all in many articles and blogs. The important point here is I had to learn all these through the hard way.

Now, what is the alternative to this? Ideally what should I have done four years ago, instead of joining a ULIP?

You need to treat insurance and investment separate things. For insurance, the term insurance policies are the most economical ones. A term insurance policy is a type of policy, in which you pay premium for insurance coverage for a certain period. Once the period is over, you are not paid anything. No bonus, no sum assured, no survival benefit, whatever you call it.

For investment? Well, thousands of methods are there. Bank recurring deposits, Public Provident Funds, Mutual Fund SIPs, etc. All these are designed purely for investment purpose. You need to do some research before finding the one most suits you. Don't tell me you have no time for research, you are working at least 6 to 8 hours a day to earn money, so it will definitely worth  spending some time to plan your investment.

Happy investment

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Monday, September 17, 2012

At the Party...

Years ago during a fun party in my previous company, our CEO asked a riddle. "Rich man needs __, Poor man has __, if you eat __ you will die.". He asked a common word to replace all __. After much brain storming, we came up with answer. It was "nothing". Then in the party it followed a debate on Rich and Poor. Every one presented their views on rich, poor and money.

Some argued that being rich and poor is relative. Of course, that makes sense. For one person, I am poor. For another one I am rich. So, it depends on perception. I can choose to be rich or poor, as I want to be. Definitely a positive thought.

Some others argued that money is not important, because it cannot bring happiness. What about a life with full of money, but no love, no health? It will be definitely miserable. This view is good, if you have no money. But disappointing if you are rich (again relative). As the famous saying goes by "If you have money enjoy it, if you don't, be philosophical".

If money cannot bring happiness, and it is not important, why don't the supporters of this school, give all their money to me? They will not. They will say that they want some money to make the wheel rolling and they are happy with whatever money they are earning, so they don't worry about money. So, they are getting enough. They are happy. They don't want additional money. Hope they will give me the extra money they get as part of their next salary hike. Good.

Some one said there is no need to worry about money. You need to think about money, You need to be aware of money. Don't worry about money, because your health is also important..

And of course there are people who argued thinking about money is a taboo. They believe money and fame are like shadows. When you go toward it, it will go away from you. If you walk back, it will come to you. Good example. But money is really like that?

Further they argued that only greedy people think about money. Those who think about money will end up doing illegal activities for making money. They will make money, but lose peace of mind.   Solution? Pinch the money thoughts in the beginning so that you will have peace of mind. Great!

Then, is greed such a bad habit? If it was not greed, why do you work hard? People, of course, need more inspiration than the satisfaction of  a work well done. Because of the greed only, many entrepreneurs started their business and some changed the world.

One of my friends presented the most interesting aspect of money. Money cannot bring happiness. Money cannot bring peace of mind. But, Money can bring you more choices. For example, suppose you want to go to city from your office. If you have no money, you have only one choice. Walk all the way! If you have Rs 10, you have two choices. You can either walk or go by a bus. If you have Rs 50, you have three choices. Walk, go by bus, or go by Taxi. As the money increases, it give you more and more choices. Interesting.

As any argument, we departed without any conclusion. I am sharing this experience just thinking it will inspire you to think and understand about money. Please feel free to comment, if you have a different opinion on money, other than what we discussed in the party.

Have a nice day.

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Friday, September 7, 2012

Confessions of a Money Unconsious Person

I started my career nearly a decade ago, with a minimal salary. I was struggling to make both ends meet, and my hope was that any moment I will get a good job and all my problems will be solved. However, It took nearly Seven years to get that dream job and cross my salary Five digits.

To my astonishment, I found that as my salary increases, the expenses are also going up. Whatever salary I got, it disappears by end of month latest, and mostly by middle of the month. I am still struggling to make both ends meet.

This puzzled me. Why am I always struggling for money? Finally I decided to find a solution by using the most common method software engineers use to solve problems, by googling!

So I googled "how to get rich". I got thousands of links, and to my disappointment, all are saying about saving money and getting rich. What a foolishness! It will take years to accumulate little money and get rich. Is there no easy way?

Then one link in Google results got my attention. It was a review of a book called "Rich Dad, Poor Dad". It reads "Poor think The love of money is the root of all evil, while rich think The lack of money is the root of all evil" (writing from my memory). Even though, I was skeptical about the idea of saving and getting rich gradually, the innovative thought attracted me. I purchased that book and read it.

Then onwards, I started to think about money seriously. and of course, without the guilt feeling. I realized there is no short cut to get rich.

Once I started understanding these things, one thing most astonished me was why no one told me about this so far. Some people gave me lazy advices like "you should save", but no one told me the importance of that. But then I was playing a blind eye toward financial things. In newspapers, TVs, books, blogs every where lot of financial articles were there, but I was simply skipping those. Thinking not for me!

Once I realized the mistake, I thought I should tell others about this to avoid my mistakes by them. You can find thousands of blogs by experts on financial management, but I am no expert. Still don't know meaning of many financial jargon. So, I can think and write in the level of thousands like me.

Have a nice day.

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