The Art of Closing Insurance Policies

Why do so many people purchase Maruti cars? Because they produce quality cars? Or maintenance is cheap? Or availability of service stations? In my opinion none of these is true reason. The actual reason is people trust that brand name. When a few of my friends purchased cars, they first checked how much money they can afford. Then they checked which Maruti car is available for that money. Is it Alto, Rits, Swift, Ertiga or SX4. Then they purchased those cars. Easy. Maruti, Life Insurance Corporation (LIC), SBI - all these companies enjoy the benefits of a trusted brand name.

I do not say people are missing any thing by purchasing Maruti cars, because Maruti produce quality cars. However, this is not the case with LIC and SBI. SBI as a bank is very competent. However, when it comes to mutual funds or Insurance - it is a different story. However, people blindly buy SBI mutual funds, just because those are from SBI.

The things are worse with LIC. Nowadays I am mastering the art of closing LIC policies. Not mine, but my friends. If one of my friends talks to me for half an hour about his insurance, he is convinced to close his policy. Why? I will teach you how to do it.

During any conversation when your friends mention about their LIC policies, jump on. But do not show the excitement. Casually ask them how much they pay as premium and what is the insurance coverage and maturity benefit. And then, ask them why they joined this scheme. The three possible answers to this question are 1) I want to save/invest some money. 2) I want my dependents to live a comfortable life even without me. 3) both 1 and 2.

No matter what they say, you can prove that they are losing money. Let's check one by one.

1) I want to save/invest some money
Don't be surprised by this answer. Many educated people buy insurance policies just for investment purpose. Don't tell them that it is not a good idea to mix insurance and investments. That will not sell. But you can tell them that how much money they are losing because of this policy.

For example, if a person pays Rs 5,000 as monthly premium, the insurance coverage will be Rs 12 L, for a 20 year term for most of the policies. On maturity, the insurer will get this amount as maturity benefit.  Usually this will be the guaranteed maturity benefit. Then they will pay bonus, which was declared every year. The LIC gives no guarantee at all for this bonus. However, many insurance agents convince the policy holders otherwise. This is the hardest part. Your friend will not believe you when you say the agent lied to him, because the insurance agent was his uncle, father's best friend, or his best friend's spouse. To convince this, go to LIC home page, and show him the details of his policy. 90% people do not read this information before they buy LIC policy. Usually, it will be difficult for them to digest the truth the agent cheated them, so I will tell them it may not be intentional. While the agent was talking about the policy, he may be confused with some other policy, because they talk about all the policies. This will relieve my friend, but I know the truth. Big commissions are paid to LIC agents for each policy, so they use one or two white lies to sell policies.

Now tell your friend that from LIC we can expect 5-6% compounded growth for your premiums from the past data. Next is the most tricky part. Go to any website which helps you calculate returns for recurring deposit. For example InvestmentYogi Calculators. Show him that what will be the return if he invests Rs. 5,000 per month for 20 years in PPF. PPF pays 8.6% returns compounded annually. In any case, the difference will be above Rs. 10L. Just convince your friend that he is losing more than 10L because of this LIC policy.

We are the people who bargain with autoriksha drivers to just save Rs 10. We drive through entire city to check price of mobile phone before purchasing one, just to save Rs 100. Then what if some one losing Rs 10 L? No need to tell any thing, watch your friend dialing his insurance agent to know how to close his policy.

I said PPF deliberately. Do not mention bank recurring deposits, because they don't have tax benefits. (80C benefits). Don't say mutual fund, because the returns are not guaranteed. If your friend learns from this mistake, and spend some time on his investments, he will soon realize the benefits of mutual funds. Leave it until then.

2) I want my dependents to live a comfortable life even without me
Well, this is the purpose of insurance. Unfortunately, LIC gives negligible insurance coverage. For Rs 5,000 premium, usually it is Rs 12L. Seldom sufficient for today's IT generation, whose annual salary runs above it. Just show your friends that for Rs 1000 a month, he can get nearly Rs 50L coverage, if he goes for an on line term insurance. (of course, conditions apply)

Now it is your job to explain your friend what a term insurance is. Most people have not heard of it, no insurance agents will explain this, because these are online policies and agents will not get any commission. go to wikipedia page on Term Insurance. and show him what a term insurance is. In a nutshell, the term insurance is a type of insurance in which you pay premiums to get insurance coverage for a certain term. In a term insurance there is no maturity benefits.


3) both 1 and 2
People, who buy insurance policies both for investment and insurance, were the easy preys to the insurance agents.  Because, when they ask about PPF to their insurance agent, the agent will say it has no insurance benefit. When he asks about term insurance, the agent will say there is no return. So, these people go for LIC endowment policies.

But it is equally easy to convince them that they made a mistake. If they are paying Rs. 5,000 as premium, ask them to split this to PPF and term insurance. If they invest Rs 4000 to PPF for 20 years, they can get Rs 24L+. Then if they spend Rs. 12,000 yearly (Rs. 1,000 per month) on a term insurance, they can get near to Rs 50L insurance coverage. This is far better than any endowment policy.

Conclusion
What will I get by making these people to close their LIC policies and switching to other investment tools? Nothing. On the other hand, I want people to manage their money well. I want people to get more returns on their investments, and more insured. And I want to stop these insurers and agents cheating their clients.

That's all the purpose of writing this blog.

New Year Resolutions

I was reading the interview with CEO of a well known stock brokerage firm. This firm is in business from 1980s. I was wondering how much money these people, staff and management of these kind of companies, would have made out of share market. In 1980s people were not much aware of the stock market. I wish I invested some money in the equity market in the initial years of my career. But, I was fully unaware of these things on those days. But these people are lucky, they have been working in equity business from 1980s.

But I was surprised when this CEO told the interviewer that he is not in the habit of investing in equity market. He even started purchasing mutual funds from last year only. I thought it is like some old small restaurant owners. They cook for the community, but never have food from their own shops. Their lunch was brought from their home. Is it like that? This CEO advises all people to invest in shares, but never invests by himself.

But this news relieved me. I am not only person, who is not practicing what he preaches. Yes, I am not practicing many things I write in this blog. Shocked? But, I started thinking about money just two years ago, and I promise you in next two years, my finance will be better managed. I am on my way.

Then what I need to improve? I think about it, as the new year is around the corner. Yes, it is time for new year resolutions. Usually, I don't believe in new year resolutions. If I find some thing is bad, I will stop it immediately. Similarly, if I find some thing is good, I will start immediately. I will not wait for a new year to stop or start new things.

Still, I think what I can improve in the new year, financially. These will be my new year resolutions. Not in any particular order.

• I will setup enough emergency fund, just in case any thing goes unexpected.
• I will get enough insurance coverage.
• I will get enough medical insurance for me and my family.
• I will stop using my credit card.
• I will start tax planning from the start of the year.
• I will reduce my monthly expenses, so that expenses are well below earnings.
• I will start goal based investments. Now I have only one goal for my investments, get rich.
• I will diversify my portfolio by including some of the areas, where I do not invest. 
• Work hard, improve my competency at work, and do some apple polishing to my manager.

Enough? You can pick up any from these for your own new year resolutions.  New year is, of course, a great time for a new start.

Happy New Year!

Lies in the Tax Planning Session

We are into last month of the year, and people will soon start thinking about tax. In this month and in the first quarter of next year, we can see lot of seminars, articles on newspapers and magazines, speeches flooded everywhere. Ideally, the best time to start tax planning was last April, start of the last finance year. All these magazines should publish articles on tax planning during last April. So that people can join to Mutual Fund Systematic Investment Plans (SIP), Public Provident Funds (PPF), or even to insurance plans and keep on investing the entire year. But now we need to invest all money altogether. Some private employers will collect the investment proof to avoid TDS in December itself. So, we need to invest Rs 100,000 now to get full advantage of 80C.


People who are lucky to have Rs 100,000 in their Savings Accounts are lucky species. They can comfortably invest for tax saving. For others, what can we do now? Get personal loans? Go for Gold Loans? I have seen people are doing all these. If you have no money to invest for tax saving, just be a happy tax payer. I know losing a major part of your salary is painful. But, suffer that for long term advantage and promise to yourself that you will not repeat this again. Repeat what? Ignoring tax planning the entire year. Next year, start tax planning from April itself.

By the way, can we blame all publications for not reminding us about tax planning during the start of financial year? No. They publish what readers want to read. If they publish tax articles on April, who is going to read? We dig the well only when we are thirsty.

These thoughts came to my mind when I went for a tax planning session recently. That session turned out to be a canvassing by an LIC agent. The trainer quickly touched Home Loans and PPF to make it a tax planning session rather than an LIC session, and soon reached to his favorite LIC policies.

I am listing out some of the lies he shared in the session.

• Home loans are the best investment method, because it saves tax and real estate will always appreciate.
• Gold prices will never come down, so it is the safe investment.
• Never go for term insurance, you will not get any maturity benefits.
• Always go for LIC for insurance, because India Government is the guarantor for your investment in LIC.
• Income from Mutural Funds are taxable even if you sell after holding one year.
• Types of insurances - Money Back, Endowment and ULIPS. (Like any insurance agent, he will not speak about term insurance unless asked)
• Money back insurance policy is the best investment method (it contradicts with first point). If you join 5 policies regularly for next five years (one policy this year, another one next year, etc). So after five years the money back paid by first policy can be used to pay other policies. 
• Finally, the biggest one. Insurance and investment are same, so you can mix both.

I am not going to explain why I call these lies. Research and find out by yourself, if you want to. Or simply believe these and invest your money in endowment policies, money backs, ULIPS, wherever you like. After all, it is your money.You can do whatever you want with it.

Are You Working for Money?

Years ago I went for a job interview to a multi national company. One of the questions asked was "What do you work for". It did not take a moment to think, I answered "Money". The interviewer did not ask for an explanation then. But now recalling that question, I ask to myself, am I really working for money?

I have worked on many days 10 or 12 hours. There is no overtime pay in our company, so the company always pays for 8 hours a day. So, why do I work more hours? If I was really working for money, I would not have worked that extra time.

Not only me, I have seen many people working extra time ex-gratia. There are different reasons for this, passion for the job, satisfying their ego, insecurity feeling, competition, work culture, workaholism, you can name many. But if you say you are working the extra time for money, that will be a big lie.

Some companies have a grading system, which puts their employees in a rat race. For example, at the end of the year each employee is given a grade like A, B, C and D. So, every employee try to get an A, by beating other fellow employees. The employees are forced to work more time than their co-workers to get an A.Usually, these grades are linked to the percentage of salary hike the employees get. So, if they work extra time, they get an A. and A gets more money. So they are working more time for money?

But if you want to make more money, the easy and sure proof method is work 8 hours in your primary job, and for rest of your time work for a part time job. If you don't like to work for a part time job, start a business, where you can spend minimum time. But these methods are not comfortable as working long hours for your job.

If you are a workaholic, my advice for you is to start your own business, rather than working for some one else. Because, if it is your own business, as you work long time, you will be benefited. On the other hand if you work for some one else, you work hard, and he will make more money.

If you can strictly stick to the policy working-for-money, that has lot of advantages. For one, you will not care to work extra time, unless there is extra payment. For another, you will not care much about a confrontation with your manager, for another you will not care much about the rat race.

The primary reason for we are all working is money. Then we should not forget this primary reason due to the challenges and pressure we face at work.

Conversation with an Insurance Agent

Phone sings...

"Hello Sir, I am ... an Insurance agent. We met at XYZ's marriage"

"Yeah, I remember. How are you?"

"Fine Sir. I would like to meet you personally to discuss on an Insurance Plan"

"Sorry, I am busy these days"

"It will not take more than 15 minutes. And no commitments. You can simply say no, no questions will be asked"

"OK, come on tomorrow"

Next day.

"Good morning, Sir. I am Mr. Agent"

"Hi, I am bit busy, so hope we can wind up soon."

"Sure, here is the plan I want to discuss. This is an endowment plan, Endowment plan is a saving and insurance at the same time"

"Wait, I am more interested in Term Insurance"

"Term insurances are not profitable sir. You will get the sum assured only if you die. Who wants money after dying"

"That is insurance for. In endowment policy also part of my payment is utilized for insurance, right?"

"That is true. But still you will get sum assured + bonus when the policy matures. In term insurance, it is a pity you will not be rewarded for surviving the insurance term"

 "OK, in your endowment plan, tell me how much coverage will I get for Rs 5,000 premium per month"

"For Rs 5,000 and for a 20 years you will get Rs 12 Lakhs coverage"

"12 Lakhs! That is seldom sufficient for my family to survive in my absence. So to get a Rs 50 Lakhs coverage, I need to pay my entire salary as premium? Do you know that I can purchase a online term insurance coverage of 50 Lakhs just for Rs 9,000 annually."

"But online term insurances are sold only by private companies. You cannot trust on them, sir. What if they don't pay after your death?"

"Some of them have above 95% claim settlement rate."

"But there is no survival bonus"

"I am paying same way for my vehicle insurance and medical insurance. No benefits on maturity. Then why not for Life insurance?"

"That is true. But you see this endowment plan. It is very attractive."

"OK, go ahead"

"This plan is an insurance and investment at the same time. In this plan, if you pay Rs 5,000 per month for a 20 year period, you will get 12 Lakhs coverage.In addition to that if you survive these 20 years, the company will pay you the survival bonus acquired so far. For 5,000 premium it will come around 10 Lakhs. For the rest of your life, you will get 5.5% of the sum assured  monthly. This will continue until you turns 100. If you die before that age, the sum assured will be handed over to your dependents. So, this plan is an insurance, retirement plan and investment"

"It seems too complicated. So, you are saying that I will get 10 Lakhs after 20 years?"

"Well, sir. It is not guaranteed. Our company usually pays that much"

"What do you meant by usually?"

"Sir, our company pays 5-6% as bonus nowadays"

"But there is no guarantee it will continue for next 20 years?"

"No sir. But every one knows that traditional insurance policies are safe"

"How can you say it is safe, if there is no guarantee of returns?"

"Sir, all these people are purchasing insurance policies thinking those are safe investment. Are all these people fools?"

"Probably they are. If there is no guaranteed returns, I prefer Mutual Funds."

"But in Mutual Funds, you can even lose your investment"

"Then there are other investment tools where return is guaranteed. "

"But those are not combined investment, insurance and retirement plan"

"See, if I pay Rs 5,000 per month for next 20 years in a PPF, I will get Rs 31 Lakhs at 8.8% interest rate, compared to your 10 Lakhs and 12 Lakhs later. And it is fully guaranteed. PPF has all tax benefits as insurance has. Only problem is PPF is for 15 years, not for 20 years. Still it gives you better returns for 15 years"

"But you will not get insurance coverage"

"Well, if I spend Rs 1000 per month for a term insurance, I will get coverage of nearly Rs 50 Lakhs. Then if I invest the rest Rs 4,000 in PPF, I will get more than Rs 25 Lakhs. Still it is much more profitable than your brilliant endowment plan."

"You calculations seem correct, however, do you think lakhs of people, who are purchasing this policy, don't know how to calculate?"

"I think so."

"Sir, it is very hard to sell insurance policies these days. People are getting more and more knowledgeable. Good bye, I need to find some one ignorant today to sell my insurance"

"Good Luck"

What did I Learn at School?

All financial experts will agree on one thing - our kids at school are not taught even the basics of personal financial management. We teach them how to make money but do not teach them how to handle it. I am not sure how are the things now, but back in my days, the teachers thought even speaking about money will spoil the students.

When I look back to my school days, I cannot say I was taught nothing on money. I can remember two lessons I learnt at school about money, other than calculating simple interest and compound interest. I will narrate those two things here.

At my third standard, there was one chapter on Life Insurance. It was written as a dialog between a Father and his son. The son is gloomy to go to school as his best friend, Ramesh, is discontinuing his education. The reason? Ramesh's father, who was the sole bread winner of the family, passed away recently.

Then father consoles his son saying Ramesh can continue his studies, because his father had an insurance coverage. Then father explains to his son about the Life Insurance and how it works. At the end of the story, the kid becomes happy and goes to school.

We need to appreciate the people who included such a topic for such small kids. It was, of course, better than nothing. However, the second lesson I was taught at school is a horrible one, and  I had to struggle hard for years to unlearn it.

It was a poem on Money. It is written with a good intention, to educate students against greed. Well, it goes like this. If you get Rs 10, you will want Rs 100. If you get Rs 100, you will wish for Rs 1000. If you get Rs 1000, you will want Rs 10,000. The greed of human beings will never end. It was a Malayalam poem, and please excuse my poor translation. (They say what's lost in translation is poetry).

What's wrong here? Of course, we need to educate our children against greed. Greed and consumerism can easily spoil one's personal finance. But, if you have Rs 10, what's wrong if you try to make it Rs 100? Ideally, every one should try this. That's why we are investing our savings, to make it grow. We work for money, and if you invest the money wisely, the money can work for you, and grow by itself.

The purpose of education is to produce good citizens of the nation, not a few saints. In that case, we cannot accept including such pessimistic poems in school curriculum.

It was nearly three decades ago, and what worries me is that our outlook hasn't changed much. Recently I read an article that Central Government is planning to make finance education mandatory for school kids. A very welcome move. But not all people are happy, and some people commented that finance education will ruin the kids. Another one commented that we should teach our students moral values instead of personal finance. The moment we hear money, we assume that it is against values. It is disappointing to see that some people still believe money is such a bad thing.

I wish some one taught me the basics of personal finance management in the early years of my career. I wish some one told me how bad it is using credit cards, the importance of keeping track of expenses, and the importance of saving and investing. Do we want our kids also grow up as ignorant as we were? I believe it is high time we should include personal finance in school curriculum. Managing money is as important as earning it.

Is it Possible to Buy a Car without Car Loan?

In my childhood if some one got a car, that means he is rich. Nowadays every household got one or two cars, is it every one getting rich or are the cars becoming cheap?

If I say that a major percentage of the cars running on roads are on car loans, it will not be an exaggeration. Is it possible to purchase a car without a car loan? If I ask this question to a group, I will get different answers like, "Yes, only if I won a lottery" or "I am not rich enough to buy a car without car loan" or "It is not worth buying a car by paying lump sum amount."

There are people who's monthly salary is near to half lakhs, and still believe buying a car without loan is impossible. Well, in this post I want to analyze one scenario to find out it is mathematically possible to buy a car minus a loan without any additional burden.

This is the scenario. You want to buy a new car worth Rs 5 Lakhs. Usually the banks will finance only 80% of the car value. So, you will get Rs 4 Lakhs as loan. If you go for loan from State Bank of India, who claims providing loans with most economical interest rates, you will have to pay Rs 1699 as EMI per One Lakh for seven years at 11.25% interest rate. So, for Four Lakhs you have to pay Rs 6796.

Then what will you do for the Rs One Lakh down payment? I have seen people going for other kind of loans like Chitties or Gold Loans. This can make things worse. For this example, I am assuming that you have Rs One Lakh with you.

But, I told you I will explain how to buy a car without the loan. Imagine, you have started a recurring deposit with any bank for the same amount you pay as EMI, that is Rs 6796. Well, most banks will not accept this amount as recurring deposit, so let's round it to Rs 6800. Keep on  investing this for next 4.5 years, exactly 55 months (again rounded). Just think you are already purchased the car and paying the loan. Considering 8.5% interest rates compounding quarterly, at the end of 55 months you will have Rs 4,57,919.62 with you.

Now, invest the Rs One Lakh, which you have for the down payment, in a Fixed Deposti for 55 months at the same rate (8.5%). That One Lakh becomes Rs 1,47,035.19 after 55 months.

So, after 55 months, you will have a total of Rs 6,04,954.81 with you. Assume the price of your new car increases by 20% by this 4.5 years. So, it will worth you Rs 6,00,000. So, you have enough frunds to purchase it comfortably.

So how much you paid for this? Rs 1,00,000 + 55 x 6800 = Rs 4,74,000.

If you have gone for the loan, how much you should have been paid? 1,00,000 + (6796 x 12 x 7) = Rs 6,70,864. That means you should have paid an additional amount of Rs 1,96,864. So you have saved nearly Rs 2 Lakhs. Not a small amount, eh?

I am not considering the petrol expenses and other maintenance expenses you saved for the 4.5 years, because as you have no car now, you are paying for public transportation.

Also, I am not considering the Income Tax acquired on the interest received. In this example, you receive Rs 130954.81 as interest (including both on recurring deposit and fixed deposit). If you are in 10% IT slab, you will have to pay nearly Rs 13,000 as income tax. In that case, you will need to pay two more installment for your recurring deposit. One way to avoid this income tax is go for a mutual fund SIP, rather than recurring deposit. This can provide more returns, and you can buy the car sooner. However, understand the risk associated with it.

It is not only about money. For the 4.5 years you are paying same money to RD that you would have been paying for EMI. But is there any difference? Yes, you are still not in a debt trap. You have freedom to stop it at any time before you purchase the car. But if you stop your loan EMI, well, the bank knows how to deal with it. So, it is all about your freedom.

When you are not in debt trap, you are more armed to face any unexpected financial emergencies, like loss of job or medical emergencies. OK, I don't want to be so much pessimistic, I will say a positive benefit. At the end of 4 years, you see one opportunity to make a big profit by investing 5 Lakhs. What you can do? Postpone your car purchase and invest there. On the other hand if you are in loan trap, you will have to watch the opportunity vanishing.

So you saved lot of money, you have financial freedom, still there is one big drawback to this method. You have to wait for 4.5 years to buy a car. Your wife is not going to accept this. What if you have planned this 4.5 years ago, and started an investment from then? You would have purchased your dream car. We cannot go back in time and start a regular investment in the past, however, we can learn from this. We can start planning now for our future financial needs. If you think about your retirement after 20 years, it will be too late. Retirement, Children's education, Children's marriage - let's list all our future financial needs and start planning.

Are you thinking all these too complicated? Then the easiest and simple thing is to just check you can afford the EMI payment. If yes, purchase the car in loan. If not, wait for your next salary hike. After all, most of people are doing it, no? As I always say it is your money. You can spend whatever way you want.


Image Courtesy: Wikimedia Commons