1. Buy term insurance on the net: it is the cheapest way to buy term insurance. Let us say you are 27 years old and are trying to buy a pure term life insurance product. Chances are you will surf the net and find out that Aviva is the cheapest (it could be Religare, but this is just an example). So you decide to buy Aviva – you pay by card, upload the IT papers, Pan Card, etc. You get a medical appointment – medicals done, you get the policy. Sum assured Rs. 1 crore. Premium Rs. 2000 a quarter. Fantastic.

However many, many, many people are NOT as tech savvy. They walk into a BANK branch and say ‘I wish to buy Term insurance’. The bank OBVIOUSLY has a tie up with a life insurance company. The representative of the life insurance company sits in the bank branch itself. Organises the paperwork. Says ‘Sir here is the quote for a term insurance – the premium is Rs. 24,612 for sum assured Rs. 1 crore. However, Sir we have a ONE time premium of Rs. 254,000 for 30 years.

Can anybody say….which was/ is a better deal…and why?

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I have no clue about the accuracy of this statement. His argument was even for those who started in 2002 and were in the boom, only HALF their money participated in the boom (thanks to the high charges).

When the ULIPs were launched in 2001-2, the mutual fund industry was already 15 years old (other than UTI). This industry had a nice set of rules and regulations -and all that IRDA had to do was to do a cut paste of the MF regulations of SEBI. However regulator egos may have been at play, and this did not happen.

One simple Mutual fund requirement that all fund houses will launch schemes only at Rs. 10 NAV was also not an IRDA requirement. And financial power houses who claimed to be the paragons of virtue also took advantage of this to launch their schemes at a higher NAV. Even today I know people who are happy seeing their NAv – without realising that it started at a different place!

So if somebody tells me that no ULIP has been able to give a REAL return it is easy to believe because there is no single website which tracks ULIP performance. I can also understand why such sites are missing – there is no mandate by IRDA for a monthly or a quarterly disclosure of portfolios.

However it is high time that disclosures started. Given the higher sales commissions, and the fact that tied agencies can SELL ONLY their own ULIPs, ULIP sales have increased dramatically. Icici Pru has an aum of Rs. 40,000 crores – far higher than many mutual fund houses – and it is growing. I do not have the figures of other ULIP schemes or of other insurance companies – but I am convinced that the EQUITIES with insurance companies COULD be bigger than the EQUITIES with mutual funds (and this I am saying without including LIC’s booty)….

Hey regulator can we have some disclosures please?

With such fantastic ULIP sales, I am wondering which business will pay better:

- Financial literacy programs (at least my children should not suffer!) or

-Law practice – to bring class action suits?

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http://www.subramoney.com/2010/06/if-you-died-tonight-what-will-your-family-do

A long time ago I wrote a piece ‘If you were to die tonight what would your family do?’- here is the link

http://www.rediff.com/money/2006/may/10perfin.htm

My question to all readers is to take some time off and seriously think of death.

You just got married, or you just got engaged, or you just had a baby…now think  “if you were to die tonight, what would your dependents do?

Are they prepared? financially and physically? It is not easy to think about death – but the uncertainty means so you must think. Who will pay the school fees, the EMI, the daily rations,…and please do remember it is not easy.

Will your wife work by choice or will she be forced to work? And be realistic -if she does not have a great qualification and has taken a couple of breaks – will she get a job? Who will pay the EMI for the plasma TV which she never wanted?

Where will be the birthday party of your 6 year old? Same hotel as last year or will the party be cancelled? If the roof is leaking and the paint is peeling off, will she afford to paint the house?

Will your brothers, and mother decide to throw her out of the house – then where does she go? NOMINATIONS are important too. If you have old policies with your mother as a nominee, please make sure your wife is now the nominee.

It is easy to live like you will not die. It is much worse to die like you never lived! – this is a take from Steve Jobs’s quotes.

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Many wealth oriented people are hoping that the clients will understand the need for Medical and Life cover insurance. Typically my suggestion is for people to buy Term insurance online. However many people (sadly including readers of this blog) go online – and the company sends over a rep. This rep is then able to convince them to buy a ULIP – and surprise, surprise fall for it!

There are agents who did not find the whole business lucrative, so they just dropped out. Then there are others who find selling mutual funds and E-brokerage accounts more remunerative, so they have dropped out. Many girls have dropped out because marriage has made them relocate. Many men have dropped out because they have changed jobs and are unable to find time to do this business – effort reward ratio has gone against them.

I know of some top agents (who would have been in the top 30 in any company from the years 2001 to 2008) who have completely dropped out of the radar. The ratio of Bank sales : Agent sales is now far far heavily favoring the banks – something like 70% even for non bank promoted life insurance companies (read Reliance, Max N Y Life, MetLife, Birla..). Even though technically Hdfc Life Insurance is promoted by Hdfc (and not by the bank) Hdfc bank is a very good sales channel and is responsible for a dominant share of the business done by the life insurance arm of the Hdfc group.

Of course there are agents who are benefitting by the dropping out of agents – those who are in the business and continue to be there will surely benefit.

Do I know agents? Well I know a few ’00s if not a few ’000s. Many of them have the clients good at heart, but I do not know of any agent who can really think of what is good for the client ONLY. That is not only tough, but also impossible to expect. Nor am I finding the end buyers taking the trouble to do enough research and know what to buy.

Dilemma…if your agent has disappeared…do not worry there is somebody who is consolidating, but he may not be as servile – he knows he is in a small club of skilful, valued agents! Good for him for sure…..

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Immediately they tell me the cost….paid Rs. 6L premium for 4 years, bought this house for 73 lakhs, …and now the value of the portfolio is Rs. 21L, ….etc.

To me the information I need to be able to take a decision are very different…let me see:

1. I actually do not care what is your cost! I need to know how this amount will be used in the future. If you are going to surrender a life insurance policy invested wholly in equities, take the money and keep it in a bank FD for 10 years, my suggestion would be to continue the life insurance policy. However if you are planning to surrender the Life policy and invest that money in an index fund for 10 years, it would be to surrender the plan.

2. The premium paid vs. the amount you will get: To me it does not matter – I would not say at all! For e.g. if you have paid for 2 years, the policy will lapse if you do not pay the 3rd premium, so my suggestion would be ..pay the 3rd premium.

3. If you are planning to sell the house in a lousy locality and buy in another (read better) locality, my suggestion would be a ‘sell the house’. If you are trying to rent the house, go abroad and ‘wait’ for the prices to improve, it would be NO. Sell it off immediately. Trying to rent something, because you cannot sell it – is poor strategy.

4. If you require life insurance, first take term insurance, then surrender / even think of surrendering the existing plan. That would be the most sensible way to go about surrendering life insurance plans.

5. If the cost structure is high – the recurring costs – makes sense to get rid of the policy. For example if you have a life insurance where you have paid 40% as commission and other one time charges staying longer does not change it. Such costs are called sunk costs, and it should not affect your staying on in the plan. If it is a shit plan, it is a shit plan, get out.

6. The mistake of BUYING a stupid policy happened long back, do not INCREASE your losses by staying on.

7. If you have invested in a well managed mutual fund, invest more, but CLEARLY if you do not have a 5-7 year view, do not be in equities. I am willing to change it to say 4 years, and change the scheme to a 70:30 balanced fund.

….there are more please take the trouble to understand ‘sunk cost’….most journalists will not mention this word in their ‘hold or surrender’ question. tsk, tsk….

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First of all let us understand the government will NEVER want to reduce sales of life insurance companies: this is because LIC has 79% market share and it owns LIC. Also the life insurance companies are mandated to invest a lot of money in government securities. As more money flows into the government kitty, interest rates can be kept low. So while mutual funds have a zero entry load, life insurance products will NEVER be at zero load.

Having said that let us see what all things do life insurance sales guys and gals tell you:

1. Sir this is a good investment product: Complete bull. It is almost impossible to build an investment product, with administrative charges, risk charges, asset management charges, as well as being efficient.

2. You do not have to undergo medical tests: Well true, the risk coverage is very low and you are giving a declaration that you are fine. In case something happens to you (death), there will be an investigation. Your nominee will be told ‘he had high blood pressure and he had not declared it…so we cannot pay’. It is impossible to create a reasonable life insurance product and price it the same for all the buyers. It is obviously unfair on the fit people!

3. You will get very good returns – say in the region of 15-18% : It is impossible to get such returns in ANY mass managed product over 30 years! No country or even a company  in the world can grow at such rates. So the salesperson is talking through his hat. Absolutely wrong.

4. This is the last week for making this investment: Amazing lie which works very well with most people. Men, women, educated, uneducated..all fall for this fantastic sales ploy. I really have no comments why people fall for it. The oldest salesman trick.

5. Sir, this is LIC’s UNIT LINKED PLAN, so the returns are guaranteed by the Government of India: If you believe this, you will believe anything! There are no guaranteed ULIPs at all in the world. When you take a traditional life insurance plan (endowment) there is a guaranteed amount. This is at an extremely low rate of return (remember the greedy government getting low cost funds?) however in a ULIP – by anybody be it SBI, Hdfc, Lic, Icici – THE RISK IS COMPLETELY on you. Beware.

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The Irda made some changes, the Income tax made some changes, they themselves made some mistakes, the customer unfortunately woke up, ….so in fine the industry is in trouble. So here is a fictitious meeting of the various departments of a life insurance company…read on.

Managing Director: We have to reduce our losses, can we have some good suggestions please? Mr. Accountant will you present the numbers please:

Accountant: Sir, for the previous year, we received Rs. 8334 as total premium. Out of this Rs. 4556 was renewal premium and the balance was fresh/ new premium.

MD: So we netted Rs. 8334?

Accountant: No Sir, there were redemptions too. About 3234 Rs. cr was refunded to people who surrendered the policies.

MD: So this amount has to be removed from the total premium received…

Accountant: Also the commission that we paid to our biggest agent sir….about 44%. That is about 143o Rs. crores.

MD: Can we have the net amount of CASH that we received?

Accountant: Er Sir, sir, ..we had about Rs. 844 crores!

MD: And our expenses were Rs. 1023 crores. Most of it was spent on commissions, salaries, bonus, rent, staff welfare, etc.!

Accountant: Sir, we should appoint a committee across underwriting, actuary, operations, accounts, sales, marketing, HR, training, recruiting, administration, secretarial, legal, compliance, to do a cost review.

MD: I agree. We do not have much budgets, let us do a small off site for each region at Goa, Kodaikanal, Shimla, and Bhubaneshwar. Once the regional offsites are over, let us do a national brain storming session at Mumbai. Mr. Admin please co-ordinate the efforts.

Accountant: Sir we should also have a target for the claims and settlement departments. I was wondering whether it is possible to say ”this years claims have already been paid..so we will not pay your claim”

Md: That is a brilliant idea. Let us ask compliance whether this will work. Any better ideas?

Sales: Sir there is no cap on mortality charges or on rider charges..so we can increase the premium.

MD: Great idea, can we have the underwriting team look into it? So far there is no cap on the rider premium…so it might work. Here we can also pay higher commission to the bank.

Sales: Sir, we can also designate one branch in Manipur as the only branch to accept surrender of policies. Also I have checked – we can make it compulsory that the surrender has to be accompanied by the clients photo, attested pancard, passport copy (expired passport not allowed), copy of the cheque, and a bank statement. It is also possible for us to put a pre condition that the customer and the nominee have to go to Manipur branch on Tuesday, Thursday or Saturday between 4pm and 5.30 pm to surrender the policy.

MD: Brilliant, absolutely brilliant.

MD: what about some influential people who may have bought?

Sales head: Sir, in such cases if he  is related to our Board or his surname matches that of a RBI or Irda official we may relax some rules…but for the common man….Manipur branch is a good option.

Md: let us meet again after 2 weeks to brain storm some brilliant ideas like this…

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Accumulation happens over a long time, however exit could happen suddenly and swiftly. Also the company may play dirty by reducing volumes – thus you may be stuck with a super illiquid share!

Similarly if a life insurance agent comes to you to sell life insurance or medical insurance ask him for the process of withdrawal / surrender of a plan. There is a good chance that the sales guy will not know the process.

Most companies will say ‘Compulsorily it will be credited to a bank account’..so you give the bank account number. Then they will say ‘Sorry sir you have to give a cancelled cheque’ …so you give a cancelled cheque.

They will say..sorry the IFSC code is not there, so please get the form authenticated by the bank…by this time you are at your wits end.

Some of them will say please give a receipt…(BEFORE THEY HAVE MADE THE PAYMENT). They will say ‘this is the procedure’ – does not matter even if you know the Chairman or his grandfather. Process, Sir process is process.

Sir as your wife is the beneficiary she has to sign in 3 places…and the amount will be sent to her account. We now need her cheque, attestation, OMG once again!

This is straight from Ripley’s Believe it or Not : One life insurance company has 22 branches in Mumbai to sell life insurance. For surrendering the plan the CLIENT has to go in PERSON (if it is a joint policy both have to go) to one branch, close to Ahmedabad (technically they still call it Mumbai, no clue how) and it is the ONLY place which will accept the application. God bless.

So ask your agent – ‘will you help me while it is being redeemed’ – or in a worst case scenario if I die during the tenor of this plan, will you help my nominee?

In case you do not pay, I will come as a ghost and collect the money from your Managing Director. I promise it will be fun for me. Not sure about your MD.

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So is it true that Indians are under-insured?

The answer is not so easy. Indians are surely wrongly insured. Most of them have LIC’s endowment policies. They stink. The returns are more to please the government. LIC is a big investor in government bonds – at rates decided by the Government of India. This is a sub optimal solution. The more endowment policies that we buy, the better it is easy for the government – easy money for Raja, Kalmadi, Holy cow, …..

Do you think the Chairman of LIC will ever have the guts to tell his super boss (Finance Minister) what rates of interest YOU AS A POLICY HOLDER SHOULD GET? Never.

Let us come to the private sector players. Just like LIC they also have products where the distributor’s margin is 55% – let me repeat – 55%. Then there are products where the margins are 25%. Of course there are some products which have 2%. Do you need even a penny to guess what they sell? If you picked 2%, I am happy to have readers in 2nd standard!

Then of course there is Medical insurance. Let us face it, you cannot be prepared for everything. Cancer treatment costs Rs. 30 lakhs, a fire accident can cost Rs. 20 lakhs. A heart attack – surgery costs Rs. 5 lakhs. Yes Cancer is likely to overtake heart attack as the biggest killer soon.

Then there is something called ‘critical illness’ insurance – it is supposed to pay when an illness mentioned in the policy strikes. I made a huge attempt at understanding the policy. Unless if you are a great lawyer, underwriter, actuary, doctor or a judge, do not make that attempt. I was not convinced that it will pay. The wordings are too complicated. ‘Heart attack arising out of a pain in the shoulder’ – ‘attack leaving a permanent …on the heart’, ‘paralytic attack leaving an impact on the brain’, or ‘kidney failure means both kidneys have to fail’ – to me (and my poor doctor friends!) it did not look like ‘critical illness’ it looked like ‘surely dead’ ! So I was (and am) convinced that these policies will not pay except with a High Court intervention (remember the ombudsman has a jurisdiction of Rs. 20 lakhs and this figure will not change for the next 430 years, making a mockery of the ombudsman!).

Then there is life insurance sold to non earning people (housewives) and in the name of the children. These policies are another set of useless policies. Insurance is supposed to compensate for a financial loss created by an earning money. The life insurance for a housewife (and an earning husband) is justified only when she is insured AND HER PARENTS ARE THE NOMINEES – in case they are dependent on her. Makes no sense if she is not earning, and the policy is taken with her husband as a nominee. However India is full of such policies.

What am  I driving at?

Well go and take a term insurance on the life of the earning member – and be liberal here. Take enough to cover expenses for the next 10-12 years, big capital expenditure – kids education (if they get the feeling that there is not enough money, they stop dreaming, and that would be sad and a big mistake), major repairs, big and small mortgages, etc. If it means 10 X your annual income, do so.

Take a medical insurance for say Rs. 5 lakhs – if you want a higher cover for say Rs. 10 lakhs, take Rs. 5 lakhs from 2 companies – like New India, Oriental…AND MAKE SURE YOU FILL THE FORM TRUTHFULLY. A policy taken with lies is such a stupid expense it is not worth talking about. It will not pay. Stop cheating your wife!  The insurance company just will not pay. You will look stupid.

As you build wealth, and your kids start earning, throw away the term insurance (anyway take it only till your age of 55 – for most normal people)….

this is MHO on the insurance that a person needs.

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I could have easily adopted the text book method of defining wealth – and there are many available. Instead let us look at mindsets.

It starts from the basic question of “Why do we borrow?”

Most of us will today not need to borrow to buy a VCD or a television (did you note we have now stopped saying color television?). However some of us will have to borrow money to buy a small car, many of us will have to borrow to buy a big car, and most of us will have to borrow to buy a house.

If you have to borrow for consumption, you are not wealthy.

Let us say you need to buy a house for Rs. 10 million – and you do not have that kind of money, but you have a good job – so you borrow. That means you are not wealthy.

However, you wish to buy a house for Rs. 7 million, and you have Rs. 300 million in equities, mutual funds, unit linked plans, etc. and you take a call that since your portfolio is growing at a rate much above 9% p.a. you borrow and buy the house. In this case you are wealthy. Simple.

When a person has a Ferrari, it does not mean he is wealthy. It means he is willing to spend, that  is all. And that could come from borrowing. A sign of wealth is seen on the face – there has to be contentment. Wealth seen in the bank is not wealth, wealth seen on the face is wealth – funny is it not?

What are the reasons that we borrow?

1. Consumption – long term and short term
2. Investing

Your short term consumption stories are many – a vacation, medical emergencies, regular consumption, buying a car, etc.

Long term consumption – house

Investment – buying shares, Loan against property, Business needs, educational expenses, etc.

If you have the money to buy all that you need – not worrying about the future cash flows that you can (may) earn, you are wealthy. If you have created that much of wealth, you are now past requiring life insurance – unmindful of what your insurance agent tells you. However, if you are still borrowing to buy things that you need, you need life insurance to cover all the loans, and the money that your family will need if you are no longer with them.

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