25 August, 2010

Soaring twenties...

I have just got my precious wings. I can fly. I’m soaring high and what a thrill it is ! These wings… they allow me to soar, dive, glide, coast… these wings have released me, given me the freedom, helped me measure the world with my flaps…

Rahul was reading a novel where the young eagle who has started doing it’s sorties high up, is feeling the exhilaration of it’s new found skill & the thrills… Rahul could not but help comparing this eagle with his situation. He is young too, foot-loose & fancy free. He is soaring high and is enjoying the freedom in this new city. No one to tell him what to do; no boring books to pore over... The pay packet he gets in his IT company is far more than he could have imagined three years ago. At 24, Rs.32,000/-pm is a lot of money – especially when his parents are still working and are pretty well off, by themselves.

So, he is flapping around and doing a few tricks with his money, without a care in the world. Entertainment, fine dining, excursions & gadgets are currently claiming most of his money. He has heard about investment. Yes. But that’s still a distant thought. He has just about started working. Why not flap around for a few more years before settling into the boring saving routine, is his thought. Give me a life, he tells Vishnu, when he broaches the subject of savings.

There are many Rahuls, who are buoyed by the hot air currents and are gliding comfortably. But there are Vishnus too, who have their share of fun, but have also started to take some interest in their finances.

A bit of this won’t hurt – Vishnu has been telling Rahul to put aside just Rs.3,000/-pm, unsuccessfully. He is doing about Rs.7,000/-pm, since the past year. Not that Vishnu does not enjoy life… he has his fun too. He invests first and then spends the rest. That way, there is no guilt and there is something to fall back on.

But what fallback do you need, Rahul keeps asking. For Vishnu, the crisis of 2008 is still fresh in memory and he was aware of many who lost their jobs then. Rahul & Vishnu were not affected at all… but then the jolt was real. That’s when Vishnu decided to put aside some money for a rainy day. He had heard of some two good funds from his friend’s father and decided to invest in them on a monthly basis. He has accumulated over a lakh by now and feels safe. He is thinking of opening a PPF account, again something he has heard of and wants to get off the blocks. He wants to invest upto Rs.70,000 of the bonus, and spend the rest. He has heard ( correctly )that one can invest upto Rs.70,000/- in a year.

He does not know what his longterm goals are yet, but he may require money while getting married, for buying a home, for setting up an establishment and for his children… He just knows that one requires money and has set the ball rolling.

A safety net to cushion the drop - Vishnu does not again have any dependants. He has heard that life insurance is not needed if there are no dependants. The company is offering medical insurance of Rs.1 Lakh to all employees. Vishnu does not hence see the need for Medical insurance. Rahul however has taken a medical insurance of Rs.3 Lakhs personally, as he feels the insurance from the company is miniscule.
Vishnu does not think so. Rahul is ofcourse tempered by the predicament faced by his cousin, Vipul who is of the same age group. He had to undergo a hernia operation and had to shell out some 60,000/- bucks, as he did not have a medical cover. Rahul then and there decided to take further medical cover – he has heard enough scary stories of people becoming paupers paying hospitals and doctors.

Collision course – Vishnu has also heard of Accident insurance, but never thought much of it. His friend Amol however, is all for it. In fact he has taken a Rs.25 Lakh cover and is covered for death, disability, hospitalization due to an accident etc. Amol believes it is money well spent as he is an avid biker. Vishnu too straddles a Yamaha, but is not convinced. Accidents happen… but not to me, is his favourite line!

Rahul, Vishnu & Amol are going for dinner now. They have made some right moves and have not done some, which they should have. Rahul feels he is soaring like the eagle on his Pulsar… he has grown wings no doubt and is enjoying the freedom, youth and money has conferred on him. He calls them hot currents. Can they learn from each other? They can. Overtime, they will.

Published in moneycontrol.com on 23/8/2010

22 August, 2010

How do I decide if prepaying the home loan is better or investing my surplus is better?

Taking a loan is taboo in India. We have a cultural milieu, which equates living without any debts, as a sign of righteous living. Understandably so. In the past, getting into a loan would have sucked one into a quagmire, as the interest rates charged were usurious. Plus there was a stigma attached to being in debt. You can hold your head high, if you are debt free. That’s the ethos... reason why HDFC Standard Life’s “Sar Utha ke jiyo”, connected so well with people. It was spot on, about being independent and fending off for oneself.
So it’s easy to understand why, when people do take loans ( even home loans ), they want to pay it off at the earliest. Those who take loans are on pins and needles. They do not want the Damocles sword over their head. Even in a benign loan like a home loan, they would rather pay-off, first thing.
Let’s find out if paying off home loans is good and if it is, in what circumstances.
Paying off home loans has to be carefully weighed. It depends on the interest rate being charged, the quantum of loan taken, tenure of the loan, if it is fixed or floating, what percentage of salary is the EMI on the loan etc.
1. One of the most important things to look for is the serviceability issue. Typically, if the home loan EMI is upto 40% of the net income, it is deemed comfortable. The higher the percentage, the worse off it is. It would be a good idea to bring down the home loan to a 40% level. But, if there are other loans where you are paying a higher interest rate, it would be a better idea to pay off those. Paying off an auto loan or a personal loan may be a good idea as the interest does not give you any tax breaks either.
2. There is an equally valid argument for not prepaying a home loan, if you have investment options which will yield higher returns as compared to the home loan. For instance, if the home loan interest rate is 9.75% fixed and there are options where the investor could potentially earn 12%, like Equity Mutual Funds, (s)he could invest the money and retain the loan. Even investment in PPF ( @ 8% post-tax interest ) could be a good idea as the effective home loan interest rate could be less than 8% considering the fact that interest upto Rs.1.5 Lakhs ( under Sec 24(B) ) is deductible against the gross taxable income. In this case, the effective interest rate could be less than 8%, making PPF a good option.
3. A lot depends on the quantum of loan too. If the loan is huge, it may be a good idea to reduce the loan. For instance if a person has taken, say, a Rs.1 Crore loan, it may be a good idea to prepay and bring down the exposure. This argument will hold good even for a high income earner. Let us say, a person has taken a loan of Rs.1 Crore and (s)he is earning Rs.2 Lakhs net income per month, the ballpark home loan may come to under Rs.1 Lakh a month. This may look comfortable.
However, this person is exposed if there is a loss of job or the income reduces in future, for some reason. Even in a situation where (s)he has to go on leave without pay, this EMI may be a millstone around the neck. In such situations, one could consider prepaying even if the home loan EMI is only 40% of the net monthly income. In this instance, 40% would mean an EMI of Rs.80,000/- and a loan of over Rs.80 Lakhs. In this situation, it would be a good idea to prepay if one has the money for reasons explained above.
4. A lot will depend on whether the home loan is a fixed or a floating rate loan. Typically, if it is fixed at a fairly low level, say 10% or less, it may be a good idea to allow the loan to continue and invest any surpluses one may have. Beyond 10%, the effective rate has to be calculated taking into account the tax benefits and then decide whether it makes sense or not. For a floating rate loan, a lot depends on the prognosis for the future and where the loan rate has reached. Suppose the rate is at 12%, it may make sense to start paying up. If interest rates are expected to go up, it will be a trigger to see if prepayment makes sense.
5. For those with variable incomes, like those in business, the risk of a huge loan is pronounced. They should consider prepaying loans, especially if their exposure is very high and the potential fluctuations are expected to be major, irrespective of other factors. Again if the loan has been taken at very attractive levels like say 7.75% fixed for the tenure, they could consider investing elsewhere, which keeps the option to prepay whenever they want.
6. Sometimes, due to interest rate fluctuations, the balance tenure may go beyond ones retirement age. In such situations, prepayment or increasing one’s EMI would be a good idea to bring down the tenure down to the balance working life.

If one has decided to prepay a loan, a good way would be to hike the EMI, where possible. This ensures that the loan gets cleared in an accelerated manner and will work even in cases where lumpsum prepayments are not possible.

Over the years people have started losing their aversion towards loans, which is one of the reasons real estate is booming. But, given a chance people want to repay. They can, after taking into account the various factors discussed here. One need not be paranoid about loans… one just has to be careful.

Published in Business Standard on 22/8/2010

19 August, 2010

Planning for dependants with special needs

When you are given challenges in life, God wants you to meet them and rise higher. We all understand the philosophy… but that does not make taking care of a disabled dependant & planning for their future, any easier.
For families with disabled dependants, the challenge is two-fold. Firstly, see if they can be trained so that they can join the mainstream. This can happen if the individual in question is not mentally affected and the problem is only in terms of lack of vision/ hearing etc. The chances of rehabilitating such a person is much higher than in the case of a person who is deaf & dumb or is mentally ill or afflicted.
Hence, what is required to be done for these two different categories of people , is going to be different.
Planning for the physically challenged - For this category, there are going to be special needs throughout life. For instance, a person with malformed limbs will have to move around in a wheelchair. For this person to travel around, one would have to make a provision for a specially modified vehicle. Lots of these people also travel by public transport these days. Railways has provided a small compartment for them and BEST buses have a couple of seats reserved for them.
Apart from this, there can be a need for special tutoring ( in case the person concerned is blind / deaf, spastics etc. ). There can be a need for attendants, in case the family consists of working couples. Any home they would move into also may require modification depending upon the person’s incapacity.
From the family point of view, they need to plan for the future of such dependants, apart from planning for their own retirement. This is a constant source of worry for the parents/ guardians, of such dependants. They are also constantly worried about the financial future of their wards. Planning for the physically challenged is an easier job. They would understand and be able to manage money. For this category, it is a good idea to build a supplementary stream of income, along the way as their income may/ maynot be sufficient to meet their needs.
How to plan their finances –
1) A good idea in such cases would be build a corpus and ensure that a certain sum of money comes to them regularly. This will ensure that they feel secure and do not have to come to the parents for every need. For instance, a Post Office MIS of Rs.6 Lakhs, will give them Rs.4000/- a month on a consistent basis, which will be in addition to what they are able to earn. The investments can also be in regular dividend paying FDs, MIPs etc.
2) Another idea would be to invest in Equity / MFs ( Dividend payout option ), where (s)he get some payouts, from time to time. This is however not a dependable, regular source.
3) Corpus accumulation for their future can be through PPF, FDs, investments in Equity shares, Mutual Fund units etc.
4) Invest in annuity products for them, which starts when the parent retires. It will be a good idea to start 2-3 annuity plans which vests 3-5 years apart from each other, as the payouts start adding up over time, somewhat nullifying the effect of inflation. For instance, the first annuity of Rs.3,000/-pm starts in 10 years from now, another annuity for another Rs.2000/-pm can start three years from then , partly compensating for inflation. Another one can start in another three years. The idea of staggering is also that the longer the contribution/ vesting time, the bigger will be the compounding effect and higher the payouts.
5) Invest in special Life Insurance products like Jeevan Aadhar/ Vishwas , which has the option of receiving a portion of the corpus as a pension, when the parent is no more.

Planning for the mentally challenged - This is far more tricky as the dependant would not be in a position to manage the money and is truly dependant for their every need. In this case, corpus accumulation that will last the entire lifetime of the dependant, is an important goal as the possibility of the dependant earning a living is not really there. The products invested in should be fairly simple to manage & administer. Even if the parents are not around, it should be easy for someone else to understand and manage.
Planning the Finances - For this category it could be through annuities or other regular income products, which could be useful especially after the parent’s lifetime. These are recommended as these require the least intervention. Also, trusts can be formed for such dependants, with a close relative/ friend administering it , for the benefit of the dependant. The other option is to admit such dependants in such institutions which will take good care of them, for life. A onetime lumpsum amount or a lumpsum plus a monthly payment needs to be made to such institutions, for this purpose. For-profit and non-profit organizations are operating in this space. A suitable organization can be chosen, according to requirements.
Tax benefits : There are some income tax benefits to give relief to those with handicapped dependants. Rs.50000/- deduction is available for expenditure incurred on a handicapped dependant relative, including payment to specified schemes for their maintenance. If the dependants have severe disability ( blindness, mental retardation etc. ), the deduction allowed would be Rs.1 Lakh. This comes under Sec 80DD.

Published in Business Standard on 15/8/2010

Investment does not always work like in textbooks

Wisdom, they say, comes out of experience. But is the same wisdom applicable to you as well? Sometimes, it may. But there is no thumb rule that it will always do. For instance, John Bogle’s famous book ‘Common Sense on Mutual Funds’ has argued that over time, index funds will always outperform actively-managed mutual funds. And while this can work consistently in a more developed market such as the US, results in the Indian market may not be that convincing
If we look at investment wisdom as handed down by the gurus, there is a gap between what one could expect and what actually happens.
Invest for keeps - The Sage of Omaha – Warren Buffett, is a great believer of investing for the long-term. In fact, he says, if it is a really good investment and works, he advocates investment for ever. He has quoted Coca-Cola as an example, where he has kept his investments for decades.
This does not always work. Many companies, which are in a commanding position at one point, do not remain there forever. Changes like technological developments can undermine a company’s market position ( Kodak, Xerox ), may reach the end of the product cycle and mature.
There are companies that are able to emerge winners and there are those who fall by the wayside. NOCIL, ORKAY, Nirlon, Dunlop were bluechips of yester years; but fell by the wayside for a number of reasons. So, if one were invested in them and just continued to hold, it would have resulted in value erosion. What Buffett said will work in some cases, not universally. You will constantly need to keep evaluating, if such stocks should have a place in your portfolio.
Index investing is the best bet - This is a truism that has worked only partially in India. This has been substantially true in the US. Even factoring the higher expenses, actively managed funds do offer higher returns over index. For instance, the average returns of all large-cap diversified beat the index, in one, two, three-year performances. Only five-year performance, the index had done better than the average performance of all the large-cap diversified funds. Now, ten year returns for Sensex & NIFTY are 15.79% & 15.21% respectivey. The average for all diversified equity funds is 22.03%. If you look at the top performers like HDFC Top 200 Fund, Reliance Vision Fund, they are all at 30%. That’s almost double of what the index offers!
What index investing, however, does for the investors here is to do away with the fund picking acumen of the fund manager and lower the cost of managing such a fund. But should it be the only part of your portfolio, I doubt it.
Timing it to a nicety – How we wish, we entered and exited the market, always at the right time. And technical chartists would have us do just that. Every day, television channels and newspapers have chartists telling investors ‘buy, sell or hold’. The only problem: Future is projected on the basis of past data. True, it will work sometimes. But not always. For retail investors, it’s a completely unreliable tool.
No wonder, even the Securities and Exchange Board of India asks mutual funds to say – Past performance is not a reflection of future performance – in their advertisements.
On a lighter note, as Fred Schwed writes in his investment classic ‘Where are the Customer’s Yachts?’ – “In our moments of sober thought we all realise that booms are bad things, not good. But nearly all of us have a secret hankering for another one. Another little orgy wouldn't do us any harm, would it? This is quite human, because in the last boom we acted so silly. If we are old enough, we probably acted silly in the last three. We either got in too late, or out too late, or both. But now that we are experienced, just give us one more shot at a good reliable, runaway boom.” Only problem – there is nothing called a good, runaway yet reliable boom that one can enter and exit, exactly at the right time.
Value investing principle – Another commonly-touted idea. The problem is in the term ‘Value’ itself. Value lies in the eyes of the beholder. At the height of the dot-com boom, companies with price-earnings (P/E) multiples of even 200, found takers. So any stock that would have quoted at 75 P/E would have been seen as a true value proposition. It is also very dependent on the industry in which the company operates, as well as their growth potential. Also, value could be derived from replacement value (as popularised by Harshad Mehta ), Book value to price principle, price-earning to growth ratio etc. Value can also be a by product of softer aspects like brand salience (Apple, Sony), quality of management (GE, HUL), innovation (Apple, 3M). That’s precisely why a lay investor is not able to get it right.
Catch them young and watch them grow – We all want to invest in the next Reliance Industries or Infosys, right? The place to look for are the sunrise sectors and good companies there. But identifying the future sunrise sector is fraught with danger. Does bio-informatics qualify for a sunrise sector? It probably does, because it is an emerging area. So does, clean energy technologies, nano technology, contract research and manufacturing in pharma, genetic engineering etc. But, even companies in far more low tech areas may be sunrise sectors too - agriculture and agro-based industries, water based industries, environment management based industries etc. Now, identifying the sectors of the future correctly, is a challenge by itself. Then putting money in the right company is even more of a challenge – as many of them would be unlisted companies and too much information about them would not be available in public domain. That is why, these companies have a fair ownership by venture capitalists, private equity investors and others, who are savvy and who will be able to invest in early stages. There may be very few in public domain and they could be expensive.
Hence, a lot of what the analysts and gurus say, cannot that easily be replicated by a regular investor. While, there is no denying that gurus have been able to do it, the normal investor still finds them a challenge. Remember, there is an important difference: Investing is a full-time profession for gurus and analysts, it’s not the same for you. For you, there needs to be an investing strategy that is consistent with your risk-appetite, time horizon and so on. Keep it simple.

Published in Business Standard on 8 August, 2010

06 August, 2010

Cashless Hospitalisation withdrawal by PSU insurers...

There was this furore over the withdrawal of cashless settlements, in case of Medical insurance polices by PSU insurers. Newspaper & Magazine headlines screamed sensationally - “ take cash with you, even if you are cashless”.
The root problem has been around for long. Only that, it has now boiled over. Medical Insurance is an area where insurers have been making losses. Overcharging by hospitals and doctors & various frauds, has been prevalent, in those cases who have medical insurance.
Finally, PSU insurers pulled the plug and withdrew cashless settlement in all, but a selected list of Preferred Provider Network (PPN). This was met with howls of protest. FICCI came out strongly that the insurers cannot unilaterally withdraw something they have promised to their policyholders. Hospitals understandably protested. Policy holders got worried about this sudden turn of events.
Many policy holders were serenaded with offers from private insurers, who made a virtue of the fact that Cashless settlement are still available through them, across the board. I have been fielding queries from people who want to know if they should go to private insurers, due to the cashless option being available across the board, in their case. I have been counseling them not to take hasty decisions, as 1) what has happened with PSU insurers can happen with private insurers as well, because the overbilling problem is faced by both 2) PSU insurers may soon negotiate with all major hospitals and bring them back on board – it’s just a matter of time. PSU insurer’s premiums have generally tended to be lower and that is in the interest of the policyholder.
Policyholders have traditionally turned a blind eye to charges, as long as they could be covered by the policy. This is a serious mistake ethically and even in their interest. If there is overcharging, the balance amount in the Sum Assured available for claims in the year, reduces; also, premium can go up more due to the higher claims. It is in the interest of the policy holders to look out for padding in the charges. We all have access to someone in the medical field. We can ask around and find out, how much a particular procedure could cost. One would atleast get a ballpark figure, that way. Ideally, if it is not an emergency, find out in advance what the hospitals and doctors would charge for the particular treatment. If you have done this exercise properly, you could save a packet. Knowledge is power. The charges can be brought down, using these as bargaining chips. I know people who have done it.
Another odious practice is the principle of charging everything based on the class of room, one is admitted in. For instance, a person from general ward is charged less for the same procedure by the same doctor, in the same operation theatre, with the same facilities as compared to another from a Deluxe room. There is no logic here – it is just that those in deluxe room can afford to pay more. This is the system that has gained root and has been followed without questions. This is a matter the health ministry needs to address. Loot the rich ( or relatively better off ), seems to be the motto... Our government does that too - for paying taxes, you don’t get anything in return, except for the “possibility” of good governance, which is marked by it’s absence. For now, if you want to pay less choose the lower level room or general ward.
Insurance companies need to address it by negotiating with various hospitals, which they will, as it is a matter of survival. It is ironical that insurance companies are overcharged by hospitals, when they give them so much business. If anything, they should be given volume discounts. There is a saying which goes – the child that cries will get the milk. The insurance companies have only now started… hospitals & doctors will have to fall in line… or lose business to others who are sensible enough to see reason.

Published in Moneycontrol.com on 4/8/2010

Cashless settlement withdrawal & issues surrounding it

Would you like if a shopkeeper offers you a product at one price and the next buyer at a 50% discount? Well… no one likes it. But this practice happens in a few industries. Airlines & hospitals are prime examples. An airline seat on which you may be sitting may have been sold on one price and your co-passenger may have bought it at maybe half the price. Airlines justify on the basis of the fact that this passenger booked in advance and hence got a special price.
Now, look at hospitals... If you are admitted in a hospital and an operation needs to be performed, the price varies depending on which ward you are admitted in. If you are from the general ward, you pay a lower amount for an operation and you pay a much higher amount if you happen to be from a deluxe room. The charges can be substantially higher. This, inspite of the fact that the doctor, operation theatre etc. are all the same. This unsavory practice has been there for a very longtime and doctors bristle when someone even question this. Robbing the rich ( or the relatively well-off ) is an art perfected since the days of Robinhood… and this has got entrenched so much that it is an accepted practice & cannot even be questioned!
Now, the second problem… Many hospitals have ostensibly been charging a high amount if a patient has insurance and entirely a different ( and lower ) amount, if they don’t. This has been one of the worst kept secrets and has been bleeding the insurance companies. It’s ironical that insurance companies are charged higher rates… they should actually be charged lower rates and get quantity discount, as they provide huge business to various hospitals. After bleeding for a longtime, PSU insurers have decided to stop cashless settlement in all, but a select list of Preferred Provider Network ( PPN ), where cashless will be applicable. Private insurers are still having cashless facility.
There are several questions in the mind of the consumer.
Do I now go to the private insurers now – They are offering cashless settlement across hospitals today, as against the PSU insurers – granted. This alone cannot be a determinant. Today it is PSU insurers. Tomorrow, it can be private insurers. PSU insurers have got affected most in this, as their premiums have been comparatively less. Some hospitals accuse the insurers of not having ailment based cover and having just a value based cover, due to which insured goes for expensive treatments… Some hospitals claim that charges can vary from hospital to hospital, based on facilities available. But the issue is that hospitals have different tariffs for those having insurance and those without.
Insurers need to fix up specific and low tariff rates with hospitals, like CGHS has done with various hospitals. In future, most people would have insurance cover and business from insurance companies will become, bigger & bigger for hospitals. Hence, they should provide volume discounts like it happens in every business.
Ignore inflated bills at your peril - Another problem noticed with patients who have insurance is that they do not bother much, as long as the bill gets settled in a cashless manner. Inflated claims by hospitals reduces the residual cover available for the year. Also, inflated claims result in more extra premium charged, in the next year. Signing the bills without checking will also expose the insured to allegations of fraudulent claims, if some procedure was not done and claimed for. These things are happening today. It is in one’s own interest to ensure that excessive or fraudulent claims are not made. The insured can take the help of the medical professionals in an insurance company or could get the same checked by an external medical professional, before signing papers, put before them. They should resist any attempts by doctors or hospitals into pressuring them to sign on the dotted line.
Keep some cash… Till the dust settles down, it would be a good idea to pay the bills and get reimbursed later. That way the bills will be more in line with the services availed. Also, it is a good idea to find out in advance, the rates for procedures & fees of doctors, fix it up and then only go ahead. In all cases, except emergency cases, this should be possible. This can help you get a fix on how much it would cost and be ready with the finances.
Be flexible - Lots of people are attached to their doctors… and doctors recommend certain hospitals. It will be a good idea to be flexible and be willing to move to a different doctor or hospital, if you know your current preferred doctor/ hospital is over-charging. There is nothing better than a bit of competition – get quotes from different doctors & hospitals. You will be able to save quite a packet by just asking around.
Best thing one could do today is to ensure good health by a combination of exercise, good working habits, healthy eating habits, avoiding/ cutting down on smoking/ drinking etc. Health is wealth. An apple a day keeps the doctor away. Eat apples – that’s the best finance tip you can get today!

Published in DNA Money on 6/8/2010

02 August, 2010

Are you buying insurance? Be aware of these…

Insurance Salesmen have been master sellers – that’s an acknowledged fact. They have been selling an intangible product quite successfully for decades, after broaching a subject the customer does not want to hear – death. While their legerdemain is appreciated, they also have their fair share of detractors. They tend to stick on like limpets and keep following up for many moons. Customers take these in their stride. Problems arise when misselling/ misrepresentation & sales spiels, bordering on lies or worse still actual lies are used while engaging with clients.
Customers need to be careful here and need to understand when they are being taken for a spin in a buggy. Here are some tricks you will readily recognize and some that are clearly new.
1. You just sign here, we’ll fill the rest – To start with, this is not really a trick. Many well-meaning insurance agents genuinely want to make the process simple, for their customers. The trouble starts when the agent fills in even the medical related information and mentions that the client is in perfect health. For small Sum Assured, the policy will also get issued based on the declaration of good health. So, if the client has some problems which are not mentioned in the form, it then can cause problems later on. Lesson – fill the form accurately, yourself.
2. The churn that earns ( for them ) – Agents are chasing business all the time. There is always the urge to harvest business from existing customers. But existing clients may not always have money to invest in new business. That’s when some agents resort to the churn game. They urge customers to surrender an existing product ( read ULIP ) and invest in another ( again ULIP ). Insurance products have a front loaded charge structure, customers pay the charges all over again and the agents enjoy their commissions. Lesson – Clarify for yourselves, if you need to cancel your policy at all… and if you need to get into another similar policy.
3. First two ( monthly ) premiums will be paid… – This is a magic word insurance agents use to “soften” their clients. The lure of something free is too hard to resist that customers sign up after putting up just a token resistance. Tax savings is another masterkey used along with the first lure to sign up clients. Lesson – Look at the gift horse, in it’s mouth… examine the product you are getting into. You will still have to pay the rest of the premiums.
4. You get fantastic returns; insurance is a bonus – ULIPs have given good returns over longer tenures… as has equity / MF Schemes. Insurance agents hype up the product and position insurance as a kind of a freebie. Fact is that, you will have to pay for your insurance. ULIP returns does not include any charges. If charges are factored in, the returns will be far less alluring, especially in the initial years. Lesson – Don’t get carried away by returns alone; factor in the charges and then see if it makes sense.
5. The product is getting discontinued – Customers keep listening to this at regular intervals. Just before the end of June, the agents were urging their customers to take the policy ( pension plans ) before insurance becomes mandatory! Now, agents are telling their clients to go for a policy before 1st September, 2010 as then there will be a five year lock-in period. What they do not tell them is that the charges will be much lower in the new products and surrender will be possible, even after a year, at 12.5 -15% charges ( which keep going down ). Lesson – Find out the correct situation before putting in your money.
6. Take this on your child / wife - If they find that the earning member cannot be insured, agents typically suggest that the insurance policy be taken on the spouse / child. They also justify saying that the premiums could be lower for child / spouse! But the point is, the earning member is the one who should be insured. No point insuring the spouse and child. It is a waste of money as the insurance premium paid, however small, serves no useful purpose. Lesson – If you are looking for investment only, don’t succumb to such sales pitches.
7. Sovereign guarantee – LIC agents have been using this. Guarantee in a traditional product is only for the Sum Assured. Every insurance company ( including private players ) guarantees the payout of the Sum Assured. It is only the bonus payout that is not guaranteed. For ULIPs, this anyway does not apply. Lesson – This is just much ado about nothing.
8. LIC will be around; it has government support – I do not know where this is coming from. Being around for 50 years does not guarantee that the company will be there for the next 50 years. If being big is an advantage, AIG did not find any. If being a government company is an advantage, ask the customers of erstwhile UTI and how much they lost when it unraveled. UTI, IDBI, ICICI – all government owned companies then - had various kinds of bonds and other assured return products. They withdrew midway leaving those who have invested in their schemes, in the lurch. Where was the government support there? Lesson – It’s pure apple sauce to think that a Government supported entity alone will survive or their products come with some special assurance that is not there in others.
9. The art of packaging – There are very cleverly packaged schemes , attractively named like Jeevan Arundhati, Jeevan Kuber or something like these, which are nothing but several LIC products put together. These are not LIC plans. They are conjured-up plans by putting together a few insurance products of LIC . Also, interestingly, the payouts which come in at various points are assumed to be invested in NSC, PPF, RBI Bonds etc. Also, they take the income-tax 80C advantages , which most people anyway have exhausted in other ways. Then they calculate the returns and inform you that this amazing product will return 8 or 8.5%!. Don’t be misled by this. The higher returns are because of these other products, income tax savings assumptions & not through the insurance that you are buying. Lesson – Find out what you are getting into. Clearly understand the product before signing up.
10. Returns as high as 30% - IRDA mandates that benefit illustrations show a return using 6% & 10%. But this is followed in the breach. You will find fancy illustrations, assuming 16%, 24%, 30%... If confronted, they explain that it is to give the customer an “realistic picture” as to what they will get if the returns are such and such! I thought IRDA came up with it’s diktat, to precisely to stop conning clients, luring them with the promise of fancy returns. You would have thought some low level agents do it. No. Many high level banks do it. The most recent one I came across is from a private bank that people would like to trust because they are “conservative”. Lesson - Anything that looks too good to be true is probably not. Beware!
As a customer, a basic level of Financial Awareness and literacy would be absolutely essential. Reading up, visiting appropriate sites, starting to read the brochures that you have till now junked without a second look, will help. If all this is beyond your ken, take the help of a genuine investment consultant or Financial Planner. Anyone can sport these tags today and finding a genuine consultant is again a challenge. That is why, people just go to their banks to renew their FDs, instead of worrying about complex financial products. But when they do go to the banks, they get sold insurance, MF schemes and lots of others they cannot even articulate. That brings them to square one. A bit like snakes and ladders, what?!

A version of this was published under the title "Come into my parlour" in August 2010 edition in Money Today