March – The month of year-end sale!
Come March and some unscrupulous insurance agents and bank's relationship managers are bustling in the market with various marketing gimmick to lure the unsuspecting targets. There has always been a curiosity among the common man when any insurance company comes up with a new product (sometimes copy of old products in new disguise with some minor alterations) especially the biggie.
Why March? So that you get little time to understand the product. And by the way who wants to understand the product when you have the friendly agent to trust. After all you have not even made that little effort throughout the year to sit down and assess you tax liability and invest in tax saving products since the start of the financial year. Therefore you are frantic at the year end to save the taxes when the honest accounts department once again reminds you about the same. Now you are ready to invest (even by borrowing, if required) in any damn thing that comes across you without even bothering to judge how much that product is suitable to you in achieving any of your financial goals. The friendly agent/relationship manager is just waiting for you with an undercover wicked smile.
I got a mail yesterday from an insurance agent I guess, with the subject heading – Jeevan Vriddhi – 5x returns guaranteed. I failed to understand at the outset as I knew that this product is a 10 year instrument. Worked out the numbers that resulted in 17.5% returns! Guaranteed?? When I opened the attachment it was something different. I started to dissect it. Got to LIC website and searched for the product. It said the insurance cover would be 5 times the single premium paid. I sensed that a predator (the agent) is on the prowl.
I reproduce that chart herebelow with erased agent's identity.
· The pre tax yield shown is 8.12%. But they have also added the non-guaranteed loyalty additions which may or may not be declared by LIC at the time of maturity. Even if declared, the rate shown here is purely speculative.
· If calculated on the guaranteed figures, the IRR works out to 6.85%. This returns decreases to as low as around 4% with increasing age at entry.
· Please note that the 80C limit available is inclusive of all the regular premiums that you are paying currently plus other investments permissible within the limit. This product does not offer a separate / additional tax saving.
· Liquidity during the term through cash value is at a lower value than invested in the initial years. And liquidity through loans is of course at a cost of interest that will bring down the yield further. Nothing is free.
So this is not something extra ordinary but one of the regular products with a return in the same range of 4% to 7%.
I am not criticizing or contesting the product per se, but only want to emphasize on the point that one should first assess his financial situation, understand the needs and then decide on the product/s that will be helpful in shaping his financial future.
The question is not about the product being good or bad, but about how this will fit into your financial planning process.
Before taking a vital decision on any financial products you need to answer yourself at least some of the following questions.
- How do you work out how much insurance you need in totality and how much you should spend to get that risk cover?
- How much disposable income (Income-Expenses) you have at the end of the month for deployment?
- Have you secured you contingency fund requirement?
- What are your assets and liabilities?
- What is the current cost of your goals?
- What is the time horizon to achieve these goals?
- Have you factored in the inflation to the current costs to arrive at the future costs?
- What is the rate of returns required on investments to realize that future costs?
- Will your current deployment of funds in various investments help you to reach your goals?
- Do you need to shuffle your current portfolio?
- How will you adjust yourself with the your changing financial situations?
Do not blindly follow the herd mentality. Your financial situation may be totally different from your friend's situation and so may be your requirements. You have to plan according to your needs and necessities, means and sources, risk appetite for different investment products, etc.
Learn before you invest and think before you act.