In our previous article, I told my ordeal in getting a collateral-free loan named as Mudra loan by our PM. I was pestered by the Branch Manager into taking an insurance policy for getting a loan sanctioned. During my interactions with other "aam junta" like me, even they informed me that many a times the people are advised by bankers to break their fixed deposits and invest the same in insurance policies, especially ULIPs or unit-linked insurance policies. For the layman, a ULIP is type of policy wherein the money that you pay is invested in the stock market and there are no fixed returns, except the assurance that you will get a fixed sum upon dying.
Since my personal experience with the Bharatiya bankers was really bad, I went about to do some homework and small research regarding the risk:reward ratio for insurance versus other investments. It is really sad to note that the general public approaches the bankers not just for depositing or taking money but also for general financial advice and all they get in return is a policy from a particular company which pays a handsome commission to the banker. What about the so-called "bankers' trust"? If the protector becomes the destroyer, where will the world head? Enough of my nonsense, and here comes the sense:-
We at Ethmos have decided to do some number-crunching ourselves (please don't think that we are boasting, but it would be an understatement if we state that we are more than excellent in number games...he he he). But before we begin the insurance number games, we want to provide some basic information to our layman junta regarding the gobbledygook of insurance industry.
Basically, insurances are of two types in our country:- General and Life. General insurance can be done of anything (including any service) that is not a living being. Life insurance is also called assurance because the sum is normally payable on "natural or accidental" death except sometimes in cases of suicide. Now life insurance again consists of various products (and this is where the insurance companies and banks try to hoodwink the poor junta!). The strategy is very simple - put so many products with different number combinations so that the person studying the same is confused from his head to toe and finally agree to whatever "they" tell him to take. The people who develop these number games for the insurance companies are called the actuaries (no offence meant for the actuaries profession, of course). Insurance products consists broadly of two products:- term insurance and money-back insurance. In term insurance, the premium paid by you is non-refundable while in case of money-back, the premium is refundable. But then why will somebody "waste" his premium when there is an option to get it back? There lies the entire game. In case of term insurance, the annual premium payable for getting a huge sum assured (say Rs. 50 lacs) will be only around Rs. 10,000/- to Rs. 15,000/- (depending on various factors like age and health of the individual) for a period of say 20 years. But if you want to take the same sum assured in a money-back policy, the annual premium will be generally given by the formula:
Sum Assured
Policy Term
That is to say, if you want a Rs. 50 lacs cover under money-back, then the annual premium would be approximately Rs. 50 lacs divided by 20 years, which is around Rs. 2.5 lacs.
We hope we have made our point clear; however, we beg to say that we have made things too simplified and the actual calculations are done based on a multitude of factors which are beyond the scope and requirement for the aam junta - just understand that money-back policies charge much much much higher premiums.
Now, we will give you a live example from a premium and reputed insurance company of our country which is having tie-up with one of the largest banks in the world, SBI Life Insurance company. We have taken their two products namely Smart Champ insurance (money back plan aimed at the future education of children) and Saral Shield (pure term insurance plan wherein you get the sum assured only on death and premium is non-refundable) to illustrate our point:-
SMART CHAMP
We have highlighted the portion that needs your attention. Here I have taken my age as 31 (which is the average population age size of our country). The simple point over here is that for getting an insurance cover of Rs. 20 lacs for a period of 15 years, the company charges a premium of around Rs. 14,800/- monthly and the amount returned in case of survival of the person is Rs. 28,28,000/- after 15 years which is again NOT GUARANTEED and is only shown for the purpose of illustration only.
Now please take a look at the Saral Shield (pure term insurance plan) of the same insurer for the same amount (Rs. 20 lacs), the same term (15 years), and for the same person:-
SARAL SHIELD
Please note that the monthly premium is only Rs. 402/- inclusive of service tax and Rs. 351/- if you exclude the service tax.
Now here is the Ethmos analysis as well as advise for our junta:-
1. Please note that in case of the money-back plan, you are being charged service tax (since of course it is a taxable service). If you make a simple calculation, you are paying around Rs. 40,000/- as service tax during the entire policy term for which you are not getting any income-tax benefit during the entire period of 15 years.
2. For getting the "money back" in case of the money-back plan, you have to pay around Rs. 14,400/- extra every month (Rs. 14,800/- actual premium minus the Rs. 400/- as per the term plan for getting the same cover). The money that you pay will only come back after the entire period of the policy is over. And in case you want to get the money back for any emergency purpose and want to break the policy midway, only the base premium minus the company charges and service tax will be payable, i.e. there are chances that you will get less than what you have paid.
3. Another drawback for the money-back plan is that you pay the premium for 12 years but the returns are generated only after 3 years, that is to say, that you again have to go for a waiting period of 3 years to get back the entire amount and the amount is given in yearly installments, which again erodes the time-value of the invested money.
4. Now suppose, you take a pure vanilla term plan like Saral Shield for Rs. 400/- and invest the rest (i.e. Rs. 14,400/- monthly) in a post-office fixed deposit or the PPF scheme of the government, then guess how much you can receive after 12 years (which is the premium paying term for money back plan) considering that the government keeps the rates at 8.5%. Any guesses?? The calculations are again out of the scope of this article, but you can get around Rs. 35,80,000/- in a span of just 12 years considering a return of 8.5% and if you consider a return of 8% (as is being given by the company), then you can get around Rs. 34,60,000/- in a span of 12 years and that too without paying a penny of service tax and totally tax-free!
5. Furthermore, in the calculation sheet provided by the company, it is clearly mentioned that the returns of 4% and 8% mentioned are not guaranteed and depend upon the performance of the company (he he he).
So, why does a sane man who can earn around Rs. 34-35 lacs after just 12 years and also get Rs. 20 lacs of term assurance, pay the insurance company for getting a mere Rs. 28 lacs and that too in installments? And why is it that the company pays such less returns while better returns are possible even for the general public? The reason is very simple:- the company has to first recover its operating costs from your investments and then pay you the balance. That's why the returns generated by the company are less and you get better returns when you directly invest rather than through any company.
We hope we have made our points clear but in case of any further doubts, please tell the AIB guys to make an episode on this!
Sorry for this "time-wasting" marathon and thanks a lot for tolerating me!
Happy Ethmos to all!
Basically, insurances are of two types in our country:- General and Life. General insurance can be done of anything (including any service) that is not a living being. Life insurance is also called assurance because the sum is normally payable on "natural or accidental" death except sometimes in cases of suicide. Now life insurance again consists of various products (and this is where the insurance companies and banks try to hoodwink the poor junta!). The strategy is very simple - put so many products with different number combinations so that the person studying the same is confused from his head to toe and finally agree to whatever "they" tell him to take. The people who develop these number games for the insurance companies are called the actuaries (no offence meant for the actuaries profession, of course). Insurance products consists broadly of two products:- term insurance and money-back insurance. In term insurance, the premium paid by you is non-refundable while in case of money-back, the premium is refundable. But then why will somebody "waste" his premium when there is an option to get it back? There lies the entire game. In case of term insurance, the annual premium payable for getting a huge sum assured (say Rs. 50 lacs) will be only around Rs. 10,000/- to Rs. 15,000/- (depending on various factors like age and health of the individual) for a period of say 20 years. But if you want to take the same sum assured in a money-back policy, the annual premium will be generally given by the formula:
Sum Assured
Policy Term
That is to say, if you want a Rs. 50 lacs cover under money-back, then the annual premium would be approximately Rs. 50 lacs divided by 20 years, which is around Rs. 2.5 lacs.
We hope we have made our point clear; however, we beg to say that we have made things too simplified and the actual calculations are done based on a multitude of factors which are beyond the scope and requirement for the aam junta - just understand that money-back policies charge much much much higher premiums.
Now, we will give you a live example from a premium and reputed insurance company of our country which is having tie-up with one of the largest banks in the world, SBI Life Insurance company. We have taken their two products namely Smart Champ insurance (money back plan aimed at the future education of children) and Saral Shield (pure term insurance plan wherein you get the sum assured only on death and premium is non-refundable) to illustrate our point:-
SMART CHAMP
Now please take a look at the Saral Shield (pure term insurance plan) of the same insurer for the same amount (Rs. 20 lacs), the same term (15 years), and for the same person:-
SARAL SHIELD
Please note that the monthly premium is only Rs. 402/- inclusive of service tax and Rs. 351/- if you exclude the service tax.
Now here is the Ethmos analysis as well as advise for our junta:-
1. Please note that in case of the money-back plan, you are being charged service tax (since of course it is a taxable service). If you make a simple calculation, you are paying around Rs. 40,000/- as service tax during the entire policy term for which you are not getting any income-tax benefit during the entire period of 15 years.
2. For getting the "money back" in case of the money-back plan, you have to pay around Rs. 14,400/- extra every month (Rs. 14,800/- actual premium minus the Rs. 400/- as per the term plan for getting the same cover). The money that you pay will only come back after the entire period of the policy is over. And in case you want to get the money back for any emergency purpose and want to break the policy midway, only the base premium minus the company charges and service tax will be payable, i.e. there are chances that you will get less than what you have paid.
3. Another drawback for the money-back plan is that you pay the premium for 12 years but the returns are generated only after 3 years, that is to say, that you again have to go for a waiting period of 3 years to get back the entire amount and the amount is given in yearly installments, which again erodes the time-value of the invested money.
4. Now suppose, you take a pure vanilla term plan like Saral Shield for Rs. 400/- and invest the rest (i.e. Rs. 14,400/- monthly) in a post-office fixed deposit or the PPF scheme of the government, then guess how much you can receive after 12 years (which is the premium paying term for money back plan) considering that the government keeps the rates at 8.5%. Any guesses?? The calculations are again out of the scope of this article, but you can get around Rs. 35,80,000/- in a span of just 12 years considering a return of 8.5% and if you consider a return of 8% (as is being given by the company), then you can get around Rs. 34,60,000/- in a span of 12 years and that too without paying a penny of service tax and totally tax-free!
5. Furthermore, in the calculation sheet provided by the company, it is clearly mentioned that the returns of 4% and 8% mentioned are not guaranteed and depend upon the performance of the company (he he he).
So, why does a sane man who can earn around Rs. 34-35 lacs after just 12 years and also get Rs. 20 lacs of term assurance, pay the insurance company for getting a mere Rs. 28 lacs and that too in installments? And why is it that the company pays such less returns while better returns are possible even for the general public? The reason is very simple:- the company has to first recover its operating costs from your investments and then pay you the balance. That's why the returns generated by the company are less and you get better returns when you directly invest rather than through any company.
We hope we have made our points clear but in case of any further doubts, please tell the AIB guys to make an episode on this!
Sorry for this "time-wasting" marathon and thanks a lot for tolerating me!
Happy Ethmos to all!
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