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Insurance or more?

So this is an extension to my last blog. I intend to explain my view about life insurance products in India and their suitability in our Investment portfolio.

First of all let me make final concluding points here (haha, I know its little soon) - Insurance is absolutely essential and everyone should have one. However, in my view nothing more than pure insurance product is needed. Everything else is somewhat a gimmick!

If you haven’t understood the last part, don’t worry. That’s what whole blog is for. However, before I start I need one change in mindset here. While all throughout investment we will talk about return on investment or internal of return, BUT when taking insurance, you should not worry about it at all. In fact in a pure insurance product, you will get its maximum value when you die sooner or get hospitalised in case of health policy. So be sure when you wish for maximum return on investment in pure insurance products!

What are my options?

We are covering only life insurance products here. Basis products available in market, I have divided them into two categories:

1. Pure Insurance Products (Term Insurance Plan and Whole Life Plan)

Term Insurance Plan – You pay series of premium for a specified term; in return you get an assurance that the company shall pay sum assured in case of your death within the policy term. You will get nothing if you survive the policy term. Yes, nothing! Zero! Anda! I am sure that doesn’t feel good. But, in my opinion, these are best insurance products available.

Whole Life Product – There are whole life insurance products also available in the market. In which, you pay premium for certain number of years and in return the company assures to pay claim to your nominee in case of your death, whenever that may happen. These are more expensive than Term Plans because the company shall surely pay claim some day or other.

2. Saving Products: Other than above two, everything else will fall under this category. That majorly includes:

Guaranteed Return Product (called Non Participating Products) – Death and Maturity Benefits are guaranteed. In other words, you will exactly know what your nominee will get in case of your death or you will get in case you make it till end of the policy term. In case you surrender, amount may or may not be guaranteed; however, it changes quite infrequently.

Sum Assured plus Bonus Product (called Participating Products) – In case you die or you survive till the end of the policy term, the benefit will be guaranteed amount (called sum assured) plus non guaranteed amount (called bonuses). Bonuses are declared each year and get added to your benefit amount. Surrender Benefit shall also include bonuses till date; however, calculation may vary from product to product.

Mutual Fund type Product (called Unit Linked Products) – All Benefits are linked to the fund you choose for investment. There are mostly low guarantees on death and low/ no guarantees on maturity.

The most important element for an insurance product is sum assured. While most people might not be aware but they are under insured. Hence, I have to cover the following section when covering insurance.

How much is sufficient sum assured for you?

So, what is under insured? I am sorry I jumped before explaining that one before. Now, imagine you die today. Yes, that is possible because you are human and no need to shy away from that situation. Additionally imagine you are earning 5 lacs a year and have sum assured of INR 7.5 lacs. Looks reasonable, Isn’t it? Well, it is not. In this situation, you may be under insured. That means, the goals that you and your family would have planned basis your future income would be very difficult to meet now. And possibly, your nominee will not be able to repay your loan, if any. That’s not a good scenario to leave behind, isn’t it?

Now that you have died once, imagine you die again – this time your sum assured is linked to your current income and is equal 12 times of your current earning, i.e. INR 60 lacs. With this amount, your family can stabilize and hopefully, shall have financial strength to continue with the same goals. Aren’t you more peaceful in ‘swarg’ now?

I did rough calculations and basis that your total sum assured should be roughly 11-13 times your current annual salary (assuming your salary will increase by 10% each year and your claim amount shall at least earn somewhere between 5% to 7% p.a.).

Is Unit Linked better than Mutual Fund?

Ohh that’s how it was sold to you? Well, I understand. It’s ok.

Amongst two, I will be inclined towards Mutual Funds. My reason for the same is not just because of difference in their performance but also because of the five year lock-in and lack of fund choices in unit linked products. I will not be able to say that fund performance of mutual fund is always better than like-to-like unit linked fund because there are always outliers to that but looking at flexibility and variety, I always find mutual fund as better investment option.  

Traditional Plans

Just try to recall why you bought that traditional policy you have? Most likely because some known Uncle, may be your Dad’s friend suggested that LIC plan to you.

While Participating Products might have better returns than Non Participating Plans, I would not suggest investing in any of them. Both are most likely to fetch you lower returns than other investment options.

Tax Implications

We all know that the premiums charged for life insurance plans are eligible for section 80C tax exemption. But you should also know that in case of death, benefit is not taxable. And in case of maturity one additional rule applies for full exemption. If the policy is bought before 1st April 2012, the premiums paid each year should not exceed 20% of the sum assured and for policies bought after 1st April 2012, it should not exceed 10% of the sum assured.

Final Points

Term Insurance Products are significantly cheaper than any other life insurance product. So, you can buy online term insurance for sum assured of INR 1 crore for annual premium in the range of 12-16K.

However, there are no free lunches in the world. So, remember anything over and above basic insurance feature is indirectly charged from your premium. That’s why term insurance premium are so much lower than participating or non participating plan.

My suggestion would be to go a simple way of buying term plan for insurance needs and look for other investment products for investment needs. I will soon come up covering few of the investment options too.

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Become Independent in your Financial Investment

Usually this time around the year, we think about investments. These investments are usually tax saving investment and many people do not think beyond this. However, you should know there are two ways to become richer — first, earn more money (obviously) and second, save more wisely.

While no blog can help you achieve the first objective — please help yourself achieve this!

Coming to second objective: I have worked in financial sector for more than a decade and can tell you saving wisely works for persons in all income brackets. In series of blogs, I am going to guide you my way of managing my own portfolio. I still consider myself as callow investor; however, I am hoping my limited experience can be a good starting point to you.

So, what are your options?

Before we address this question, you need to know what your risk appetite is. Ok, no complex theories, just answer the following:

Q1. Are you saving for some purpose?

No, I am free bird

I have liabilities, but no particular goal in mind

Oh, yes of course

Q2. Are you comfortable investing in stock market?

Very comfortable

I can try

No, not at all

Now coming back to original question, following are the easily available options:

Bank Savings Account — why this is even an ‘investment’? Because some people still like to keep significant in hand cash, yes in 2021… And even after demonetisation!

Bank Fixed Deposits or Recurring Deposit — Well known conventional sort of investment

Mutual Funds — This one comes with lot of options: Liquid, Debt, Equity or Hybrid

National Saving Certificate (NSC) — Post office savings scheme

Gold or Silver — Solid physical investment in gold or silver

Stock Market — Direct equity investment through Demat account

NPS or PPF — Long term investment with guaranteed returns

Real Estate — Capital Gains through investment in property; involves high amount of investment

Insurance Plans — Traditional or Unit Linked plans with savings element

But why I asked two ‘stupid’ questions above then? Because your investment choices are related to above two ‘stupid’ questions. That also brings us to our second section.

How should I choose?

One should choose their investments in view of their goals and risks involved in the investment. Ohh yeah… That’s why those questions! Anything new here?

Yes, ‘diversification’ is a fancy word in investment world and desirable too. Hence, ideally you should invest in multiple instruments. But how? Here you go…

My suggestion would be to categorise investment and invest as follows:

If your answer to ‘stupid’ questions is both 1’s: First of all compliments for feeling like a free bird. Now, ideally all your investment can’t be in stock market, so basis your age, you may apply following thumb rule:

Category 1: Gold/ Silver & Equity (Equity Mutual Fund plus Real Estate) = (95 — Your Age)%

Category 2: Debt (PPF or NPS, Debt Mutual Funds, Bank Deposits, NSC) = (Your Age)%

Category 3: Liquid Funds (Saving Bank Account, Liquid Mutual Funds) = 5%

If your answer to ‘stupid’ questions is both 2’s, or 12, or 21, or 31, or 32: You are a wise kind of person, who wants to take calculated risk. You may possibly have loans or other expenses to bear, hence, following change in thumb rule for you:

Category 1: Gold/ Silver & Equity (Equity Mutual Fund plus Real Estate) = (75 — Your Age)%

Category 2: Debt (PPF or NPS, Debt Mutual Funds, Bank Deposits, NSC) = (Your Age+10)%

Category 3: Liquid Funds (Saving Bank Account, Liquid Mutual Funds) = 15%

If your answer to not-so-‘stupid’ questions is both 3’s, or 13, or 23: You are risk averse kind of investor and would like to keep maximum investment in Category 2 above. However, do keep 5% to 15% liquid portfolio (basis your liabilities).

Additional Point: For all those who have any particular short term goal in mind for their investment (say within 3–4 years horizon), your preferable investment would be Category 2 or Large Cap Mutual Funds. For long term goals — just follow the above suggestions! That’s what we all are here for.

Final Points

The above suggestion are broad indications only. Basically to give you comfort on how far you can go in each category. It will be very difficult to maintain these percentages at all point in times, so don’t panic if you are here or there a bit.

Managing your own portfolio may seem time consuming initially but it is much more rewarding in long term. Most of the investment agents are driven by commissions, and rightly so because it’s their living! But I can assure you, if in your hands, your investments can earn much more. It’s like your first new car… Somebody might be a good driver but you would like to drive yourself because there is no other way you can learn to drive it!

By now you should ask one question — where the hell is insurance? Well, that’s tricky. That needs lot of more writing. I will cover that in my next blog.

And I will also cover Mutual Funds, Stock Market, NPS. I can’t think of more. In case you have any more topics for me to cover, please comment.