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Sunday, 12 August 2018

Do we need Insurance?


Insurance is a contract between two parties where one pays the premium to other to cover a specific potential financial loss. It is not an investment at all. It is just like the foundation of a portfolio. Any good portfolio is incomplete without a cover. As we can’t think a multi-storied building with a deep strong foundation we should not even start thinking of investing for future without insurance. There is an old say i.e. “safety first” so we should think about Insurance first then Investment.

Most of the time people get confused with Investment and Investment. Most people do not understand that the basic Logic of Life Insurance is to provide security to your Family from an unfortunate event. Insurance should be bought for protecting your financial future and for securing your financial future. It should not be mixed with Investment which should be done for creating wealth for the future. Insurance is an expense or cost to protect our financial future from an unfortunate event. It is always better to avoid mixing your Insurance with Investments.

In India if you look around then you can easily find that maximum number of people pays their premium between December and March just before the financial year end. What does it mean? It means. People buy Life Insurance for the purpose of saving tax which is again wrong thing to do. Just because buying Life Insurance lowers your tax burden it is understood by most people that it is the best form of Investment. These are the money back policies which can give 5 to 6% per year. They offer very small cover too, which will not be sufficient for dependents after her or him.

So what should be done? When it is insurance then we should only have the pure term insurance policy. Here the premium is very less compare to money back policies form same amount of coverage. Rest all the saving should be invested in high yielding instrument like equity or equity related assets. In any time period this combination can give better return than any money back policies. Let me explain this with an example.

Suppose there are two friend Ravi and Shashi. Both are 25 year old. They have decided to save ₹30000 per year for 30 years. Ravi has decided to invest this surplus in a FD which can give max 8% return(on higher side). It will also give the coverage of ₹600000 to ₹700000. On the other hand Shashi buys a term plan with ₹6000 with a cover of ₹2500000. And remaining ₹24000 in Equity mutual fund. Equity has a historic CARG is 17%. But for my calculation I have taken on 13% CAGR return.




Now refer the above table. At any point of time Shashi will get better corpus. One thing I like to mention that equity return will not be so steady. It is going to be volatile but in long run it will beat any fixed return asset class.



If both friends increase the investment by 5% each year then the return will be like this.


You can download the excel file for you reference from here.


Hope this will help……


Saturday, 4 August 2018

Should you buy an annuity?

Today I got a call from one of my relative. He needs some suggestions on one of his investment in pension plan. He paid the premium for 10 years. Now he has only two options as withdrawal or invest in Annuity plan offer by same company. Annuity is an product that pays income on regular basis.  and can be used as a part of retirement planning.most of annuities do not provide life insurance cover. Instead they offer you a guaranteed income either for life or for a defined duration.



Retirement is an inevitable stage for every working individual. An annuity provides the security that investor will continue to receive money on regular interval for the rest of your life. investor may choose to receive your fixed payouts at intervals that suit him best - monthly, quarterly, half-yearly or annual. The biggest advantage that annuities offer is that they eliminate the re-investment risk. The risk is that when you go to reinvest the principal, you may get a lower rate of interest.Other monthly income paln such as the Post Office Monthly Income Scheme (POMIS) come with reinvestment risk. But in Annuity plan we have guaranteed the same rate of payout for life or paymnet duration.


While annuities do provide a guaranteed sum of money, and hence security and stability to retirees, they have a few disadvantages too.

According to Irdai rules, pension plan investors have to use 67% of the corpus to buy an annuity from the same insurer they bought the pension plan from. Investors do not have the option of buying the annuity from another insurance company, which might be offering better rates. NPS investors too have to use 40% of their accumulated corpus to buy annuities. The only advantage is they have the option of going with the best annuity provider.

Investor has no access to the capital. Premature withdrawals not allowed in annuities plans. Annuities do not allow premature withdrawal. if there is any emergency then investor must use some other option.

Lower rate of return. The returns (annual) on annuities have not been that attractive(It is between 6 to 7%) as compared to other products. It even less than the bank FD. with this ROI it can not fight inflation. Prices will continue to rise even after retirement.

Diversification is very important aseact of every investment plan. we should not put all eggs in one basket. We should not put all of our retirement savings in an annuity plans. Retirement corpus should be used to have following goals


  • Regular income which should Combat inflation.
  • Create an emergency Fund to meet emergency or unexpected expenses. 


HOPE THIS WILL HELP

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