It's heartening to know, so many of you have visited my blog even though it's been a long time that I have written anything, but believe me, nothing interesting was happening that I would have liked to share with you all, till yesterday.
Case study
Yesterday, (yes I know it was a Holiday but I was working/helping) I was approached by a friend who had been advised by an "insurance adviser/consultant" on a certain investment cum pension product with added life cover from a well reputed insurance company.
In konkani cuisine, there is a very nutritious and ethnic dish called 'khatkhatem', which is essentially a curry of a variety of vegetables. While the essence of this dish is to provide a nutritious meal to the consumer, the above combination of insurance, investment and pension is totally unhealthy and a recipe for disaster.
Now this (story) product (being from an insurance company) has three parts to it .
1. Pay an annual premium of Rs.70,000/- for 27 years. After which my friend would get Rs, 68 lakhs at his age of 60.(graphic attached)
2. He was also going to get a life cover of 60 lakhs.
3. Invest the accumulated 68 lakhs in a pension product (of the same company) at the age of 60 to get Rs 5 lakh per anum for his lifetime. (approx 41000 pm in 27 years)
Here is what I had to say to my friend (for the sake of simplicity I advised him in
1. Contribute the same amount of Rs.70,000/- for 27 years in a simple product like PPF, your gross returns stand at 81.6 lakhs.(graphic attached)
2. Buy a term life cover of Rs 1 crore costing Rs. 15,000 annualy. Your returns even after deducting the term life premia from the PPF investment are 0.55% more and additionally you are getting 9.6 lakhs.
3. Pension always needs to be linked with inflation. If we consider a yearly expense of Rs. 2,40,000 and inflate it by 6%, then in 27 years my friend would need about 11.57 lakhs per anum, what good will that 5 lakh pension for life do if his requirement is more than double of that?
Coming back to the pension requirement from age 60 yrs, if I trace back the retirement corpus my friend needs, based on a yearly expense of 2.4 lakh, a figure of nearly Rs. 2 crore pops up. Mind you this is the inflation adjusted figure unlike a fixed pension beneift.
This friend of mine is risk averse, (In India who isn't?) Hence my advise to him was, don't invest in Equity Mutual funds, but stick to simple products and you are much better off than falling prey to a mis - seller. In the coming years you can increase your investment whenever your income increases.
Cost:
The commissions that agents selling mutual funds, Reserve Bank of India and other bonds and Post Office deposits, as compared to that received by insurance agents are a scandal. The commissions are enormous, generally around 15 per cent of first year premiums and 7.5 per cent in the second and 5 per cent from the third year onwards. For a financial product that is supposed to be an investment, this is a shocking level.
The above incident was a clear case of buyer beware. If you buy insurance as investment then your fixation for Guaranteed returns will ultimately pinch you very hard in the pocket, not necessarily right away but surely in the years to come. More importantly, buying illiquid insurance products will only diminish your choice of savings.
So, don't invest in Mutual funds, but don't hit yourself in the foot by buying unhealthy investment products from insurance companies, Agreed that their job is to sell, but it is for you to decide whether that concoction suits your financial life.
Ninad Kamat
CERTIFIED FINANCIAL PLANNERCM
