Wise Wealth Advisors

D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Archive for the ‘Insurance’ Category

Beware of LIC agents pitch

Posted by Muthu on December 2, 2013

I hear that some LIC agents are asking to take policies before 31’st December 2013 as the current ones would no longer be available from 1’st January 2014. 

Probably brisk sales may be going on for LIC policies during the last few months and it may reach feverish pitch this month. 

Please understand that this is a ploy by agents to maximize their revenue in a shorter span for time. 

It is true that existing policies would no longer be available after the end of this month. What is unsaid is that, new policies with better features for customers are being introduced from next month.

 From January 1’st;

 1)     Surrender value would be higher

 2)     Minimum holding period to be eligible for surrender is being decreased

 3)     The insurance cover would be more for the premium paid (sum assured as number of times of premium)

 4)     The commission for agents are being brought down

 5)     LIC would be opting for a new mortality table. As life expectancy has increased in the last decade, the mortality charges would come down. This would result in decrease of term insurance premium and also mortality charges for other policies

 6)     Service tax is levied only by private insurers so far. LIC has been absorbing the same into their pockets. Like private insurers, LIC also would start passing on the service tax to its customers

As we repeatedly mention, all one need is a reliable term cover from a good life insurance company at a competitive cost. Rest is all noise. So I’m confident that you would not be falling for these sales pitches. Still just wanted to write this on the side of caution.

Whenever some one says this is now or never option, be skeptical and completely on guard.

Even in mutual fund space, a closed ended value fund of a fund house was aggressively sold last month even though it has a good performing similar open ended fund. Aggressive campaign and high commission resulted in mobilizing of higher corpus. Before abolition of entry load in August 2009, there was aggressive pitching and selling of funds so that entry load on the same may be enjoyed; similar to what is being done by LIC agents done now.

It’s your money and any one pushing you to take a decision is definitely not working in your interest.

Tail Piece: We always make it a point to keep emphasizing on staying the course and have patience. Last week, Franklin India Blue Chip Fund completed 20 years. Rs.1 lakh invested in the fund 20 years ago is now worth Rs.53 lakhs, which works out to annualized return of 21.95% per annum. This is despite bull and bear markets, up and down business cycles, economic growth and slow down, depression and euphoria, performance and non performance of funds in some years etc… Much wealth is made by not doing frequent tinkering but patiently staying the course. I wish that we get such rewards by developing these traits.

Posted in General, Insurance, Muthu's Musings | 3 Comments »

How much should I invest in Insurance?

Posted by Muthu on October 19, 2010

I face this question often and it always amuses me.

Insurance companies, mainly LIC for the last 5 decades or so has convinced the common man that Insurance and Investment go hand in hand.

They are very successful in this propaganda.

“There is no insurance without investments.”

“One should atleast get ‘some returns’ from one’s Insurance.”

We have become victims of the above propaganda.

When I was working in BPO, I used to see appearance of insurance agents in the campus from December onwards selling insurance as investments for claiming tax benefits. All the well educated ladies and gentlemen eagerly lapped up these policies.

Insurance companies have been clever to exploit our nature of expecting returns from insurance.

Infact we loose sight about insurance cover and instead worry about how much we would receive, if we live. We never think what will happen if we die. If there is no possibility of death, then there is no need for insurance itself. We have to take insurance because life does not comes with any guarantee.

Do you know that traditional policies like Endowment, Money back, Whole Life etc. gives you an annualized return of only around 5.5% to 6%? Is this what you would call as a good investment?

Considering the average rate of inflation to be 6%, you are earning nothing out of all the hefty premiums you are paying. Have you ever questioned this?

Are you aware of the fact that your insurance agent gets around 35% of your first year premium as income? The second and third year income may hover around double digits and from fourth year onwards he continuously earns 4% to 5% as renewal commission.

Your insurance agent almost earns how much you would earn from your insurance policy.

ULIPs in the old avatar were a day light robbery. Now in its new avatar too, it has not changed significantly.

There is no portability in ULIP, which IRDA says might come in future.

Assuming you’ve portability, the charges are still highly front loaded. You stand to loose if you change the fund manager (insurance company) within first 10 years of the policy period.

Combining investment with insurance is definitely helpful, for your agents and insurance companies.

Think about yourself.

A pure term policy for a 30 year old for a cover of Rs.1 Crore may not exceed Rs.1500/- a month. For the same premium amount, you would not get from any other policy, even a fraction of the huge cover mentioned above.

Remember, you take insurance only for an unexpected contingency. It is not worthwhile to speak of it as an investment at all, if you happen to live.

Till the year 2000, insurance was sold as ‘tax product’. From the beginning of this decade, it is being sold as an ‘investment product’.

Insurance is never sold as a product to cover risk, which is what it is actually meant for.

It is pathetic that such a misselling is accepted almost as a way of life in our country, you the end customer neither get an adequate insurance cover nor a good piece of investment.

Next time, some one tries selling you a policy other than ‘term insurance policy’, offer him a good cup of coffee and then politely ask him to leave.

If you are going to take any other policy out of pity, because the agent happens to be a relative or friend, accept my heart felt sympathies. 

Be careful with your auditors, for they may be the primary point for misselling insurance. Some auditors take insurance agency in the name of their wife and sell you the product which fetches them higher revenues. These auditors respect professional code and ethics, which is why the insurance agency is always in the name of the spouse, who may not even know the basics of insurance.

Tell me, how many of your auditors, oh, sorry, auditors’ wives have sold you a term insurance policy?  Some auditors, again I’m sorry, auditors’ wives are the MDRT (Million Dollar Round Table) agents, mostly by selling policies other than term insurance.

Wouldn’t it be better if these auditors stick only to their area of business instead of becoming product peddlers?

As a thumb rule, avoid taking an insurance policy from your auditor. You would thank me in future for this one piece of advice.

If you still want to oblige your Auditor, tell him that you would not take anything other than term insurance. If all his clients are going to tell the same, he may even surrender his insurance agency and focus only on his profession. Good for all.

I’m not against Chartered Accountants from becoming insurance advisors. Let them then take insurance advisory as their main profession instead of practicing as auditors.

Criticisms are most welcome for this article from misselling insurance agents and the auditors.

Posted in Insurance, Muthu's Musings | 3 Comments »

Let the ULIP Looters Go

Posted by Muthu on September 8, 2010

Yesterday one client of us called and conveyed her appreciation for our little contribution in helping to manage part of her wealth during last couple of years. Why I was moved because I could sense the words came out of her heart and not from lips. Thanks Madam, We owe our existence to people like you. As Gandhi mentioned, we exist and there is meaning to our professional existence, only because of our clients. Thanks for your motivation.

We’ve been writing repeatedly how India is growing only for 25% of its people and the rest 75% are simply forgotten. IT Czar, Narayana Murthy in one of his recent speech has given the following statistics.

35 crore Indians cannot read and write. The country has the largest number of malnourished children in the world. 25 crore people do not have access to safe drinking water. A whopping 75 crore have no access to sanitation facilities. 35% of the country’s food grain production is simply allowed to rot. You are right sir. This is our national shame. Sadly no progress is being made in this regard. India is existing, growing at 9% and prospering only for 300 million people. The rest 850 million people are simply left out of the game. There is no point in only us listening to you. Your voice has to reach Delhi and make our policymakers to wake up.

There is now a lot of PR talk in insurance industry shedding tears for lakhs of agents going out of the business due to change in ULIP norms. There is also talk about the profitability of Insurance industry would be affected by change in the norms. But nobody is talking about the end customer, because of whom all the insurance intermediaries thrive. As I mentioned above neither the insurance companies nor the agents has any meaning to exist, but for the end customer.

We all know how happily both the insurance companies and their agents looted the customers in the name of ULIPs. In the last one decade, more than 75% of the policies sold in the market were ULIPs. How do you justify a first year commission which can be as high as 60% to 80% and double digit commission in the subsequent two years and a good single digit commission from the 4th year onwards?

How do you justify selling ULIPs as a 3 year product so that you can keep on churning to keep commission rates high? Did any one care why so many policies lapsed? Did anyone worry why the end customer did not make any money in the ULIPs despite a massive bull run in stock markets? Well ULIP Sellers, this is the time for you to answer the questions and make a disgraceful exit.

Why shed tears for someone who is all along looting us?

Let us assume there is lot of robbery in the society. The police bring the robbers down to their knees, and reduce the robbery. Will we encourage a PR campaign that the robbers have lost their jobs? Society would be better off without them.

In my last 4 years of our profession, I would have listened to dozens and dozens of woes as to how people were fooled and exploited by ULIP looters.

Like wise, I know fresh graduates who sold ULIPs and made lakhs as commission and went to exotic locations across the world. At whose cost? All the ignorant customers funded them. Now start going for a job, work 10 hours a day, and earn money in the hard way as all the salaried people earn. ULIP Sellers, your days of easy money are over. We have no sympathy for you missing the opportunity to keep looting people.

Even now, at around 8% commission, you are going to earn well only. But compared to 40%, 60% and 80% you were earning, poor you, 8% is too meagre.

Insurance is a product to cover risk. Why don’t you do PR campaign to educate people in this regard instead of doing campaign as to job losses and your profit losses? Why bring investments into insurance and fool people?    

As I’ve been mentioning in our writings for the last couple of years, what is the need to combine insurance and investment? The traditional policies like endowment, money back, whole life etc. provides annualized returns of only around 6% per annum, barely sufficient to beat the inflation. The ULIPs, well they have given negative returns for many.

You would be better off having a PPF account and a term insurance separately, leave alone thinking of higher earning products like mutual funds.

By combining insurance and investment, they charge you high and not only that deny one critical aspect of investment, portability. When your mutual fund manager does not perform well, you can switch funds. When you switch ULIPs, as it is highly front loaded, you loose money and also your life cover if there is any change in your physical condition. Well only a crooked genius would have devised such an unfriendly instrument for the customers but the most profiting for the looters, agents and Insurance companies.

May be I’m sounding harsh against ULIP looters. Being both a well informed investor and advisor, I’ve no sympathy for looters. Nothing wrong in earning money and making profits. Enterprises and Entrepreneurs thrive only because of the same. But making money is not same as looting money.

I eagerly look forward to a day when all the illegal PMS sellers, under the disguise of stock brokers are brought to their knees. Stock brokers are meant for buying and selling shares, not for managing clients’ portfolio. There are separate norms and licence to be obtained from SEBI to be a portfolio manager. Many stock brokers violate this rule and illegitimately manage clients’ portfolio promising anywhere between 36% to 60% returns per annum. They are right. They make anywhere between the above percentage by churning your money.

Personally I know atleast one broker who is part of an investors association (what an irony?), selling the PMS illegitimately. An audit by the regulator can bring out this fact easily. This man has now started appearing in business channels and is immensely pleased with the publicity he is getting. This would bring more gullible people to him providing their funds for his (illegal) portfolio management.

As I’ve mentioned in the past, I have the least respect for the traders and market timers appearing in the business channels. It excites the gamblers, helps the channel to fill time slots (well otherwise what they would do from morning to evening), bringing some cheap publicity for those who lobby their way to appear in these channels. Seeing the above person appearing in a business channel has only strengthened my views. As Charlie Munger once pointed out, how are we going to prevent the innocent people having easy access to ‘National Gambling’ through these brokers?

This gentleman has written that only coins make noise and currencies don’t, implying that he is a currency and not a coin. Well, Gold coins, with which you do Lakshmi pooja, can also make noise. A petty mind can think only about steel and not Gold.

Coming back to ULIP looters, for whom I have lot of malice, let us listen to (edited excerpts) what Dhirendra Kumar of Valueresearch has to say in this regard.

Leaving all hype aside, I would suggest that a potential ULIP customer should carefully consider what really has been the story so far. For at least six to seven years now, ULIPs have been practically the only product that Indian insurers have been interested in selling. During these years, this product degenerated into a complete scam. Agents were lying through their teeth to extract customers’ money and collect their giant commissions. Through all this, IRDA kept its eyes firmly shut, refusing to entertain the notion that there could be anything wrong with either the products or the sales process. Over these years, independent advisors and analyst as well as most writers in the media (by independent I mean those who don’t actually sell any financial products) started heavily criticising the product.

However, the insurance industry and IRDA stayed unfazed through all this. Eventually, it took an event unprecedented in the history of financial regulation— the Securities and Exchange Board of India’s (SEBI’s) attempt to takeover ULIP regulation — before it was recognised that the blatant loot had become a little too blatant to carry on any longer.

So, the real story is not one of a regulator fixing some problems and an industry making heroic sacrifices in order to benefit its customers.

Instead, it is one of a rapacious industry managing to carry on something it should never have been allowed to do in the first place. Had the bizarre SEBI-IRDA standoff not triggered off far too much attention to be tolerated, the earlier state of affairs would probably carried on indefinitely. In fact, nothing lays bare the corrupt DNA of the insurance industry than the frenzied sales efforts that were put into the old, high-cost, anti-customer ULIPs in the months before the rules changed.

The moral of the story is that till the time the facts — not promises and projections — prove otherwise, all investors who want to be careful with their money should continue to be suspicious of ULIPs. It is easy to get carried away by the hype but the fact is that this industry and its regulator have come up with as few improvements as possible, as late as it has been possible.


Posted in General, Insurance, Muthu's Musings | 2 Comments »

New ULIPs: Are they really different?

Posted by Muthu on June 30, 2010

Time and time again, we are never tired of reminding you that combining Insurance and Investments are bad. Be it ULIPs or traditional insurance policies, where you get a meagre return of around 6%, which is barely sufficient to only match inflation, if at all.

Any Life Insurance policy other than plain vanilla ‘Term Insurance Policy‘, are not in your interest and is only in the interest of Insurance agents. No doubt, why term insurance policies are not ‘sold’ and constitute less than 2% of the Insurance Industry’s size.

Our Standard Warning: Stay away, a long distance, from life insurance agents, who try to sell you any insurance product other than plain vanilla term insurance products. If you listen to us, you will be getting a high risk cover at a low cost. In fact, that is what life insurance is all about. Your investments can be deployed else where, at a lower cost and better returns. 

There is a lot of talk going on now about ULIPs ‘new avatar’. They are the same old wine in a different bottle.

New ULIPs are as bad as their ‘previous avatar’. Infact, it has become more complex.

ULIPs, like tobacco or alcohol, have been legitimized by our honourable Government of India, due to their narrow vision (thanks to successful lobbying by IRDA & LIC), ignoring the interest of millions of investors.

The Insurance Regulatory and Development Authority (IRDA) introduced sweeping changes in Unit-linked Insurance Plans (ULIPs) yesterday. Among the measures are-a five year lock-in, even-out commission over the first five years and graded charges for the subsequent years.

How will these changes affect ULIPs? Are they competitive now with mutual funds (MFs) as long-term products? Nothing has really changed for the investors.

All IRDA has insisted is that the fat commissions, which insurance companies were paying, would have to be spread over five years. Insurance companies were doling out upfront commission as high as 30%-35% to distributors in the first year.

They will now have to spread this commission over the five-year lock-in period. But this will put off distributors used to making a fat upfront income. “It’s not attractive for distributors anymore,” said Debashish Mohanty, country head (retail), UTI Asset Management Company Ltd (UTI). Mr Mohanty points out that for mutual fund investors, there is no entry load. If you invest Rs1,000, you will get units equivalent to Rs1,000. Considering a commission of 6% in ULIPs for the first year, if you invest Rs1,000 in a ULIP, your investment will be worth Rs940 after deducting the 6% expenses.The insurance regulator has attempted to cap the charges at 4% annually for 5 years, and 3% for 5-10 years and 2.25% for products of above 10 year terms.

These are more expensive than mutual funds. The total maximum permissible expense for a mutual fund stands at 2.5% on the first Rs100 crore of the average weekly net assets collected by the fund. This is then reduced to 2.25% for the next Rs300 crore, 2% on the subsequent Rs300 crore corpus, which finally comes down to 1.75% for the balance assets. The expenses consist of Investment Management & Advisory fee (1.25%); Custodial fees (0.05%); Registrar & Transfer Agent (RTA) fee (0.25%); marketing expenses including commission paid to distributors (0.65%); Audit fees (0.10%); Costs of fund transfer from location to location (0.10%) and other expenses (0.10%).

Moneylife contributor R Balakrishnan says, “The ULIP changes are cosmetic in nature. Maybe the product becomes a little more efficient than it used to be, but in no way has it become comparable to a mutual fund. In a mutual fund, the total damage is limited by law to 2.50% per annum. In ULIPs, the selling commission has not been reduced. The only thing that has happened is that instead of front ending, it is now supposed to be spread evenly. In effect, a marginal improvement.”

Some industry experts believe that ULIP charges will still be opaque and can differ from company to company. Insurance companies can still charge a lot of money to investors under the garb of administration and management expenses.

Mr Balakrishnan pointed out that in all investment products of the insurance industry, “There is a management charge, administration charge and some other charges. Typically, these aggregate over 3% per year, assuming a typical monthly investment of say Rs20,000 per month. These charges are separately deducted from the contribution paid by the customer.”

He added, “ULIPs are the sole survival mechanism for the insurance industry. And they are perhaps the biggest prop for the stock markets. The government just does not want to rock the boat. Hence they have legitimised what they have been doing.” 

(with inputs from Moneylife)

Posted in Insurance, Muthu's Musings | Leave a Comment »

How ‘Highest NAV Guarantee’ schemes fool you?

Posted by Muthu on June 22, 2010

ULIPs are back again. Good fortune for insurance agents and absolutely bad for investors.

When I write against Share Trading, Life Insurance Products (both traditional and ULIPs, with the sole exception of Term Plans), Portfolio Management Services (both legal and illegal) etc., the question invariably put forward by the advisor community who are selling these products are as to if the Government itself have allowed these products to exist, who am I to question them.

This is a very strange argument. Have not Government allowed selling of alcohol, country made liquor, smoking, Lottery, bull fight etc.? Many countries have legalised casinos, one night stands etc. Some Governments allow suppression of minority rights, ethnic cleansing etc. One state Government in India is accused of actively sponsoring killing of minorities. Governments in power have encouraged demolition of minority places of worship. 

Many Governments in the world actively promote ethnic cleansing, drug trafficking, arms trading etc. Have not Governments in the world which prevents equality to woman, equal rights to all races, freedom to follow various forms of worships etc.?  There are Governments which actively encourage terrorism. Just because Government is allowing some thing, does it mean it is a good thing to do? Government may allow or follow so many things. But as an Individual, it is for us to choose what is good and ethical.

People have asked me in various meetings and forums, how it is possible for an Insurance company’s ULIP to guarantee highest NAV, which a Mutual Fund cannot do.

Initially I was also caught by the surprise, but definitely I knew intuitively that it is misselling and there should be details in the fine print. Because in a product which is ‘marked to the market’, how can you guarantee the highest NAV? It is impossible. After doing some study, I realised it is nothing but a marketing gimmick. Here are the details I gathered from ‘Valueresearch’ and ‘Moneylife’.

“One after another, a number of insurance companies have launched ULIPs which promise to repay the investor on the basis of the highest NAV that the fund has achieved. The pitch is that these funds’ NAV effectively does not drop. Once a level is achieved, then the investor is assured of getting at least as much, no matter what happens to the market. It’s certainly a very attractive idea. 

Any investor who is told of this concept will immediately start salivating at the thought. Imagine how rich you could have been had you been invested over the last ten years and had been able to lock your investments at the magical value that the markets achieved on the day when the Sensex touched 20,873!

Any investor thinking about this product would say, “What a wonderful idea!” Why don’t all investment schemes-whether mutual funds or ULIPs or even portfolio management schemes offer this kind of a protection on all their products anyway?

The answer to this obvious question is simple. There is no free lunch. These products don’t actually offer what you think they are offering. That is, they do not offer equity returns that never fall. Instead, they offer an investment system with a very long lock-in (seven to ten years) in which protection is achieved by progressively putting your gains in a fixed income assets which will give returns far more slowly than a pure equity option. The lock-in and the non-equity assets make this a very different kind of investment than the equity-gains-without-losses dream that these funds’ advertising seems to imply.

First, how do guaranteed NAV plans work? The most important point to understand is that insurance companies are guaranteeing NAVs, not returns. Are the two different? Yes. NAV is a number at a point in time and returns happen over a period of time.

For instance, your 10 year plan may have hit an NAV of Rs.14, after five years. At that point, it is the highest NAV. This Rs.14 is guaranteed for the next five years. What if the NAV remains at Rs.14 for the next 5 years or goes down to Rs.13? You would still get this NAV of Rs.14. But Rs.14 happens to be 4% over 10 years! Not worth the trouble. There is no free lunch in life.

If you want to know how the schemes would work in practice, take a look. In the above mentioned example, when the NAV goes up to Rs.14, all that the manager has to ensure is that this amount remains intact at the end of the next five years. What he would do is simply invest X amount of money in the bond market so that it fetches Rs.14 at the end of 5 years. Now, whatever happens, getting Rs.14, at the end of 5 years in ensured. In the 6th year, if the market goes down, the NAV also will god won. But your Rs.14 is ‘guaranteed’ for 5 years, at a pathetic rate of return.

If the market goes up, the NAV also goes up – say to Rs,16. Now, more money will be shifted from equity to bond funds to retain the NAV of Rs.16 at the end of the balance period. Notice that more and more money shifted to debt to lock up the highest NAV. This is because to guarantee on anything, you must get a guarantee on the Principal. And it is debt is one that protects the principal amount. So, in effect what you are buying is a progressively timed debt fund.

But ask yourself what a debt fund will do to your returns. We don’t think you will get than more than 6%-7% returns on the guaranteed NAV schemes. And, most important, what will a debt fund do to your insurance / risk protection? Surely, when you want an insurance plan, you don’t want to end up with a bank fixed deposit with some insurance thrown in!

The truth is that in a growing economy like India’s it’s extremely hard to lose money over a long period like seven years. If you are willing to lock in your money for seven years, then for all practical purposes, you have a guarantee of making a profit.

However, even that’s not the real reason that these funds are useless. The real reason is that if you are willing to lock-in for seven to ten years, then practically any equity mutual fund would deliver this dream of equity-gains-without-losses. Seven years is a very long time. Over such a period practically any equity portfolio into which any kind of thought has gone would capture substantial gains. This is not mere conjecture. Since at least 1997 the minimum total return that the Sensex has generated over its worst seven is 12 per cent, which was over the seven year period from 6th July 1997 to 5th July 2004.

Of course, this is not a guarantee that is signed in a contract and legally enforceable, but it’s the kind of guarantee that any thoughtful investor would be willing to believe in. Mind you, this is also not a guarantee that you will get the highest NAV achieved but again, that’s the kind of thing that can’t be attained if you want the gains of pure equity anyway.

The most instructive thing in this whole business of guaranteed highest NAV products is the contrast between the illusions spun by those peddling complex financial products and the reality of simple, straightforward investing. It just reinforces one’s belief that financial products are being designed whose goal is nothing more than to create a marketing hype which can manipulate the psychology of the ordinary saver.

(with inputs from Valueresearch & Moneylife)

Posted in Basics, Insurance, Muthu's Musings | 2 Comments »