The so-called turf-war on ULIPs that SEBI and IRDA have been fighting has now taken on a life of its own. In reality, just about the least important thing is who regulates ULIPs, while the most important thing-or rather, the only important thing-is that investors understand what they are getting into and make the choices that are best for them. I find that there's a great deal of misinformation floating around about ULIPs and why exactly are so investment advisors so critical of them. ULIP proponents generally give a set of reasons which in their opinion invalidate criticism of ULIPs.
I'd like to briefly describe why I think these arguments are not valid.
Argument: ULIP expenses have been lowered by IRDA. ULIP expenses are now down to just 3 per cent for ULIPs of up to 10 years and 2.25 per cent for longer ones. Mutual funds, by comparison, have a higher fund management charges.
Reality: The way IRDA has framed the rules, 2.25 or 3 per cent is effectively the average over the entire lifetime of a ULIP. The charges are heavily front-loaded. During the first year, these charges are as high as 40 to 70 per cent. If the customer cannot continue with a policy for any reason, then his real expenses are far higher. And as it happens, a huge proportion of policies lapse during the earlier years. The front-loading has no logic, except to enrich insurers and agents. And fund management charges being lower than mutual funds is a not a full comparison. In mutual funds, total expenses are capped at 2.25 per cent for equity funds and less for other funds. These are not comparable to the fund management charges of ULIPs because ULIP customers also pay premium allocation charges, policy administration charges, mortality charges, and for guaranteed ULIPs, guarantee charges. Comparing fund management charges alone is a joke.
Argument: ULIPs have led to a massive rise in insurance penetration in India.
Reality: Insurance means insurance, in the sense when the insured person dies, his family gets money to pay for food, rent and education. In a country with as little social security as ours, the growth of insurance has to mean the growth in the reach and quantum of risk cover for lives. To call a non-insurance, market risk-bearing product such as ULIP insurance and then present it as evidence of the growth of insurance is simply dishonest.
Argument: The insurance industry provides a huge amount of employment. 30 lakh people have found work through insurance.
Reality: If ULIPs were a sound financial product than this would be wonderful news. Since they are not (see above reasons), this issue is a complete red herring. It is not the responsibility of ULIP customers to provide agents employment by giving away vast proportion of their premiums as commission. If crores of people's money has to be mis-invested to provide employment for lakhs of people, then it's better for those lakhs to find some other, more productive employment.
Argument: ULIP fund flows are important for the stock market and for infrastructure development.
Reality: The same as the employment argument. It is not the responsibility of ULIP customers to buy expensive and non-transparent investment products so that the stock markets can be boosted. Wouldn't it be possible to create infrastructure if ULIPs could be made more investor friendly.
I find the last two points to be particularly dishonest. They somehow imply that if ULIPs were made more investor-friendly, then lakhs of people would immediately become unemployed and money would stop flowing into development. However, ULIP critics like myself have nothing against the concept of ULIPs. If ULIP cost is brought down and made non-front-loaded; and if transparency is enhanced to the level of other asset classes, then they would be a very good product. The fact that the ULIP's enforce gradual SIP-style investments could actually make them a superior product.
By Dhirendra Kumar
Thursday, April 22, 2010
Sell Insurance Not Investment
Like many investment analysts, I firmly believe that in their current form, ULIPs are harmful for investors' financial health. However, I also believe that ULIPs are also bad for the insurance industry. Over a short-term, ULIPs provide insurance companies and their agents with a wonderful flow of revenues. However, more fundamentally, this product class has converted this industry into a subterfuge, whose financial well-being actively depends on NOT providing the very service that they claim to be providing. It's not just that selling investment products is lucrative for insurers. It's that providing as little life cover as possible is actually beneficial for them.
Here's why. For every rupee of life cover that is underwritten by an insurance company, it has to have a certain amount of capital that its promoters have to invest in the business. Like many other financial businesses, regulations enforce a certain capital adequacy that has to be maintained. This capital is the biggest constraint in growing the insurance business.
The exact capital required depends on many factors and is different for different products. However, it's much higher for offering life cover and for guaranteed products than for market-linked products. This means that when an insurance company's sales and marketing machinery has convinced you to put in X amount of money in its company's products, then it is in the economic interest of the insurance company to ensure that as little as possible of that money goes towards life cover and as much as possible towards market-linked investments.
And that's the explanation for the bulk of the 'mis-selling' that customers report. Some of those who complain assume that the agent is the one who is misguiding them. However, this is not true. Agents' behaviour and preferences are driven by insurance companies' guidance and by the commissions paid on various products. Insurance companies don't want to sell real insurance. Instead, they want to sell investment products. They just dress up these investment products as insurance by adding a small percentage of insurance. The business logic of what the insurance companies are doing is inexorable. If the same machinery is allowed to sell life cover and market-linked investments, then it will always sell as little life cover as it can get away with. And that's the real issue that is getting obscured because of the way the current controversy has evolved.
Which regulator regulates ULIPs is the least important problem that faces insurance customers today. What really matters is that in a country with practically no social security, insurance is a critical need for crores of Indians. Insurance that actually is insurance, as in the money that a family gets for food and rent and education when the breadwinner dies. What you are getting instead is an industry designed-by regulations-to actually de-emphasise life cover. And by the simple expedient of calling investments insurance, you get statistics that paint a fake picture of how well-insured the ordinary Indian is.
:- By Mr. Dhirendra Kumar ,CEO Value Research Online
Here's why. For every rupee of life cover that is underwritten by an insurance company, it has to have a certain amount of capital that its promoters have to invest in the business. Like many other financial businesses, regulations enforce a certain capital adequacy that has to be maintained. This capital is the biggest constraint in growing the insurance business.
The exact capital required depends on many factors and is different for different products. However, it's much higher for offering life cover and for guaranteed products than for market-linked products. This means that when an insurance company's sales and marketing machinery has convinced you to put in X amount of money in its company's products, then it is in the economic interest of the insurance company to ensure that as little as possible of that money goes towards life cover and as much as possible towards market-linked investments.
And that's the explanation for the bulk of the 'mis-selling' that customers report. Some of those who complain assume that the agent is the one who is misguiding them. However, this is not true. Agents' behaviour and preferences are driven by insurance companies' guidance and by the commissions paid on various products. Insurance companies don't want to sell real insurance. Instead, they want to sell investment products. They just dress up these investment products as insurance by adding a small percentage of insurance. The business logic of what the insurance companies are doing is inexorable. If the same machinery is allowed to sell life cover and market-linked investments, then it will always sell as little life cover as it can get away with. And that's the real issue that is getting obscured because of the way the current controversy has evolved.
Which regulator regulates ULIPs is the least important problem that faces insurance customers today. What really matters is that in a country with practically no social security, insurance is a critical need for crores of Indians. Insurance that actually is insurance, as in the money that a family gets for food and rent and education when the breadwinner dies. What you are getting instead is an industry designed-by regulations-to actually de-emphasise life cover. And by the simple expedient of calling investments insurance, you get statistics that paint a fake picture of how well-insured the ordinary Indian is.
:- By Mr. Dhirendra Kumar ,CEO Value Research Online
Wednesday, April 21, 2010
Do I need Life Insurance? how much?
Life Insurance is the way to protect your dependents of a financial loss in your absence. So if you have no dependents, do you need insurance?
Life insurance is to save your dependents from paying for your liabilities in your absence. So if you have no liabilities so you need insurance?
The answer to these questions is a 'No'. You only need life insurance if you have dependents or if you have any liabilities. Your dependents can be your parents, grand parents, children, grand children or anyone else if they are dependent on your income for their expenses.
Your life insurance cover should be an amount, when invested in the safest way should yield a return that can help your family to pay all of its expenses which you would have provided for. So your insurance should firstly cover the amount that gives your dependents their monthly income
Life insurance should also cover any liabilities on you. This will ensure that in case of any sudden incident happening to you, your liabilities can be paid off and your family will not have to face this burden in your absence .
So in short your insurance sum assured should cover the follows:-
1)A sum that provides for the household monthly expenses for life in present value terms, adjusted for inflation
2)It should cover all your liabilities
3)It should make up for the expenses needed to fulfill your future goals in it present value terms
So if you are a bachelor/spinster and your parents are not dependent on you financially. and you don't have any other dependents, nor do you have any liabilities, then you need no Life Insurance. In the same way if you are retired and have no liabilities, and no more goals ot be achieved for your dependents and your dependents are completely financial independent then you too need no insurance at all.
Life insurance is to save your dependents from paying for your liabilities in your absence. So if you have no liabilities so you need insurance?
The answer to these questions is a 'No'. You only need life insurance if you have dependents or if you have any liabilities. Your dependents can be your parents, grand parents, children, grand children or anyone else if they are dependent on your income for their expenses.
Your life insurance cover should be an amount, when invested in the safest way should yield a return that can help your family to pay all of its expenses which you would have provided for. So your insurance should firstly cover the amount that gives your dependents their monthly income
Life insurance should also cover any liabilities on you. This will ensure that in case of any sudden incident happening to you, your liabilities can be paid off and your family will not have to face this burden in your absence .
So in short your insurance sum assured should cover the follows:-
1)A sum that provides for the household monthly expenses for life in present value terms, adjusted for inflation
2)It should cover all your liabilities
3)It should make up for the expenses needed to fulfill your future goals in it present value terms
So if you are a bachelor/spinster and your parents are not dependent on you financially. and you don't have any other dependents, nor do you have any liabilities, then you need no Life Insurance. In the same way if you are retired and have no liabilities, and no more goals ot be achieved for your dependents and your dependents are completely financial independent then you too need no insurance at all.
Life Insurance of Rs. 30 lakh costs Rs.5160/- in term insurnace and Rs. 190000/- in Endownment...!! which one will you go for?
Life Insurers give you a lot of options and fancy names for insurance like endowment. whole life, term, ULIP's etc but the fact is that only one form/type of insurance covers your need and is effective on your pockets too. and that is 'Term Insurance'
Term Insurance is a pure form of insurance wherein you are not linking insurance(risk cover) and investments together. People over the past with their so called advisor cum insurance agents have put a lot of money in insurance plans expecting a good return at the end. The way its portrayed by the agent is the numerical value of returns and not the percentage terms which should actually be the case, as Rs.100 today is only equal to Rs. 466 after 20 years @ 8% Per annum, So if your insurance gives you even 4 times your money that is Rs. 400 then too you are at a loss.
Insurance linked investments are basically of two types.
1) Debt investments:- Endowment, Whole life, most Moneyback policies,
2) Equity market Linked:- ULIP's and unit linked pension plans
Historically debt linked insurance products don't give more than 6.5% return over the term of the insurance contract and the problem with ULIP;s are that they are very costly as the agent gets upto 40% of your premiums as commissions and the management expense is also very high.
So if you want to separate investments from your risk cover then you should only protect yourself by a term insurance policy
Example:- To compare the two types of insurances
A Term policy for a 30 year old male for a cover of Rs. 30,00,000/- for a period of 25 years will cost around Rs. 5160/- pa where as an Endowment worth this will cost him around Rs. 190000/-pa
There is a cost Saving of Rs. 184840/- Pa which can be saved and invested as per your investment risk profile and asset allocation rather putting it for 25 years at around the average growth rate of 6.5%
This is why only Term Insurance should be bought and make investment into better yielding products as per your risk profile and time horizon.
No agent will ever tell you this as his commission income will be reduced drastically.
Term Insurance is a pure form of insurance wherein you are not linking insurance(risk cover) and investments together. People over the past with their so called advisor cum insurance agents have put a lot of money in insurance plans expecting a good return at the end. The way its portrayed by the agent is the numerical value of returns and not the percentage terms which should actually be the case, as Rs.100 today is only equal to Rs. 466 after 20 years @ 8% Per annum, So if your insurance gives you even 4 times your money that is Rs. 400 then too you are at a loss.
Insurance linked investments are basically of two types.
1) Debt investments:- Endowment, Whole life, most Moneyback policies,
2) Equity market Linked:- ULIP's and unit linked pension plans
Historically debt linked insurance products don't give more than 6.5% return over the term of the insurance contract and the problem with ULIP;s are that they are very costly as the agent gets upto 40% of your premiums as commissions and the management expense is also very high.
So if you want to separate investments from your risk cover then you should only protect yourself by a term insurance policy
Example:- To compare the two types of insurances
A Term policy for a 30 year old male for a cover of Rs. 30,00,000/- for a period of 25 years will cost around Rs. 5160/- pa where as an Endowment worth this will cost him around Rs. 190000/-pa
There is a cost Saving of Rs. 184840/- Pa which can be saved and invested as per your investment risk profile and asset allocation rather putting it for 25 years at around the average growth rate of 6.5%
This is why only Term Insurance should be bought and make investment into better yielding products as per your risk profile and time horizon.
No agent will ever tell you this as his commission income will be reduced drastically.
IRDA’s short sighted approach helps insurance agents mis-sell…
I would today like to talk about a flaw and a loophole which is existent in the IRDA regulatory framework. The IRDA attempts to protect the investors and purchasers of insurance products, for which it has placed specific limits on the rate of return shown in illustrations used in client presentations.
Just to protect the investors from over claimed returns expectations in the ULIP products, there is a provision that all illustrations should show return expectations of 6 percent and 10 per cent only. Although, this serves the purpose of keeping the returns expectations for ULIP plans under limits, but as this same regulation is used in the traditional policies’ illustrations- therefore, it by showing 10% return in a traditional policy overstates the returns attainable by any debt product consistently over the products tenure.
As normally people think that traditional endowment plans are able to give the guaranteed returns, a high return estimate of 10 % can be highly misleading and can spoil the financial planning of investors over his/her life span.
I would like to urge to IRDA to change this regulation and keep lower limits than 10% for illustrations of traditional plans and propose that the illustrations be made with two returns percent scenarios of 5% and 8%.
This will reduce the extent of miss-selling prevalent in high numbers as insurance agents sell traditional policies as guaranteed products with return percentage of 10% p.a. for periods over 30 years which is not at all guaranteed.
Just to protect the investors from over claimed returns expectations in the ULIP products, there is a provision that all illustrations should show return expectations of 6 percent and 10 per cent only. Although, this serves the purpose of keeping the returns expectations for ULIP plans under limits, but as this same regulation is used in the traditional policies’ illustrations- therefore, it by showing 10% return in a traditional policy overstates the returns attainable by any debt product consistently over the products tenure.
As normally people think that traditional endowment plans are able to give the guaranteed returns, a high return estimate of 10 % can be highly misleading and can spoil the financial planning of investors over his/her life span.
I would like to urge to IRDA to change this regulation and keep lower limits than 10% for illustrations of traditional plans and propose that the illustrations be made with two returns percent scenarios of 5% and 8%.
This will reduce the extent of miss-selling prevalent in high numbers as insurance agents sell traditional policies as guaranteed products with return percentage of 10% p.a. for periods over 30 years which is not at all guaranteed.
How to end the problems of black money and its links to terrorism
The ever imminent problems which the country of India faces are money laundering, corruption, black money which leads to the main problem of terrorism. When we say that there is terrorism is affecting the country’s security and hence leading to an environment not worthy of investing in the country leading to FII taking out the existing money from our country and not putting in money if they were planning about doing it.
The very simple way of solving this problem is by stopping the printing of notes with high denomination. Like in the UK there is no note above 50 Pounds and very rarely will you find a $100 note in the USA. This is something very important in stopping the fake currency scandal which in turn will stop all the other problems on its own.
There should be no notes of value greater than Rs. 100 so that like in many developed countries. And take out all the notes of higher denominations out of circulation. This will make it very difficult for corrupt parties to carry black money from one place to another unlike now due to the large Rs. 1000 notes they can carry a large amount in a very small briefcase unnoticeable by officials, but if the same amounts were to be carried in Rs. 100 or Rs. 50 notes then the loads and size of the parcel will be more than 10 to 15 times the original load making it very difficult to transport the bribe amounts.
The next topic about black money, only because of the high denominations people are able to hide a large amount of their black money in their house floorings and walls so if these notes are to be canceled and new low value notes to be brought in then they will not be able to use it or even hide it as they will have to get the notes changed and In the process the black money can come in broad day light and the offenders can be punished and at the same time the government should only take back the notes which are in their serial order lists so that all the notes that are not in the records can be tagged as fake currency and be burnt
The next stage is of discussing about the printers of fake currency, they are able to do so as they get a very high margin and value out of printing a high valued currency bills and getting profits many times over their cost and also worth the risk that they take in doing the illegal act of printing and transporting the notes inside our country. So if these notes are only of Rs. 50 then it will not be feasible to take so much risk and hurdles involved in printing these fake currencies. So the printing will also stop
So now finally coming to the main problem of terrorism, the main way in which they are able to buy the weapons is through the way of fake currencies. Because they are very closely linked to the people who are directly associated with printing fake currencies and once they have injected these fakes into the main monetary system it is really difficult to get it out as it spreads very swiftly.
So finally we can understand and link all these elements and conclude that a simple solution of getting these high denomination currency bills out of circulation will be of enormous help and benefit towards solving all these problems of money laundering, black money, fake currency bills and last but not the least terrorism
I would like you to spread this word which will work out to be the best means of improving our country’s economic development and security issues. I would like to thank ‘Yogi Ramdeo Maharaj’ for this in genuine idea.
The very simple way of solving this problem is by stopping the printing of notes with high denomination. Like in the UK there is no note above 50 Pounds and very rarely will you find a $100 note in the USA. This is something very important in stopping the fake currency scandal which in turn will stop all the other problems on its own.
There should be no notes of value greater than Rs. 100 so that like in many developed countries. And take out all the notes of higher denominations out of circulation. This will make it very difficult for corrupt parties to carry black money from one place to another unlike now due to the large Rs. 1000 notes they can carry a large amount in a very small briefcase unnoticeable by officials, but if the same amounts were to be carried in Rs. 100 or Rs. 50 notes then the loads and size of the parcel will be more than 10 to 15 times the original load making it very difficult to transport the bribe amounts.
The next topic about black money, only because of the high denominations people are able to hide a large amount of their black money in their house floorings and walls so if these notes are to be canceled and new low value notes to be brought in then they will not be able to use it or even hide it as they will have to get the notes changed and In the process the black money can come in broad day light and the offenders can be punished and at the same time the government should only take back the notes which are in their serial order lists so that all the notes that are not in the records can be tagged as fake currency and be burnt
The next stage is of discussing about the printers of fake currency, they are able to do so as they get a very high margin and value out of printing a high valued currency bills and getting profits many times over their cost and also worth the risk that they take in doing the illegal act of printing and transporting the notes inside our country. So if these notes are only of Rs. 50 then it will not be feasible to take so much risk and hurdles involved in printing these fake currencies. So the printing will also stop
So now finally coming to the main problem of terrorism, the main way in which they are able to buy the weapons is through the way of fake currencies. Because they are very closely linked to the people who are directly associated with printing fake currencies and once they have injected these fakes into the main monetary system it is really difficult to get it out as it spreads very swiftly.
So finally we can understand and link all these elements and conclude that a simple solution of getting these high denomination currency bills out of circulation will be of enormous help and benefit towards solving all these problems of money laundering, black money, fake currency bills and last but not the least terrorism
I would like you to spread this word which will work out to be the best means of improving our country’s economic development and security issues. I would like to thank ‘Yogi Ramdeo Maharaj’ for this in genuine idea.
Emotional Atyachar:- The new sales point
With a deep concern on the standard of advertisements being shown by financial institutions like banks and insurance companies it feels like they have no actual products or services to be sold left that can be publicized about in the adverts, but the superficial claims on their personal relations and stuff, like icici states that chhotti baatein hamesha chhoti nahin hoti and they show a women who discusses her sons reasoning for hours even after office hours, this is something that no one is ever gonna do for any client but yet they want to make a claim about how they would want it to be rather than how it is.
so these over claiming of adverts should be taken into consideration and not be linked to actual performance ability of the service provider, so with these forms of ads it only one thing for the buyer that u be aware as the companies are only trying to play with the clients emotions and nothing else as an actual service offering
so these over claiming of adverts should be taken into consideration and not be linked to actual performance ability of the service provider, so with these forms of ads it only one thing for the buyer that u be aware as the companies are only trying to play with the clients emotions and nothing else as an actual service offering
Personal Financial Planning- Need of the hour
Ever wondered if you have a single source to manage, execute and account for all your personal financial planning needs like retirement planning. insurance planning, taxation planning, investment planning, loans, mortgage and cash flow management. It would make lives considerably easy cause you wont have to run behind ten different people to get a hold of all your personal finance documents and account statements. With a financial planner your financial management will be easy swift and all in one place.
The biggest advantage of a financial planner is that he will not be a salesman trying to sell products to you with the main intention of filling his pockets with the commissions of the products he sells to you. His main goal and motive is to keep you financially safe and secure and help you achieve your goals.
Many agents and salesmen in India pronounce themselves as a financial planner but the differentiating factor is that if a person is an agent or a representative of any company then he will not be in a position to give you unbiased advise as his aim will be to tell you some story and sell his companies' products to you. To be an unbiased advisor the person must be able to provide a comparison of various available product options.
Financial planners charge fees from their clients for the advise given just like a doctor, lawyer or an architect. The advise is genuine and based on the clients needs, budget and after a detailed analysis of several available options.
The biggest advantage of a financial planner is that he will not be a salesman trying to sell products to you with the main intention of filling his pockets with the commissions of the products he sells to you. His main goal and motive is to keep you financially safe and secure and help you achieve your goals.
Many agents and salesmen in India pronounce themselves as a financial planner but the differentiating factor is that if a person is an agent or a representative of any company then he will not be in a position to give you unbiased advise as his aim will be to tell you some story and sell his companies' products to you. To be an unbiased advisor the person must be able to provide a comparison of various available product options.
Financial planners charge fees from their clients for the advise given just like a doctor, lawyer or an architect. The advise is genuine and based on the clients needs, budget and after a detailed analysis of several available options.
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