Beware Of Free Lunches

Posted on December 16, 2010 by Ranjan

Do you get invites for FREE HOT TIPS, daily newsletters with hot market picks with a request to share your email id or mobile number? Most of us do.

I am reminded of the following excerpts about an email scam (from the Boglehead’s Guide to Investing)

Get a list of email addresses of people interested in sports betting. Say you have 32,000. Email 16,000 of them to say that the home team will win this week’s big team, and 16,000 to say the home team will lose. Now, half of the people will have gotten the correct prediction, and the next week, you do the same thing with them. After 5 weeks, you’ll have 1,000 email addresses of people who have seen you pick the winner five times in a row!. Now you pitch your 1-900 number or paid email list subscription to this amazed group.

Interesting, no? Still happy to be a guinea pig in the hands of such scamsters?

Coming Soon! RupeeCamp "Financial Planning Workshop". "Join us"

Welcome back! Join me on this journey to improving our financial IQ and sharing what we know. Updates at RSS feed or Email. And spread the word please Thank You!

Share/Save

Insurance Is The Best Investment?

Posted on December 8, 2010 by Ranjan

I got the following sms this morning and if it is true then it is best to put 80% of your money in the product!! It says,

Invest in LIC’s Jeevan Saral, Save Rs 2000/- per month, Get Rs 5 Lakh cover, Get Tax Free Returns, Returns after 10 years is Rs 4.2 lakh, 15 yrs: 8.8 lakh, 20 yrs: Rs 16 lakh

Vow! That’s a 10% solid return. Add to it being tax free and also covering a risk of Rs 5 lakhs!

If all of it is true, why should you bother about any other financial product? Why even take any risk of a stock or the outperforming mutual Funds? As LIC confidently says in its branding campaign, Kahin aur kyun jaana?

But let’s go on to LIC’s website and learn a bit more about Jeevan Saral. Link

It’s a simple and straightforward product. You simply need to choose the amount and mode of premium payment. The plan provides financial protection against death starting with 250 times your monthly premium. The Maturity Sum Assured depends on the age at entry of the life to be assured and is payable on survival to the end of the policy term. It also offers the flexibility of term and a lot of liquidity.

As per the illustration, if you pay Rs 4704/- every year, you get a starting death cover of Rs 1 lakh (250 times the monthly premium of approx Rs 400/-).

At the end of the 10th year, the maturity proceeds as per the illustration is Rs 50360 when the projected investment return of the Corporation is 6%. When the returns is 10%, the return is Rs 61360/-

This essentially translates into an IRR of 1.2% and 4.7% for the policyholder. As far as I know the investment yields of Insurance Companies is around 6-8% only.

The above example also shows that when the Insurer is earning 6% on it’s investments, the yield for the customer is around 1.2%.

Similarly when the investment yield of the insurance company is 10%, the return for the customer is 4.7%.

Can we say that approx. cost of your investments in an Insurance company is 5%?

Note from LIC’s website: The non-guaranteed benefits in above illustration are calculated so that they are consistent with the Projected Investment Rate of Return assumption of 6% p.a.and 10% p.a. respectively. In other words, in preparing this benefit illustration, it is assumed that the Projected Investment Rate of Return that LICI will be able to earn throughout the term of the policy will be 6% p.a. or 10% p.a., as the case may be. The Projected Investment Rate of Return is not guaranteed.

Loyalty additions will depend on future profits and as such is not guaranteed.

Share/Save

Watch AajTak & Build Your Wealth!

Posted on November 2, 2010 by Ranjan

Yesterday, AajTak TV had a programme which detailed out the number of Diyas to light up, the mantra to chant during Diwali Puja.

Do it and all your financial problems will go away. And Goddess Laxmi will ensure “Dhan ki barsaat“.

See, it’s that easy! But remember to put the right number of diyas on the right and the right number on the left, chant the right mantra according to your Rashee and follow the ritual to the T.

And you can stop reading all the blogs and websites, do away with your financial planner and take it easy. After all, you know how to please the Goddess Laxmi. Thanks to Aaj Tak TV.

Share/Save

Mis-selling Starts With The CEOs

Posted on September 22, 2010 by Ranjan

Jayant Pai writes about two comments made by the CEOs on TV.

1. CEO 1 said that his was the only fund which was currently available at Rs. 10 per unit and hence investors could get attracted to it.

2. CEO 2 said that ULIPs was a “Money Spinner” earlier but had now ceased to be so. That is why they had discontinued it.

It’s a clear case of misrepresentation and lack of customer focus being doled out by the CEOs on TV channels.

But how many people can see through this misrepresentation? Isn’t this a conflict when the CEOs should focus on improved financial awareness among their customers and not try to obfuscate?

In a different situation, like in a conference discussing financial inclusion or financial awareness topics, the same CEOs would wax eloquent on their initiatives in educating the customer.

I wonder how the CEOs would respond when they are confronted with their contradictory thoughts!

This reminds me of the famous concept of cognitive dissonance:

[Source]In a classic experiment, The 3 Christs of Ypsilanti, psychiatrist Milton Rokeach assembled three patients who each believed they were Jesus Christ. He wondered if confronting them with each other’s conflicting claims would create enough cognitive dissonance to produce a psychiatric breakthrough. Unfortunately, this effort did not lessen the patients’ delusions. The three Christs maintained their claim on their divine identity.

The above case say that, when it comes to cognitive dissonance, we believe what we want to believe. And even in the face of persuasive evidence, we hold fast to beliefs that may in fact have no basis in reality.

My point of sharing this is that we (I and you) are able to recognize the cognitive dissonance in the CEOs (and within us too!) and be able to take sound decisions.

Share/Save

Misinformation Campaign About Pension Plans

Posted on May 29, 2010 by Ranjan

Looks like I need to start a “CryBabies” category for CEOs of Financial Services Companies. Sample 1

Now with IRDA asking Insurance Companies to add “Insurance” to their Pension Plans, here are some stories in the media:

Hindu Business Line: People with pre-existing ailments will now find it difficult to buy a pension plan as insurance companies will have to compulsorily sell pension plans with a life cover starting July 1.

With this, some people with existing ailments may not be able to buy a pension plan at all, while others would end up paying higher premiums.

“So people suffering from cancer or kidney failure and those who have undergone coronary bypass surgery will not be able to buy pension plans now, while those suffering from ailments such as diabetes, blood pressure may have to pay higher premiums,” said Mr Kamalji Sahay, CEO, Star Union Dai-ichi Life Insurance.

“Currently, there is no life cover for pension plans. So even if the health of the policy buyer is not up to the mark, he is issued a pension policy. But this will change from July 1 with inclusion of the life cover becoming mandatory,” said Mr K.S. Gopalakrishnan, CFO, Aegon Religare Life Insurance.

Now no where in the story NPS is mentioned. Or other options like PPF. So the lay reader will feel that he’ll no longer be able to plan for his retirement, if he has a pre-existing disease! (All of us have some ailments or the other)

Isn’t this a misinformation campaign? Giving out select information with a motive to spread fear and falsehood?

Beware of the CryBabies! And read this blog post where PV Subramanyam clears a few “retirement planning myths“

Share/Save

The CryBabies of Life Insurance Industry

Posted on May 28, 2010 by Ranjan

I hope the IRDA does not revisit the cap on surrender charges that it has proposed on all life insurance policies from July. The insurance industry (especially the private insurers) has strongly opposed the proposal. LIC is not worried as it does not charge anything for surrenders.

In the draft guidelines, the Insurance Regulatory and Development Authority (Irda) has suggested that the surrender charge during the first year of the policy be fixed at 12.5 per cent of the premium paid in case the policy term is less than 10 years. For longer duration policies, the charge is proposed to be capped at 15 per cent.

The regulator moved to cap surrender charges after a complaint filed with its Ombudsman said a policyholder did not get any money after he surrendered his policy in the first year.

“If the surrender charge is capped, policyholders will not face high penalty on withdrawing. This will encourage them to surrender even within the first three years of lock-in,” said the chief executive officer of a life insurance company.

“There was a discussion on surrender charges in the council meeting and insurers expressed their discomfort with the cap,” said Life Insurance Council Secretary General S B Mathur.

I fail to understand the convoluted logic of the CEOs of the private life insurers. I look at them as crybabies who are crying hard to protect their turf, even if it means something which is not in favour of their customers!!

The reason the private life insurers are crying hoarse is because their lapsation ratio is very high. This means that the policies being sold by them are not being renewed. So naturally, there’ll be a lot of requests for surrender.

Fact: LIC, the Daddy of Life Insurance industry has aboslutely no surrender charges!

While on surrender and lapsation, here’s another issue that’s very important. It’s about the turnover of Agents.

Source: Annual Report, IRDA: In 2008-09, while the total number of agents appointed was 12.89 lakhs, the number of agents terminated was as high as 8.72 lakh. The scenario was worse for private insurers as compared to LIC. While private insurers appointed 9.43 lakh agents, they terminated 6.77 lakh agents. On the other hand, LIC has terminated 1.95 lakh agents while it appointed 3.46 lakh agents. Such high turnovers may have negative consequences.

This means that the policies procured by these agents are rendered orphan on their termination and thereafter often result into lapsation due to lack of servicing support.

This also goes on to show that your friend and relative who shoved an insurance policy in you name may not be there when you need him for service issues.

And if you decide to surrender your policy, the private insurer is making a lot of noise over returning your money!!

Share/Save