Thursday, 21 November, 2013

Importance of Insurance - Part 4

Be safe or You'll be sorry! Part 4

Choosing the right Life Insurance Company

Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on the quantum for which an individual should obtain a life cover:

In this post, I propose to talk about how to identify a suitable life insurance company.

How do you choose a life insurance company from which you can buy a life insurance policy? Some points to note:

  • The industry has evolved over the years. Despite MoneyLife (magazine, website) and others who claim that our regulators are toothless tigers, IRDA has evolved into a regulator on which I'll personally have quite a lot of confidence and trust.
  • Based on the IRDA norms, virtually every single player in the insurance industry has to take care of issues like capital adequacy, sustainability of the policy, basic levels of customer satisfaction, etc. There's always scope for improvement, but then, things are broadly "so okay" now that you can go ahead and rely on any life insurance company - All of them are "reasonably" reliable and trustworthy.
  • Having mentioned the above, it is possible that you might be personally uncomfortable with Company X or Management Y - with or without any reason whatsoever. By all means, drop those companies from your list of "suitable life insurance companies" - After all, unlike a few years ago, today you have the luxury of CHOICE - There are quite a few active life insurance companies even if you decide that you don't wish to buy a policy from half a dozen companies.
  • Next, look at GEOGRAPHY. It is possible that a couple of specific life insurance companies may be relatively inactive or perhaps even be absent in your city / town / village. While it may still be OK to take a policy from such a life insurance company, it is likely to be that much more difficult to handle issues related to claims processing - Certainly in comparison with another life insurance company which has an active presence in your place of residence.
  • Now, you have a bunch of companies which continue to survive in your shortlist of life insurance companies from which you can consider buying a life insurance policy.
  • Thanks to the first point above, you can virtually choose ANY of the above life insurance companies that continue to be part of your shortlist.

In my next post, I propose to write about the actual process that you need to follow to try and identify that particular policy that will be suitable for your specific needs.

Watch this space!



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Tuesday, 12 November, 2013

Importance of Insurance - Part 3

Be safe or You'll be sorry! Part 3

Here's the next part of my continuing coverage on Insurance. You would have read my earlier post on whether you need Life Insurance in the first place:

In this post, I propose to talk about how to identify the quantum of amount for which an individual should obtain a life cover.

At the outset, let's be clear on what should NOT be the amount of coverage that you require:

  • It should not be the amount recommended / suggested by your friend, parent, spouse, child, financial advisor, blog author, insurance agent, bank manager.

Clearly, each of the above will have his/her own reasons to suggest varying amounts as "just the right quantum" for you. While some may have your genuine needs in mind, others may have ulterior motives. However, it is unlikely that any of them will have a clear and holistic idea about your current situation and hence, you can't depend on their suggestions.

You need to keep in mind various factors while determining the amount for which you should buy a life insurance policy. Some of these would include:

  • Your personal profile - age, academic / professional qualifications, job profile, current income, future prospects
  • The number of financial dependents, their ages and the period for which they are likely to remain financially dependent on you
  • Your current wealth level
  • Your desire to "care for" those who are financially dependent on you (this factor is often ignored by most people including competent financial advisers due to their emphasis on being "politically correct" - As you're aware, I give a damn!)

Each one of the above will influence the amount for which you need to obtain life insurance cover.

The actual amount will obviously vary from person to person. And the only person who can identify it is the person whom you meet every day when you look into the mirror. But it would help to keep in mind the broad (and simple) rules of thumb:

  • The more the number of financial dependents whom you care for, the higher you need to buy life insurance
  • The better your academic / professional qualifications, the higher your future potential is likely to be. Obviously, when you die, the financial loss would be that much greater. Obviously, you need to think of a higher life insurance amount
  • Ditto for higher income / wealth levels, the stability of your job, etc.
  • The younger you are, the longer you're likely to live, earn and prosper. This warrants a higher sum assured for your life.
  • The number of years for which your dependents will need to survive after your death before they get a meaningful alternative source of sustaining themselves
  • Your ability to afford to pay the premium REGULARLY for servicing the policy that you take based on the amount arrived at after taking into account all the above factors

Obviously, you can't have a "one-size-fits-all" formula to calculate the ideal amount for which an individual needs to buy insurance. Every individual needs to identify the amount required on his/her own.

You calculate the amount required by you - By the time you've identified the amount required, I hope that my next post would be ready to help you further in the process to be followed to identify the appropriate life insurance policy for you.

Watch this space!



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Sunday, 10 November, 2013

Importance of Insurance - Part 2

Be safe or You'll be sorry! Part 2

You would have read my earlier post on

In this post, I propose to talk about insuring the most important risk that any human being faces - His / her life. Life insurance happens to be the most popular but gravely misunderstood insurance product.

A Life insurance policy essentially promises to cover the risk of life and during the tenure of the policy, if the policyholder were to die, the nominee / beneficiary who has been named in the policy would be paid the sum assured. (I'm consciously using the word "die" instead of using the usual euphemism which says "if anything untoward were to happen to the policyholder" - After all, I believe in calling a spade a spade!)

In its simplest form, let's assume the following:

  • Ms. X has insured her life for a sum of Rs. 25,00,000/=.
  • She's nominated her son Mr. Y as the nominee and beneficiary as per the terms of the policy
  • (Unfortunately like all of us including you and me, she also has to die some time or the other). Ms. X dies a couple of years after taking the policy while the policy is very much continuing to remain valid.

In the above example, after the death of Ms. X, Mr. Y will get a sum of Rs. 25,00,000/= from the insurance company, subject to the usual terms and conditions of the insurance policy being complied with to the satisfaction of the insurance company in terms of proper documentation of:

  • The validity of the insurance policy
  • The death of Ms. X
  • Identification of Mr. Y as the nominee & beneficiary as per the policy.

There are, as I've mentioned in my earlier post, a whole range of life insurance products that are available. A vast majority of those products would be completely unsuitable to you. Hence, you must learn to identify the basis on which you will choose a life insurance product that's relevant for you.

Here are some cues for the process:

First, do you need a Life Insurance policy? Well, most of the readers of this blog will require a life insurance policy. Some exceptions:

  • If you have no financial dependents, who is going to get the amount of sum assured after you die? Obviously, it doesn't make sense to have any life insurance policy.
  • If you're stinking rich like a Bill Gates or Warren Buffett or Azim Premji or Mukesh Ambani, you need to seriously evaluate if your dependents or near and dear ones are likely to be financially at a disadvantage due to your death. An additional million or two dollars may not make any difference to the wealthy heir of such a rich person. If you are truly wealthy, in my opinion, you (and your dependents) do not need a life insurance policy unless there are very strong reasons for the same.
  • If you're NOT earning any income or are earning a negligible income, your legal heirs are unlikely to be at any significant financial disadvantage due to your death. Again, a life insurance policy is of no use for you.
  • If your legal heirs are  "well-settled" and are financially completely independent, they won't be impacted adversely due to your death - at least financially. Again, in such an instance, you don't need any life insurance coverage.

I'm sure that based on the above, you'll have a better idea as to whether you require Life Insurance cover.

In my next post, I hope to talk about how to identify the quantum of amount for which an individual should obtain a life cover.

Watch this space!



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Saturday, 9 November, 2013

Importance of Insurance - Part 1

Be safe or You'll be sorry! Part 1

It is a long time since I wrote anything about the importance of Insurance.

For those of you who are financially literate, the information in this (and perhaps the next few posts) would be a repetition of known stuff. For you, I'd just say: I hope that you have already acted on your knowledge. Review your existing policies and recent developments in the past couple of years by way of new products in the markets. And, if appropriate, go in for mid-course corrections.

For the rest of you, I hope that my thoughts on insurance would come in handy to make a beginning. And in case you've already made a beginning, do a meaningful review.

Having covered the prelims, here's the main course:

Insurance is nothing but a method by which you can make up (or at least mitigate) any financial loss that may arise due to a risk that you have insured against. Among other things, some of the stuff that you can think of insure would include:

  • Your life (and that of various members of your family)
  • Your home (and perhaps various valuables that are kept therein)
  • Your vehicles (Car, Bike, etc.)
  • Your health (so that hospitalisation expenses do not come as a shock)

First, I'm sure that there are a whole lot of other things that can be insured - don't bother - Right now, make a beginning with the basics.

Secondly, like in most other financial products (whether it is mutual funds or shares or credit cards), there's a plethora of insurance policies that are available in the market, provided by a host of insurance companies. More than enough to completely confuse you. In fact, even the supposedly financially savvy and financially literate individuals are often prone to choose (or continue with) a policy that may not be suitable to them or have become unsuitable to them since the time they initially went in for the policy.

Some action steps for you before you are ready to actually start evaluating and choosing insurance policies that are suitable for you:

  • Identify a list of various types of financial risks that you (and your family) are likely to face in the foreseeable future.
  • Among the above, shortlist those financial risks that you are ready, willing and capable of bearing on your own. For these "things", you DO NOT require any insurance policy unless it is mandatory according to law.
  • Now, the financial risks that remain are the ones for which you would ideally like to consider buying appropriate insurance policies.
  • Do a bit of preliminary reading to identify the different types of policies that are available in the market place to cover those risks. A good starting point would be to identify the web sites of major insurance companies and financial service providers.
  • Till you are reasonably clear about what you want (and, better still, till you have read enough and acquired adequate knowledge about what's suitable for your specific needs, DO NOT CONTACT ANY INSURANCE AGENT.  

In my next few posts, I hope to write about covering different types of risks.

Watch this space!



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Wednesday, 6 November, 2013

Greed for Safety!

Paradoxical Oxymoron: Greed for Safety

Just came across a brief but insightful interview with Seth Masters of Bernstein Global Wealth Management:

Traditionally, people have been accused of losing their money due to their greed. When I read the above interview, I was able to recall a rather interesting trend that I've consistently observed among the famous Indian Middle Class, which gets accentuated after every scam / bubble (ranging from Harshad Mehta scam to Dot-com bust to Ketan Parikh scam to East Asian currency crisis to the US Sub-prime Mortgage crisis to the Euromess to the Chinese slowdown to the NSEL Scam):

  • In the name of running after safety, the middle class Indians tend to focus too much on the risks associated with equity shares and too little with a rather critical risk.

  • Interestingly, this risk aversion that prevents the middle class Indians from investing in equity shares is at its highest when the indices are at their lowest valuations due to one scam or burst bubble or whatever. Hence, they tend to completely stay away from investing in shares when the BSE Sensex is at 9000-10000 in 2008, but much more willing to get tempted to invest in equity shares when the share prices have gone up consistently for 3-4 years, as it happened between 2003 and 2007. But then, this post is not about the foolish behaviour of investors when it comes to investing in shares.

  • Instead, I'd like to highlight the foolish behaviour of the very same investors in an entirely different arena - their Greed for Safety!

Many middle class Indians tend to look for SAFETY and LIQUIDITY when it comes to investing their "hard-earned money". This often means that they look to focus almost exclusively on bank fixed deposits.

Let's look what kind of risks gets ignored in this process:

  • Risk of Inflation - The government publishes an inflation figure - unfortunately, that happens to be the "wholesale inflation", which is of no consequence to you and me. What matters to us is the inflation at the retail level. In the past few years, the retail inflation index would have been going up easily at a rate upwards of 10% per annum. The actual figures, equally unfortunately, are unknown to me. What's worse, however, is that the inflation applicable to an individual hosehold is often likely to be driven by their ACTUAL standard of living and not based on the AVERAGE standard of living of the whole Indian population.

  • Translated in layman's terms, what does this imply? Take a look:

    • A "normal" middle class city-dwelling urban Indian has a much higher ACTUAL standard of living compared to the AVERAGE standard of living of the whole Indian population

    • The typical monthly rent / housing loan EMI is often at least thrice higher than the national average

    • The typical monthly grocery basket consists of a whole range of things which are NOT bought at all by the "Average Indian"

    • The typical school fees, medical bills, dining out, entertainment expenses, fruits and vegetable expenses, fuel expenses, etc. of a REAL middle class Indian is much higher than that of the AVERAGE INDIAN.

    • Naturally, the typical retail inflation for the Middle Class Indian is likely to be much higher than what would be the "Average" retail inflation figure.

  • If the Average retail inflation is upwards of 10% per annum, on a very conservative estimate, the ACTUAL retail inflation for the middle class Indian is likely to be upwards of at least 12.5-13% per annum.
  • Considering the fact that typical non-equity investment options of middle class Indians are often restricted to Bank Fixed Deposits, the present rate of return (pre-tax) happens to be around 8-10% per annum. This is woefully inadequate even to cover the inflation figure applicable to you and me, and certainly not enough to generate any meaningful real returns. 

My simple question: If you're so GREEDY about ensuring the SAFETY of your investments, you're ignoring the RISK OF INFLATION. Can you afford it?

I think not.

Start thinking of alternatives. And quickly!



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