I often advice people not to combine insurance and investment and the only insurance product which offers such a possibility is term life insurance.
First let's try to find out what's term life insurance. Wikipedia has a very good definition for it.
In simple, term life insurance provides you only insurance and you don't get anything at the end of policy term ( on survival ). Hence those who opt for it treat insurance as a cost ( or expense ) rather than an investment.
Recently I came across this page on the personalfn website. This page lists down the premium charged by different life insurance companies in India for term life insurance. As you would notice the lowest premium is charged by SBI Life Insurance ( which is owned 74% by the State Bank of India ).
An year back, when I was evaluating Indian Life Insurance companies to purchase a term insurance plan, I had chosen SBI Life. In hindsight, that looks like an intelligent decision.
To be precise, I had bought the option under which the "Sum assured increases by 5% annually" so that the Sum assured can atleast keep pace with inflation. But after I had purchased this policy I got a shocker. The 5% increase per annum is not compounded as I had thought, but is rather caluclated as simple interest on the original sum assured. Still SBI Life Shield looks the best that is on offer presently, since no other Inusrance company offers this facility of increase in Sum assured annually.
Disclosure: I am not associated with SBI Life in any way, except for the fact that I have purchased SBI Life Shield, their term insurance plan last year. If you are aware of any other Life insurance company offering a lower premium for term insurance in India, please do comment and I will update this post accordingly.
Showing posts with label LIC. Show all posts
Showing posts with label LIC. Show all posts
Thursday, January 15, 2009
Thursday, December 11, 2008
LIC Jeevan Aastha - an update post
I had previously written a post about LIC Jeevan Aastha policy. You can find it here.
Some (infact all!) of the comments did not agree with my opinion. I would like to answer each of the questions posed by the comments posted.
- I am against Insurance/Insurance companies
I have nothing against Insurance or Insurance companies. Infact I believe that everyone should have himself and his family covered against all types of calamities. Every one should a proper life insurance, accident insurance, mediclaim, home insurance etc. One should also have a proper plan for his/her retirement in place. So you see I recommend everyone to insure himself/herself appropriately.
What I am against is the mis-selling practiced by the Insurance companies and Insurance agents alike. The previous sentence is more true for ULIPs, where mis-selling is more prevalent.
I am also against combining Insurance and Investment. When you combine Insurance and Investment either you don't get sufficient insurance or you miss out on the yield.
- I want to malign LIC
I have no doubt about the service quality and track record of LIC in claim settlement. But you can't ignore the fact that our govt has in the past ( also in the present stock market crisis ) used LIC to shore up the market. You can read one very informative article by Sucheta Dalal .
If the track record of LIC in claim settlement is very good, this does not mean that it cannot be accused of some other mistake it has committed. Its like saying a politician cannot be charged of corruption cases, simply because he runs a charitable school.
- LIC Jeevan Aastha is the best Insurance product
Here again I would like to repeat my previous statement, don't combine Insurance and Investment. If you want to buy Jeevan Aastha as an investment product go ahead and do it. But somebody should not be duped into thinking that it is an Insurance product. A gullible person who buys this with a Basic Sum assured of Rs. 9 Lakhs, may be under the impression that his life is insured for Rs. 9 Lakhs. But in reality, second year onwards, the assured amount would be only Rs. 3 Lakhs+
So I will just rename my previous post to "LIC Jeevan Aastha - Do not buy as an Insurance product" for more clarity.
- and Last of all, a comment says that I am a CA
I would like to reiterate the fact that I am not a CA. Please read the complete disclaimer about this site here.
Some (infact all!) of the comments did not agree with my opinion. I would like to answer each of the questions posed by the comments posted.
- I am against Insurance/Insurance companies
I have nothing against Insurance or Insurance companies. Infact I believe that everyone should have himself and his family covered against all types of calamities. Every one should a proper life insurance, accident insurance, mediclaim, home insurance etc. One should also have a proper plan for his/her retirement in place. So you see I recommend everyone to insure himself/herself appropriately.
What I am against is the mis-selling practiced by the Insurance companies and Insurance agents alike. The previous sentence is more true for ULIPs, where mis-selling is more prevalent.
I am also against combining Insurance and Investment. When you combine Insurance and Investment either you don't get sufficient insurance or you miss out on the yield.
- I want to malign LIC
I have no doubt about the service quality and track record of LIC in claim settlement. But you can't ignore the fact that our govt has in the past ( also in the present stock market crisis ) used LIC to shore up the market. You can read one very informative article by Sucheta Dalal .
If the track record of LIC in claim settlement is very good, this does not mean that it cannot be accused of some other mistake it has committed. Its like saying a politician cannot be charged of corruption cases, simply because he runs a charitable school.
- LIC Jeevan Aastha is the best Insurance product
Here again I would like to repeat my previous statement, don't combine Insurance and Investment. If you want to buy Jeevan Aastha as an investment product go ahead and do it. But somebody should not be duped into thinking that it is an Insurance product. A gullible person who buys this with a Basic Sum assured of Rs. 9 Lakhs, may be under the impression that his life is insured for Rs. 9 Lakhs. But in reality, second year onwards, the assured amount would be only Rs. 3 Lakhs+
So I will just rename my previous post to "LIC Jeevan Aastha - Do not buy as an Insurance product" for more clarity.
- and Last of all, a comment says that I am a CA
I would like to reiterate the fact that I am not a CA. Please read the complete disclaimer about this site here.
LIC Jeevan Aastha - Do not buy as an Insurance product
LIC of India has launched Jeevan Aastha on December 8th, 2008. The scheme is open for subscription for 45 days.
You can get the details about this scheme here.
When reading through its features, please make note of the two terms used in this:
Basic Sum Assured - This is insured amount during the first year of the policy.
Maturity Sum Assured - This is equal to ( Basic Sum Assured / 6 )
Thus, if you purchase a policy with basic sum assured of Rs. 3,00,000/- , the maturity sum assured is only Rs. 50,000/-
In a way, this insurance policy is quite stupid and absurd ( truly speaking this does not look like an insurance policy at all ):
1. Decreasing Insurance benefit: This is the first insurance policy I have come across in which the death benefit decreases with the increase in the term of the policy. If you purchase a policy for Rs. 3,00,000/-, then only during the first year the death benefit is Rs. 3 lakhs. Second year onwards the death benefit is in the range of Rs 1 lakh - Rs. 2 lakhs. You can see the benefits illustration here.
2. Guaranteed additions are not on the Basic sum assured but on the Maturity Sum assured ( which is one-sixth of the Basic Sum assured ). So when you read the policy features, keep this thing in mind.
Infact, this looks like another of LIC's tricks to fool the common public. The purpose of this scheme is not to provide insurance, but to mop up huge sums of money from the public so that LIC can shore up the sinking stock market.
Update: This post was previously titled "LIC Jeevan Aastha - Do not buy". To know why I have renamed it, please read this.
You can get the details about this scheme here.
When reading through its features, please make note of the two terms used in this:
Basic Sum Assured - This is insured amount during the first year of the policy.
Maturity Sum Assured - This is equal to ( Basic Sum Assured / 6 )
Thus, if you purchase a policy with basic sum assured of Rs. 3,00,000/- , the maturity sum assured is only Rs. 50,000/-
In a way, this insurance policy is quite stupid and absurd ( truly speaking this does not look like an insurance policy at all ):
1. Decreasing Insurance benefit: This is the first insurance policy I have come across in which the death benefit decreases with the increase in the term of the policy. If you purchase a policy for Rs. 3,00,000/-, then only during the first year the death benefit is Rs. 3 lakhs. Second year onwards the death benefit is in the range of Rs 1 lakh - Rs. 2 lakhs. You can see the benefits illustration here.
2. Guaranteed additions are not on the Basic sum assured but on the Maturity Sum assured ( which is one-sixth of the Basic Sum assured ). So when you read the policy features, keep this thing in mind.
Infact, this looks like another of LIC's tricks to fool the common public. The purpose of this scheme is not to provide insurance, but to mop up huge sums of money from the public so that LIC can shore up the sinking stock market.
Update: This post was previously titled "LIC Jeevan Aastha - Do not buy". To know why I have renamed it, please read this.
Tuesday, December 9, 2008
Why the Employees' Pension Scheme (EPS) is a scam?
Whatever I write below is applicable only to employees of Private sector in India ( including IT and BPO employees ), since Govt. companies have their own separate pension fund ( as far as I know ).
Employees' Pension Scheme (EPS ) is operated by EPFO http://www.epfindia.com/ , the same organisation which handles your Provident Fund( PF ) as well.
12% of your Basic salary goes to EPFO.An equivalent amount is contributed by your Employer as well i.e. in total 24% of your basic salary goes to EPFO.
This amount ( i.e. 24% of your basic salary ) is allocated into different accounts as follows:
1. EPS - 8.33% of your basic salary goes towards EPS, subject to a maximum of Rs. 541/- (i.e. 8.33% of Rs. 6500 )
2. The rest of the amount goes into the PF account.
An example of this allocation can be found in this file.
You earn certain % of interest on the amount in your PF account. The rate of interest is decided by the Board of EPFO. Whatever is the amount accumulated in this PF account by the time you retire, you receive that as a lump sum.
But we are only interested in what happens to the amount deposited in the EPS account. The amount accumulated in your EPS account is paid back to you as a monthly pension after you retire.
Now it's time for some serious number crunching, here we go:
Ram joins a company at Age 25, works there for 35 years and retires at the age of 60.Let's assume his basic salary was Rs. 10,000/- from the beginning of his employement to his retirement.
Since his basic salary was greater than Rs. 6500/- the amount that went towards EPS was Rs. 541/- ( the EPS rules place a cap on the maximum basic salary which is used to calculate your contribution and your monthly pension )
After retirement his monthly pension would be calculated using the below formula:
( Pensionable salary X Pensionable service ) / 70
Here,
Pensionable salary = Rs. 6500/- (remember, EPS rules place a cap on basic salary )
Pensionable service= 35 years ( the number of years he was in service, and contributed to EPS )
So, the calculation yields.
( 6500 X 35 ) / 70 = Rs. 3250/- ( Ram's monthly pension )
i.e. his annual pension is Rs. 39,000/-
So now we need to calculate whether Ram got a fair deal. Whether this monthly pension paid to him was just?
Let's use a recurring deposit calculator, to estimate how much he would have accumulated in his EPS account by the time he retires. We assume a conservative rate of interest 8%
It would be Rs. 12,49,263/-
To calculate:
1.Go to this link
http://www.teacherone.com/Business/recur_deposit/recur_deposit_maturity_calculator.php
2. Enter amount as Rs. 541/-
3. Frequency of deposit: Monthly
4. Rate of interest: 8 %
5. Duration: 420 months ( 35 years X 12 months )
6. Press "Calculate Maturity amount" button. You will get 12,49,263
There are annuity ( i.e. immediate payment of pension ) schemes offered by public and private life insurance companies. Let's take LIC ( a govt. owned life insurer ).
It offers a scheme known Jeevan Akshay which is an immediate pension plan.
http://www.licindia.com/jeevan_akshay_plan_009_features.htm
A PDF printout of the page in this link is here.
Observe the table on top of Page 2 of this PDF file.
For Rs. 1 lakh price, anyone retiring at age 60 can get a annual pension Rs. 9350/- ( constant and guaranteed for his lifetime )
Since Mr. Ram has Rs. 12,49,263/- with him ( I am assuming that the amount accumulated in his EPS account is given back to him on retirement, but as per the rules this does not happen ), let's calculate how much annual pension he can get from LIC. We use the premium calculator available on LIC's website to do this.
1. Go to this link. http://www.licindia.com/premium_calculator.htm
2. Choose Jeevan Akshay from the drop-down.
3. Press on 'Select Product' button.
4. Enter date of birth as 31/12/1947, so that he is 60 years today.
5. Enter purchase price as 1249263 (the amount accumulated in Mr. Ram's EPS)
6. Annuity type is" Annuity payable for life"
7. Annuity mode is yearly.
8. Press on Calculate premium button.
The annual pension is shown to be Rs. 1,21,803/-
This translates into a monthly pension of approx. Rs. 10,000/-
What a scam!!!
A person who deserves a monthly pension greater than Rs. 10,000/- is paid only peanuts ( Rs. 3250/- ) by the EPFO.
This is a scheme by the Govt and for the Govt, to cheat people of their retirement money. Anybody who has the option to take money out of EPS scheme and purchase annuity on his own, will get three times the pension he gets from EPFO.
PS: EPS rules can be found at this link
http://www.epfindia.com/Circulars/EPS95_update102008.pdf
Disclosure: I am not an accountant or CA and the above calculation is as per my understanding of the EPS rules. I am writing this post so that an qualified CA can comment on the above, whether my concerns are genuine. If you know a CA or accountant, please pass this blog post on to him and ask his opinion on it.
Employees' Pension Scheme (EPS ) is operated by EPFO http://www.epfindia.com/ , the same organisation which handles your Provident Fund( PF ) as well.
12% of your Basic salary goes to EPFO.An equivalent amount is contributed by your Employer as well i.e. in total 24% of your basic salary goes to EPFO.
This amount ( i.e. 24% of your basic salary ) is allocated into different accounts as follows:
1. EPS - 8.33% of your basic salary goes towards EPS, subject to a maximum of Rs. 541/- (i.e. 8.33% of Rs. 6500 )
2. The rest of the amount goes into the PF account.
An example of this allocation can be found in this file.
You earn certain % of interest on the amount in your PF account. The rate of interest is decided by the Board of EPFO. Whatever is the amount accumulated in this PF account by the time you retire, you receive that as a lump sum.
But we are only interested in what happens to the amount deposited in the EPS account. The amount accumulated in your EPS account is paid back to you as a monthly pension after you retire.
Now it's time for some serious number crunching, here we go:
Ram joins a company at Age 25, works there for 35 years and retires at the age of 60.Let's assume his basic salary was Rs. 10,000/- from the beginning of his employement to his retirement.
Since his basic salary was greater than Rs. 6500/- the amount that went towards EPS was Rs. 541/- ( the EPS rules place a cap on the maximum basic salary which is used to calculate your contribution and your monthly pension )
After retirement his monthly pension would be calculated using the below formula:
( Pensionable salary X Pensionable service ) / 70
Here,
Pensionable salary = Rs. 6500/- (remember, EPS rules place a cap on basic salary )
Pensionable service= 35 years ( the number of years he was in service, and contributed to EPS )
So, the calculation yields.
( 6500 X 35 ) / 70 = Rs. 3250/- ( Ram's monthly pension )
i.e. his annual pension is Rs. 39,000/-
So now we need to calculate whether Ram got a fair deal. Whether this monthly pension paid to him was just?
Let's use a recurring deposit calculator, to estimate how much he would have accumulated in his EPS account by the time he retires. We assume a conservative rate of interest 8%
It would be Rs. 12,49,263/-
To calculate:
1.Go to this link
http://www.teacherone.com/Business/recur_deposit/recur_deposit_maturity_calculator.php
2. Enter amount as Rs. 541/-
3. Frequency of deposit: Monthly
4. Rate of interest: 8 %
5. Duration: 420 months ( 35 years X 12 months )
6. Press "Calculate Maturity amount" button. You will get 12,49,263
There are annuity ( i.e. immediate payment of pension ) schemes offered by public and private life insurance companies. Let's take LIC ( a govt. owned life insurer ).
It offers a scheme known Jeevan Akshay which is an immediate pension plan.
http://www.licindia.com/jeevan_akshay_plan_009_features.htm
A PDF printout of the page in this link is here.
Observe the table on top of Page 2 of this PDF file.
For Rs. 1 lakh price, anyone retiring at age 60 can get a annual pension Rs. 9350/- ( constant and guaranteed for his lifetime )
Since Mr. Ram has Rs. 12,49,263/- with him ( I am assuming that the amount accumulated in his EPS account is given back to him on retirement, but as per the rules this does not happen ), let's calculate how much annual pension he can get from LIC. We use the premium calculator available on LIC's website to do this.
1. Go to this link. http://www.licindia.com/premium_calculator.htm
2. Choose Jeevan Akshay from the drop-down.
3. Press on 'Select Product' button.
4. Enter date of birth as 31/12/1947, so that he is 60 years today.
5. Enter purchase price as 1249263 (the amount accumulated in Mr. Ram's EPS)
6. Annuity type is" Annuity payable for life"
7. Annuity mode is yearly.
8. Press on Calculate premium button.
The annual pension is shown to be Rs. 1,21,803/-
This translates into a monthly pension of approx. Rs. 10,000/-
What a scam!!!
A person who deserves a monthly pension greater than Rs. 10,000/- is paid only peanuts ( Rs. 3250/- ) by the EPFO.
This is a scheme by the Govt and for the Govt, to cheat people of their retirement money. Anybody who has the option to take money out of EPS scheme and purchase annuity on his own, will get three times the pension he gets from EPFO.
PS: EPS rules can be found at this link
http://www.epfindia.com/Circulars/EPS95_update102008.pdf
Disclosure: I am not an accountant or CA and the above calculation is as per my understanding of the EPS rules. I am writing this post so that an qualified CA can comment on the above, whether my concerns are genuine. If you know a CA or accountant, please pass this blog post on to him and ask his opinion on it.
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