As Charlie Munger, Warren Buffett’s partner for over 50 years quotes “If you mix raisins with turds, they‘re still turds”. This is typically what happens when you mix investing along with insurance.
Some of these products get garbed and sold to gullible investors, especially parents as Assured Return/Guaranteed Return schemes in the form of Child Protect/Wealth/Education, etc. by the Relationship Managers (‘RMs’) or agents. However, the RM or the agent NEVER tells the return which the investor would generate every year for his investment horizon.
A typical conversation goes something like this:
RM: “Ma’am, considering that you have a child, you may want to secure her education when you are wanting to send her abroad for further studies. How old is she?”
Most Indian parents would be overwhelmingly agreeing to this!! Who doesn’t need a FOREIGN DEGREE “THAPPA” for their children??
Parent: “She is 11 years old”
RM: “Oh great!!, considering that she is 11 years old, you can look at an investment horizon of 10 years. She would have completed her graduation by then. A large kitty when she is 21 years old will enable her to pursue her dreams in any of the Ivy-league colleges outside India.”
Parent: “Sounds great, can you suggest some plan or somewhere I can park funds, but I need Assured Returns, I don’t want to risk this by investing in something which I don’t understand!!
RM: “Sure, I completely understand Ma’am. This is something which obviously needs to be very secured. Any of the Ivy-league colleges will cost at least USD 200,000 ~ INR 1.5 crores; so, your investment corpus should be approximating to that amount in 10 years from now.
This XXX plan is great. It not only gives you your desired amount at maturity, it also provides you insurance coverage of 10 times of your yearly premium amount.
Premium payment?? How come? Wasn’t this supposed to be an Investing product to begin with?
Parent: “How much do I need to invest?
RM: “You need to invest USD 16,276 ~ INR 12,20,681 every year for the next 10 years“
The parent obviously never calculated that investing the above amount translates to a return of a meagre 4.5% per annum for the next 10 years!! That’s it!! Lower than Fixed Deposit rate in few cases. But who cares (RM of course does!!) and who calculates!! The parent feels happy that he would get at that amount mostly for his child, hopefully plus an added protection of INSURANCE!! This has been garbed as a Child Protect/Wealth/Education scheme after all.
This is exactly what happened to my friend when she visited one of the banks 5 years back. The return from that Investing scheme (oops, sorry!! Insurance product) has been a paltry 4% p.a. and the RM has been gunning to sell something similar, more exotic sounding once again!!
After all, who doesn’t want to skim the cream!
So, where we go from here? Simple, Treat Investment and Insurance separately.
In the above example, if you were to separate the yearly premium of USD 16,276 into 2 distinct components, i.e. Insurance and Investing, you would tend to get optimized outcomes.
Quick calculation below:
- Put 15% of yearly USD 16,276 into Insurance: USD 2,441 ~ INR 183,000 into TERM Insurance: Yearly premium of INR 183,000 translates to insurance protection of approximately INR 18.5 crores, i.e. ~ USD 2.5 million, far cry from the insurance coverage of ~INR 1.22 crores, i.e. ~USD 162,000 of insurance coverage in the first garbled scheme.
In fact, if you were to take a pure term insurance protection of INR 1.22 crores, the premium outlay would translate to less than yearly premium of INR 25,000 ~ USD 330 for a 40-year old!!
- So, now with USD 15,946 to spare (USD 16,276 – USD 330) to invest on a yearly basis, investment value at the end of 10 years conservatively @ 12 % p.a. translates to ~USD 280,000, i.e. ~ 2 crores as against ~ 1.50 crores in the first “Raisin + Turd” scheme
So, now you know, it’s best to separate turds from Raisins. After all, you get rewarded optimally both from an insurance and Investing standpoint!!
Disclaimer: Please note that these are my personal views. While I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.
I did the mistake when I was 19 years old bought Jeevan Anand policy from a relative. He sold it with a promise of 9% CAGR returns, The govt yield at that time was 10% Plus. After paying a premium for 16 years and learning more about investments I realized that it was value-destroying and stopped further premium. I cancelled my policy, LIC paid me only the principle without any interest, yet I calculated I would be better off investing it in a 10% CAGR product for next 12 years instead of investing it with LIC.
LIC is the single most value-destroying investment company in India. People have invested 25 lack crores with them and are getting a partly returns of 4%. Whole life and endowment policies are sham. They are always miss-sold to people who don’t know much anything about investment. The selling pitch is the money is guaranteed by the GOI.
IRDA should only allow people to buy term policies. Insurance companies can offer other investment separately mentioning the ROI clearly.
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