Are Money Back Policies "PRODUCTIVE" ? ? ? ? ?

By -
.

INSURANCE COMPANIES IN INDIA

‘Save a little money each month and at the end of the year, you will be surprised at how little you have’ – Confused??? Aren’t you..... Time and again, financial advisors have propagated the rewards one can reap by saving little by little. And here, we are contemplating otherwise!!! Well, you need not be Ernest Haskins to believe the truth behind this aphorism. Simply analyse the returns likely to accrue from the money back (insurance) policy you have invested in, and the above adage would flash like a golden truth, literally.

Money back policies are one of the most traditional insurance cum investment policies and have been widely promoted and distributed by the INSURANCE COMPANIES. Unlike a regular endowment plan, where the policy amount (sum assured) is receivable either on death or at the end of the policy term, money back policies ensure that the survivor receives a certain percentage of sum assured regularly during the term of the policy. This ensures periodic cash inflows in the hands of the survivor to meet various financial needs that might crop up with time.

The unique selling point (USP) of this product however lies in the fact that in the event of the unfortunate death of the insured, the nominee shall be eligible to receive the entire sum assured irrespective of the payments already made as “MONEY-BACK”. To simplify this USP, assume a 30-year old youth with a money-back policy of Rs 10 lakh for a period of 20 years. Now assuming a 20% pay-out (of the sum assured) every five years, this individual would have received Rs 6 lakh by the end of the fifteenth year, with the remaining Rs 4 lakh to be received on maturity. But if the individual dies before the end of the 20th year, the nominee shall be entitled to the entire sum assured of Rs 10 lakh, resulting in total pay-out of Rs 16 lakh by the insurance company.

Sounds interesting, really, but probably for those who wish or plan to die early in life leaving their wealth for their heirs to enjoy! And for those who are in no hurry to meet the ‘Yamraj’ , a little pondering and analysis of the premiums payable on money back plans would help to structure their prospective investments.

Money back policies are probably one of the costliest traditional insurance produces available in the market. And this is obviously because the insurance companies are unable to milk the premiums received by them for the entire investment tenure. To have a gist of the cost structure of a money back policy - a simple 20 year money back policy from LIC calls for a premium of over Rs 6,300 per one lakh sum assured for a healthy individual aged 30 years as against Rs 4,900 charged by a pure endowment plan. A term plan, on the other hand, shall be available at 1/20th of this cost.

Thus, though money back plans are usually promoted as schemes taking care of both insurance and investment needs of the insured, a deeper look into these schemes is bound to unsettle the investors. An ETIG study of 10 popular money back policies reveals that the sum total of premiums paid during the entire policy tenure are either higher than or equal to the total receivables from these schemes. This is despite the fact that most of these schemes promise guaranteed additions upon maturity (See Table).

While we have not considered the proportion of variable pay-outs or bonuses which may be declared by the INSURANCE COMPANIES from time to time - as the same are not guaranteed - even if the same are incorporated , they are not likely to make a significant difference to the probable pay-outs by insurance companies. Thus, while these money back schemes do justify their insurance features, they grossly fail to answer the thesis behind the investment structure of the policy. An investment, after all, implies growth of capital and not its diminution.

The insurance companies are likely to argue that since they periodically repay a part of the sum assured, the same can then be reinvested by the investors in other investment avenues. While the point is valid and well noted, it definitely calls for a counter argument.

If the investor ultimately has to seek other investment avenues in the middle of the policy tenure, why not do so in the beginning itself and invest the amount in instruments that yield returns rather than use it for paying premiums. And as far as the insurance needs are concerned, a pure term plan would do just the same at a premium, which is nearly 1/20th of that paid for money back.

(A term plan from LIC would charge Rs 3,227 per annum for Rs 10 lakh policy vis-àvis Rs 62,796 per annum levied by a money back policy.)

The hefty premiums demanded by the various insurance cum investment policies make one ponder over the productivity of such investments. While both insurance and investment are equally important and need to be provided for fairly early in life, it is advisable to split the two objectives. Let insurance companies take care of insurance needs and there are opportunities aplenty as far as investments are concerned.

P "SAVE TREES" ... Please Don't Print This Unless Must .... "MAKE IT GREEN"

Popular posts from this blog

Kayastha

By -
Image
.                                       Chitragupt Maharaj                           Progenitor of the Kayasthas                        Left: Devi Sudakhina and four Sons, Right: Devi Iravati & Eight Sons   Kāyastha   or   Kayasth   ( Hindi :   कायस्थ ) is a   caste /ethnic-group of India. They are the only sect who are referred to as direct descendants of a Vedic God in the religious texts and the only ancestor worshipping sect of Hinduism also called Chitranshi/Devputra [1] . They are said, in the Vedas   and   Puranas , to have a dual-caste status i.e.   Brahmin   and   Kshatriya . They are mainly spread across   North India   and are a sub-sect of Brahmins   whose ancient profession was writing   [2]   [3]   [4]   [5] The Sanskrit dictionary at   Hindunet.org   defines Kayastha as follows: ka_yastha, ka_yata   a man belonging to the writer-caste; a tribe of bra_hman.as whose employment is writing (Ka.)(Ka.lex.) . BRAHMINS   by vedah.net   is an arctic
Read more

All About GOA

By -
= = = = = = = http://www.bits-goa.ac.in/About%20BPGC/BITS%20360/index.html Goa is India 's smallest state in terms of area and the fourth smallest in terms of population . Located on the west coast of India in the region known as the Konkan , it is bounded by the state of Maharashtra to the north, and by Karnataka to the east and south, while the Arabian Sea forms its western coast. Panaji is the state's capital. Vasco da Gama is the largest city. The historic city of Margao still exhibits the influence of Portuguese culture. The Portuguese first landed in Goa as merchants, in the early 16th century, and conquered it soon thereafter. The Portuguese overseas territory existed for about 450 years, until it was annexed by India in 1961. Renowned for its beaches , places of worship and world heritage architecture , Goa is visited by large numbers of international and domestic tourists each year. It also has rich flora and fauna , owing to its location on the West
Read more

Steam Engineering.

By -
Image
. http://www.spiraxsarco.com/resources/steam-engineering-tutorials.asp   These tutorials explain the principles of steam engineering and heat transfer. They also provide a comprehensive engineering best practice guide covering all aspects of steam and condensate systems; from the boiler house and steam distribution system up to the point of use; through the condensate recovery system and returning to the boiler. Virtually all major applications and products are discussed. 1.        Introduction 2.        Steam Engineering Principles and Heat Transfer 3.        The Boiler House 4.        Flowmetering 5.        Basic Control Theory 6.        Control Hardware: Electric/Pneumatic Actuation 7.        Control Hardware: Self-acting Actuation 8.        Control Applications 9.        Safety Valves 10.     Steam Distribution 11.     Steam Traps and Steam Trapping 12.     Pipeline Ancillaries 13.     Condensate Removal 14.     Condensate Recovery 15.     Desu
Read more