Cheap Online Term Policies - Our eternal quest for Free Lunches

Hi Friends,

It seems our logic goes out of the window when we perceive something to be very cheap (a clear indication of greed working overtime) and that generally becomes a starting point for an inferior decision making process.

Almost all the online term insurance policies are being sold either without riders or with nominal riders (like accidental death benefit rider) as if the companies want to avoid this uncomfortable question of “Why riders aren't given in online policies?”. 

They conveniently avoid critical illness rider (though some are offering a  stripped down version of the same), premium waiver benefit rider, total permanent disability rider etc.,

If a term policy can be sold online by writing software, it should not be too difficult to write a few additional lines of software and add the riders too to the online policy. Then why aren't the insurance companies doing it?

Interesting fact is, most of these companies while selling the online “cheap” term policy without riders, have a very costly offline “with riders policy”.

As an example, we may check the variation in premiums of HDFC life insurance Company’s online term policy(named “HDFC Life Click2Protect” ) and offline term policy(named “HDFC Term assurance Plan” ) by making use of the following link and toll free numbers

http://ops.hdfclife.com/ops/click2protect.do?source=W_HP_CMenu_T2P

Toll free numbers for finding the premium (of offline term policy - as I could not find the link to calculate the same on the company’s website) 18002669777 , 1800227227 .

We may find that offline term policy with riders would be Two to Three times as costly as online term policy.

Logic tells us that companies are not comfortable giving online term policies with riders at  or near the price point that they are offering now. 

The reason is, there is an insurance regulation / law, titled "Insurance Regulatory and Development Authority (Protection of Policyholders’ Interests) Regulations, 2002", that says "The allowable rider or riders on the product shall be clearly spelt out with regard to their scope of benefits, and in no case, the premium relatable to all the riders put together shall exceed 30% of the premium of the main product".

Please check the following link, to read the above regulation,

http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo50&flag=1&mid=Grievances%20%3E%3E%20Regulations

If the risk involved in riders has to be correctly priced-in, in the policy then the above condition necessitates that some of the price has to be transferred to the base policy premium. 

Hence, overall premium of the policy increases for those policies that offer riders. The higher the risk involved in a rider the higher will be the premium.

This condition is put in place, as the name of the regulation indicates,  to "safe guard policy holders' interest", by not allowing the companies to go bankrupt, as the law simply doesn't allow them to sell 'under priced' policies to 'beat competition'.

When insurance companies cut down the riders, they are not only cutting down the premium, but are also cutting down their risks significantly. Meaning benefits to the policy holder gets reduced significantly too.

An additional benefit for companies with online term policies is, they can attract a large section of people for whom "the only differentiating factor" is "price". Two birds with one stone. Good isn't it?

Insurance prices in every thing, even a company's brand gets priced in. It may be an emotional thing for us, but is a business for companies that sell it.

So, it is better that we pay a bit extra for a "quality product", rather than buying a "below par" product.

Online comparison sites offer data and there is no dearth of data these days. But, how we interpret the data is a matter of skill and that is where an adviser comes in to play.

One more question we have to ask ourselves is, we know that an agent / adviser is being compensated by us through fee / commission and is accountable for us. How are these online comparison sites being compensated ? Who are compensating them? How are they surviving?

No Free Lunches my friends.

Time cost of house / housing loan

Hi Friend,

Major investment in the initial days of one’s career for a majority of the salaried class will invariably be a house. 

It happens due to a variety of factors like pressure from family members, peer pressure, to save taxes etc.,

In most cases we need to take a housing loan to buy a house. 

Obviously buying a house by investing huge sums and also by taking a loan is a crucial financial decision, but somehow it seems that not many people evaluate financial implications / understand the financial implications of taking the decision properly. 

Let us check two major reasons given to buy a house and their veracity to understand the impact of buying a house so early in our career.

1. Financial Reasons: 

These mainly include saving taxes, rents etc., 

The logic being given is the rent that we pay will easily compensate the EMI and we will be left with the house in the end. People tend to forget the calculation part of it. 

A double bed room flat that costs Rs.45,00,000/- to buy would cost us Rs.15,000/-monthly (approx.) if rented. 

That is a rental yield (annual rent / apartment market value) of 4%. 

Wherever we are in the country, in a majority of cases rental yield would be in the range of 4 - 6%. 

To buy a Rs.45,00,000/- apartment, the down payment requirement will be around Rs.10,00,000/- and a loan of Rs.35,00,000/- for 20 years would result in an EMI of Rs.35,000/- (Approx.). 

Running the calculation on the following link would tell us the total amount that we have to pay for the loan.

http://emicalculator.net/

Even if we take an optimistic estimate of the value of the apartment after 20 years it would hardly beat the amount that we put in.  So, financially it may not be so wise a decision.

2.Emotional reasons: 

We certainly like to have a house of  our own for psychological comfort. But, one question that troubles me is that, are we really so attached to the house that we buy? 

If it is really the emotional attachment let us ask ourselves a simple question. Do we like to live in the same house that we bought in the initial stages of our career even after accumulating a wealth of Rs.20 crore or even more? My guess is, not many people would. Or is it the fear of losing money in other investment options that forces us to buy a house?

Whatever be the reason there is a cost associated with every financial decision. 

Let us try to find out the cost of buying a house early in one’s career.

A person(30 years of age) decides against buying a house:

Instead of taking a housing loan and buying house, let us assume, a person decides to invest the initial down payment of Rs.10,00,000/- in Equity based mutual funds until after he retires (say for 30 years). 

Let us also assume a compounded return of 17% (last 30 odd year return of SENSEX) on this investment. 

That would grow into a corpus of Rs.11,10,64,650/- . 

Please make use of the following link to do the calculations,

http://www.moneycontrol.com/planning_desk/planning_magic.php#

Another person(30 years of age) goes for housing loan: 

If a second person takes a housing loan, he will be left with little capital to invest as his / her initial earnings will be completely consumed by a housing loan normally. 

Let us assume the second person invests the same Rs.10,00,000/- after 20 years (after repayment of housing loan). 

He will be left with 10 years only until his retirement. 

At the time of his retirement with the same 17% return assumption he / she would get Rs.48,06,828/- .

The difference in both these cases is more than Rs.10 Crore and that is time cost of buying a house. 

We tend calculate tax benefits, saving in rents etc., but time can be really costly as the above example shows and should never be ignored in investment decisions.

As a majority of us ignore the importance of time, we tend to buy house so early in our careers and rob ourselves of an opportunity to be rich and financially safe. 

Shall we commit the same sin?

Happy investing.

Land reforms in India - Quantum of money that could flow in to Equity

Hi Friend,

Whether land reforms will be put in to practice?

Two of the biggest sources of parking capital are (Third one obviously is Business/Equity).

1. Banks
2. Land 

Had anyone of us predicted about 8 years ago that PAN card will be mandatory for crediting cash of Rs.50,000/- or more in Bank accounts? 

And that Tax department will have complete control on the banking data through core banking solutions? 

That is the impact of computerization and that certainly is happening in land records as well. 

So, it is not a matter of “Whether” but a matter of “When”? 

That is exactly the reason that I mentioned “over the next 10-15 years” in my earlier article.

Quantum of money in Land deals in India:

To understand the impact of anything we better have data. Take the example of Andhra Pradesh(A.P.) where Budgetary estimate of revenues due to registrations are approximately Rs.7,000/- crore for 2013-14. 

Please check the following link to know more.

http://www.thehindu.com/news/national/andhra-pradesh/registration-charges-shoot-up-in-andhra-pradesh/article4564665.ece

An income of Rs.7,000/- Crore is possible only if the transactions “as per government’s market value / registration value” are over Rs,1,00,000/- Crore. 

We all know that actual market value of land is much higher than the registration value and would be 4 to 5 times of the same or even more. 

Meaning, the quantum of deals could be Rs.5,00,000/- Crore or even more. 

But, we have not considered the deals that happen through “agreements” to avoid registration charges. 

If we consider all these transactions, actual real estate deals in A.P. could be in upwards of Rs.8,00,000/- Crore per annum.

There should not be an iota of doubt that there are much bigger real estate markets than A.P.(Like Delhi, Maharashtra, Tamil Nadu, Karnataka).

Considering the above, land transactions across India would easily cross Rs.50,00,000/- Crore per annum.

Quantum of money that could flow into Business / Equity:

Even if 10% of this money from land deals gets diverted into business / Equity (due to land reforms) that could be a diversion of Rs.5,00,000/- Crore per annum.

What Rs.5,00,000/- Crore investment in Equity / Business could do:

Rs.83,424/- Crore pumped in by FIIs (Foreign Institutional Investors) made the SENSEX jump from the rock bottom of 8000 to 18,000 in the calendar year 2009. 

Please check calendar year data from the following link,

http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii

Imagine what Rs.5,00,000/- Crore per annum could do then? 

We should see the big picture clearly. Then only we will be able to ignore daily market fluctuations and will have the courage to invest a substantial capital over the next 10 years to benefit from such huge capital flowing in.

Happy Investing.