Insurance and Investment: Don't mix!!

When we go on one of those BRO roads in the border areas, we often encounter the road signs warning us : DRINKING AND DRIVING, DON’T MIX. I want to give out a similar warning to all of the faujis: INSURANCE AND INVESTMENT: DON’T MIX!! I will just quote a recent anecdote to substantiate my point.

One of my NDA course-mate, an Air Force Gp Capt, is shortly quitting the services. Since his insurance cover will be almost down to zero when he leaves, he decided to go in for an insurance to cover his life-risk last week. An LIC agent convinced him to take a ‘good’ policy which will NOT ONLY GIVE GOOD COVER BUT VERY GOOD ‘RETURNS’ TOO. The policy, called ‘Jeevan Anand’ was subscribed for him. He is to pay Rs 60,000/- premium per year for a cover of Rs 7.5 Lakhs. The policy is for duration of 17 years, at the end of which he is to get back double the sum assured (sum assured + bonus, likely to be same as sum assured), ie, Rs 15 Lakhs. It was, thus, projected as a win-win situation for him as he was going to be insured through and through, while he gets back 1.5 times of the premium paid by him if he survives.

When he narrated this to me, I assured him that it was a win-win situation all the way – for his agent, but not for him. His agent was to get a commission of 25% of the premium (Rs 15,000/-) on his policy in the first year, 7.5% (Rs 4500/-) in the 2nd year, and 5% (Rs 3000/-) per year for the balance of the years. Thus, the agent gets a total of Rs 64,000/- in commission (not counting the inflation adjusted value of the present money) due to this single policy. Obviously, his interest is to push such policies which fetch him good commission than the low-commission one which are actually beneficial to you.

To illustrate my point, I gave him a straight example of a pure Term Insurance product. Had he gone in for LIC’s Anmol Jeevan-1 policy, the same cover for the same period of time would have cost him a mere Rs 8,510 per year!! If something happens to him, his survivors get the sum assured of Rs 7.5 Lakhs + the bonus accruing on it which depends on the length of time for which he is in the scheme, same as the scheme sold to him. If nothing happens to him, he gets nothing – something like car insurance. But then he saves Rs 51,490/- per year. This amount, if invested for 17 years in a very safe place like the PPF or his DSOPF on a monthly basis (easier on the pocket and better too), fetches him Rs 19,91,000/- and Rs 30,06,000/- if put in very good 5-Star rated mutual funds (assumed return a very conservative 12% per year) with minimal risk associated with them.

However, the agents will NEVER ever mention term insurance (LIC’s Anmol Jeevan-1 is term insurance policy) to their gullible clients since they get hardly any commission on it. However, term insurance is the way insurance was supposed to be, till the insurance companies got greedy and made it complicated by combining it with all sorts of ‘returns-back’ products. Now, even the clients have got so used to it that they themselves ask – how much returns will they get from that policy, without realising the honey-trap they are walking into.

Tailpiece: If you do have to go in for insurance, take only Term Insurance (LIC’s Anmol Jeevan, ICICI’s Pure Protect, etc). Balance of the money, of which there will be plenty saved, can go into much superior investment products.

Remember, combining insurance with investment is actually, willingly taking worst of both the worlds!!

Inaugural Post : Hum Fauji blog - the wealth creator for faujis

I, Col (retd) Sanjeev Govila, have created this blog as a link to my website www.humfauji.com, two days after taking premature retirement (PMR) from the Indian Army on 31 Mar 2010. This blog is to act as a direct link between the website and the visitors in a very informal manner - something that a medium as formal as a website can never do.

The very first thing that I wish to write on this blog is the reason why I have created my company and taken this 'Initiative' which, as far as I know, has not been ever attempted earlier.

My initiative through my company 'Hum Fauji Initiatives' is to create a medium through which I can provide financial stability to the otherwise chaotic lives of us faujis. Throughout my almost 27 years of fauji career (31 years, if NDA and IMA are also included!!), I have seen a general apathy towards something as fundamentally important to us as management of our own hard-earned money. Though the trend is thankfully changing, but just about so. The dominant view still prevalent in the fauj is that we officers should not indulge in something as petty as management of money. Somebody indulging in shares or property is still looked down upon, though his wealth so created is looked at with jealousy - a sheer dichotomy indeed. But apart from a problem of our own mindset, there is a real problem related to our professional hazards too.

The way we move around every 2-3 years or even earlier, and the kind of places we get posted to, there is no real financial help available except one odd LIC agent, who, with his very limited knowledge (but good oratory skills), makes us believe that an insurance policy is the best saving instrument under the sun. Consequently, many of us have a large number of insurance policies of all hues. And by the time we realise (if at all!) that we have have been saddled with lemons, there is not much that we can do. I have always maintained that, as Class I Gazetted officers, we have a fairly good pay which can easily ensure that we lead a good life while in service as also after our retirement. However, what is required is its good management. This last part is what we are neither able to do ourselves nor able to get good help to do at a resonable cost.

The last two words of 'reasonable cost' are very important. There are any number of portfolio managers available especially in large metros who are scouting around for HNIs (High Networth Individuals). Though competition has ensured that they are ready to manage portfolios worth just about Rs 5 Lakhs too, their expenses are so high that most of us would just cringe back. The question is - does it really cost so much to manage anybody's portfolio? My calculations have shown that it is merely a case of unlimited greed and hype around Portfolio Management Services (PMS) that these people charge so much, which puts it well beyond the reach of middle class - in fact, the class that needs such services the most.

This brings me to the reason why I decided to launch this 'Initiative'. I have seen so many proud faujis in my life who lead great lives as long as they are in service and have got all the fauji facilities. But the day they retire, they are literally out on the streets. Many of them don't even have a single house and they regularly dip into their retirement money for routine expenses. What happens a few years down the line is just a nightmare. Consequently, just to make ends meet and to discharge their balance of responsibilities, they have to work till late into their retired lives. At times I have seen many such retired officers take up jobs which definitely are low and unthinkable by any standard. A little financial prudence during the service or sane timely financial advice would have easily avoided such a situation. I have decided to take up this challenge and offer financial services targeted solely at faujis at rates which just about meet my costs. Of course, I aim to survive myself by generating volumes - hoping that people will realise the wisdom in what I am attempting to do and my noble intention behind this risk that I am taking for myself. Though approved for the next rank of Brigadier myself, I have refused it just to be able to fulfill my long-standing ambition of giving back to this great institution of Indian Army in a small manner, what I have got from it in plenty in the past 30 years or so.

I have tried to be as accessible as possible - through landline, Cell-phone (Voice as also SMS), website, email and this blog apart from the usual letter by snail-mail. I aim to make available the entire range of professional financial services - wealth accumulaion, planning for children, retirement planning, mutual funds, property across 25 cities, Income Tax returns through GHQ(IT) Pune and insurance - but the main thrust of my company remains the long-term goal-based financial planning which, through a system of regular though small investments, makes sure that you get the minimum two houses before you retire, get your children the best of education, and a comfortable retirement and other goals if you start early enough. My team, which consists of experts in almost all the fields that are connected to a fauji's finances, is able and dedicated enough to ensure a quick delivery of all that we promise.

I hope that I am able to achieve what I have dreamt all these years and able to make a difference to the lives of my brethren in fauj!!