The title sounds cool, doesnt it?
Yesterday, i received an email from an online Insurance Quotation website that said “Get Rs. 2 Crore Pension for just 8K pm“. As always, i was curious and opened the email.
Part of the email looked like below:
I clicked on the “Know More“ buttons for either option. Wouldnt you? As salaried individuals, A Crore is a hugeeeee sum of money and the prospect of becoming a Crorepati was more than Inviting. When i clicked on the buttons, the first shock hit me...
The Page which opened on clicking the “Know More“ button for the 1 Crore Pension said Total Returns = Rs. 66 lakhs
The Page which opened on clicking the “Know More“ button for the 2 Crore Pension said Total Returns = Rs.1.36 crores
Now tell me, wasnt the title totally misleading? The advertisement has offered a Return of 1 and 2 crores respectively, while the actual policy mentions projected returns as 66 lakhs and 1.36 crores respectively. The best part is, there is a disclaimer which says, the actual returns may not be that much. Where is 1.36 crores and where is 2 crores? The best part is, in either cases the 66 lakhs or 1.36 crores can be achieved only if we invest in the full Equity orinted fund option which is extremely high risk. If you chose a balanced or a debt oriented fund profile, the returns would be much lower than what is projected in the ad.
This is the kind of mis-selling of Insurance policies that I have always talked about. It was even one of our Financial Resolutions for 2012. To know more about the resolution click here
Ok. As the usual curious cat that I am, I proceeded to read the policy details to really see if the fund can atleast return the amount as promised in the website (I forgot the advertisement email)...
Both of these pension options were for the same Unit Linked Insurance Plan offered by a prominent Insurance Company.
Note: Guys, I am not taking either the name of the Insurance website or the Insurance company in this post. I dont want to criticize anyone. As Investors it is upto us to be vigilant and cautious. If someone fools us, it is our fault and not the other guys. If we were careful, it wouldnt have happened in the first place. Wouldnt it?
Lets take the 2 Crore Advertisement and Analyze it. The Plan is as follows:
1. I Invest Rs. 1 lakh per year for 5 years making a total investment of 5 lakhs
2. I can select from a variety of investment options that range from fully debt oriented to fully equity oriented (The Returns in the examples in the policy advertisement are based on a full equity oriented option which is extremely high risk)
3. I get an Insurance Coverage/Sum Assured of around 30 lakhs - In case anything happens to me in the next 30 years, my family will get a guaranteed amount of 30 lakhs or the existing Fund Value, whichever is higher
4. Partial Withdrawals are allowed after a full 5 years of paying the premium
5. Tax Benefits under section 80C for upto Rs. 1 lakh (Assuming you have no other investment that will give you benefits under section 80C)
At the outset, if I see, I am investing a total of 30 lakhs over a period of 30 years and at the end of which, they are projecting (Not Promising) Rs. 1.36 crores.
Below is a table that would show how our investment would progress if the Rs. 1.36 crores is to be reached by this policy.
|Year No.||Invested Amount|
|Rate of Interest(%)||Interest Earned this year|
|Fund Value at the end of the year|
Do you reall think, any Investment can generate a nearly 12.5% rate of returns consecutively for 30 years? The Stock Market is known to offer returns in excess of even 20% or 25% but, consecutively for 30 years? Practically not possible isnt it?
Ok, lets get down to further details.
Fee’s Associated with the Policy:
The following Fee’s are applicable on the policy:
1. Premium Allocation Fee - 6% for the 1st year, 4% for year 2 to year 5, 0% from year 6 onwards (If premium is less than Rs. 1 lakh, there is a 2% premium allocation fee from year 6. But, in our case, we are going to pay premium only for 5 years. So there is no fee.)
2. Fund Management Charges – 1.35% of the fund value per year
3. Policy Administration Charges – 0.1% of Premium or Rs. 400 whichever is lower. In our case Rs. 100 every month.
4. Mortality Charges – Around Rs. 1.4/- for every Rs. 1000/- Sum Assured per year. In our case the Sum Assured is around 30 lakhs. So, this fee works out to Rs. 4200/- per year
5. Plus other fee related to Riders that you may choose
6. Service Tax and Educational Cess
So, if we factor in all the fee that we may have to pay for this policy, the net returns our policy has to generate will go much higher than the initial 12.5%.
Coming back to the title “ Can you Really Get a 2 Crore Pension by Investing Rs. 8000/- per month?“
Even if we assume that the full1 lakh we invest is invested, the fund has to generate a returns of nearly 15% every year, without fail for 30 full years to achieve the elusive 2 crore pension mark. Unfortunately, there is a host of fee that will eat atleast 2-3% of your investment every year which means, your fund has to earn that much more extra interest to achieve the 2 crore mark.
Realistically speaking – any good fund manager will be able to generate an average returns of around 9 - 10% if we consider the market ups and downs. When the equity markets are good, the returns may go up to even 25% and when the markets are bad, the returns may fall to even 0% or worse, generate losses.
Are you thinking this? “Anand, in the initial paragraph, you have mentioned that there is an Insurance Coverage/Sum Assured of around 30 lakhs. So, what kind of returns must the policy generate to meet that number?“
Well, in the previous paragraph, I have mentioned that the realistic rate of returns we can expect is around 9 - 10%. In order to achieve the 30 lakh sum assured, the fund would have to generate a return of around 7% every year. This is a realistic number and quite possible if the equity markets perform well for atleast 15 of the 30 year investment period.
As a whole, the policy looks like a decent investment if we consider the realistic returns of 10%. At such a rate, this policy will grow to around 60+ lakhs at the end of 30 years. Considering that you only invest 5 Lakhs in the first 5 years, this is very good returns. But, if you are someone who dreamt of the 1 crore or 2 crore pension after seeing the Advertisement, this policy is not for you.
Some Last Words:
As I have always said, being vigilant and cautious should be your NUMBER ONE RULE when it comes to making investment/insurance decisions. Be Cautious, Do your Homework, Ask Experts and Expect Realistic Returns from your investments to avoid Disappointment...
Happy Investing Folks!!!!