Employer paid insurance

In India most employers have a generous life & health insurance cover for their employees. However is it good enough? Are employees over cautious when they purchase a separate personal cover? On one hand there are several government and manufacturing industry employees who don’t switch jobs because of the retirement benefits, medical and insurance cover provided by their employers, while there are so many fresh graduates who don’t pay any importance to these perks (if they even do exist).

The issues with employer insurance are:

1. It is not enough. An adequate cover should take take of the entire present value of the family’s obligations (debt, housing, kids education, medical, food etc.) less the accumulated (or inherited) assets. A single blanket cover is often not good enough.

2. What happens if you loose your employment status due to a a prolonged illness/disability which renders you unfit to continue to perform your official duties. Hence this privilege/perk of insurance is revoked?

3. It is not portable. i.e. the benefits cease to exist when you switch companies (voluntarily/ involuntarily) , your employment status changes from full time to part time etc.

4. It is not guaranteed. It is considered as a perk and the company could change the cover/suspend the policy at its whims. Even most reputed company often switches between insurance providers or the fine print terms/restrictions on the insurance. This puts your long term risk coverage goal at a risk.

Hence it is often advisable to supplement your employer paid insurance with a personal cover of term insurance. Also medical bills due to prolonged illness/critical care often ruins even the best planed finances. It is advisable to have a separate rider to cover for the situation where the breadwinner starts to drain the family’s equity.

Title Insurance

With the way the property prices are going, everybody in India wants to invest in property. I have a few MBA batchmates who are knee deep in student loans, but are already checking out properties in and around Bangalore.

Apartment structure depreciates over time so many of the smart fellows want to invest in land/plots. However their investments are hindered by 2 reasons:

1. Squatters: illegal occupation/land-grabbing.
2. Legitimacy of the transaction:
a. It is not uncommon that a fraud sold you the land without the knowledge of the owner.
b. The legal owner sold the same piece of land to multiple persons and disappeared.
c. The ownership is disputed. There are siblings (usually sisters) who have claim over the property and yet were not paid the proceeds.

In the USA, there is a concept of title insurance which a person can buy and it secures them against ownership disputes. I could google for some commercial property where the title was insured. However I wonder why the insurance companies do not sell title insurance. Also it would be good if some institution can guarantee the land against squatters. This could turn into a huge business proposition.
Right now gated communities/plots offer some kind of security. There is a community boundary wall with enough security to prevent squatters. Also the builders who create and sell these plots use their brand name to provide an implicit title guarantee.


Insurance Scam

Ever wondered why your doctor/mechanic asks for insurance before treating your/your car?
Let me illustrate.
Here is what happened to me 2 weeks ago.
My car (maruti alto k10) developed a problem because some rain water seeped inside its clutch. The mechanic (maruti authorized service center) was ready to repair it in 2 hours and would cost me 150/- and 350/- to tow the vehicle. He additionally recommend me to get my upholstery cleaned which was smelling due to water stagnation.
Since it was a brand new car, and the cleaning of carpet would take 2 days, I thought of claiming insurance (Tata AIG)

Net result was that instead of the 2000/- that i had to clean for the entire process:
The total mechanic bill came to: 5200/-
Insurance paid 2500/- (3000/- – deduction of 500/-) and I had to pay 2,700/-.
On top of it, I lost no claim insurance bonus worth 1500/- and had to shell out another 300*7 days = 2100/- for autorichshaw charges to commute to my office. (even if i deduct for the fuel, i lost 1000/- and an added inconvenience of 9 days)

without insurance
mechanic: +2000
Myself: -2000 – 450 (auto – fuel) = -2450 and I would have got my car on the 3rd day.

with insurance
insurance company: -2500 + 1500 (no claim bonus) = -1000/-
mechanic: 5200/-
myself: -2700 – 1500 (insurance) – 1050 (auto) = 5250/- and I got my car on the 9th day.

During my MBA classes, I was told that options, like insurance, are a zero sum game. No wealth is created and it is just transferred from one account to another. (usually from the client to the broker)
Out here, it seems that the only person who gained was my mechanic.

You could have argued that I should have contested the excess charges. Well when one claims insurance, the mechanic provides you with itemized billing and with physical and photo graphical evidence of all the work he/she does. So it becomes very hard to contest.
I have heard of so many cases where some hospitals also inflate the bills when the client has insurance.

I wonder when will the customers realize that because of this malpractice, their insurance premiums are higher. Hence it is they who ends up paying 2-3 times for the same service.

Personal Financial Planning

A friend asked me yesterday how one should plan his/her finances. At what stage in life where should the money go and how best to plan my taxes.

After spending a couple of hours listening to his idea, this is what we came up with:
1. Don’t confuse investments with tax planning. First decide in which financial instrument you want to park your money. This is because whether you want insurance, property, FD/bonds or mutual funds, there is always some tax saving instrument to help you.

2. At any given point of time have liquid assets to cover for 6 months of expenses. This could be parked in savings bank, or FDs or other financial instruments that can be prematurely encashed instantly without attracting much penalty. This cash often comes handy when you are between jobs, during emergencies esp. medical and when family/friends need you. I strongly advise that an individual should not dip into it and also refrain from any long term investments until this reserve has been created.

3. Work towards reducing your loans. If you have a education loan which costs you more than the Bank Fixed deposit (even after accounting for the tax break it provides) then it is advisable to retire it before doing any financial planning.

4. I would recommend you to keep your personal finances separate from that of the parents. However, what good of is all the money if it is not there for those who need it, when they need it. If your parents/family needs money or has taken a high cost debt, work towards retiring that.

5. After taking care of all these, I would recommend you to read this amazing book “Rich Dad, Poor Dad”. This simple book gives a remarkably different insight about how one should classify various assets and investment options.

Now some serious stuff……. 🙂
6. FDs are a good place to park the money. You can be sure that your money is safe and will be there when you need it. However the returns this generates is hardly sufficient and inflation eats into it. Hence One should invest in the Stock Market linked instruments (Shares, Mutual Funds, ULIPs etc.) Early on when your savings are small and risk appetite sufficient, then one should park upto 50% of the money these instruments.
However it is also advisable to reduce it as you age. The best way I found is to put an artificial cap of 3 years of Salary on your Market portfolio. 3 years of salary is large enough that it will be a substantial part of your investment. Yet at 15% p.a. expected returns, it won’t be able to generate half of what you earn from 8-10 hours of labor. Hence the market performance will not be a major distraction from work.

7. Now comes property/home: Some people who want to take less risk want to buy a property immediately after graduating. However I would recommend you to push off this decision by a couple of years. The reason for this is that even if land prices don’t fall, it often involves taking a EMI on floating rate. With EMI payments exceeding 50% of the salary, the financial flexibility one has to cope up with unexpected events is severely limited. Once you have sufficient savings and/or a working spouse, then investing in property is advised.

8. Insurance: It is one of the most mis-sold financial instrument. An insurance is neither an investment avenue, nor a tax saving instrument. It is taken to enable a person to take care of the unexpected. The best times in life to buy a life insurance are:
a. When you take a long term loan (for property/education etc.)
b. Marriage (esp. to a non working home-maker)
c. Planning for Kids
Also whenever possible, please buy Term Insurance (huge insurance cover for a small premium) and medical insurance.

So to summarize we have covered liquid assets, market linked portfolio, property and insurance. Last is tax.

9. Most tax savings happen under 80c. If you buy an insurance, its contributes under this segment.
If you plan to go for bonds: then NSC, Infrastructure bonds, PPF are few of the avenues
If you want to invest in market then ELSS (Equity Linked Savings Scheme)
If you want to invest in property then Home Loans give you tax shields.
Hence you should first look into what lock in period you are looking for and what risk/return profile you fall into and then select the tax saving instrument accordingly.

I hope this really long and boring post helps. How different is your investment philosophy?

Home Loan Insurance Vs Term Insurance

For most people, the Home Loan EMI is the single largest monthly expense. With the interest rates getting revised, often the wifes are forced to continue employment just to be able to run the household. Hence Home Loan Insurance is a very good scheme. It allows your family to have a house over their head even after you are gone.

However, I would advise people to go for term insurance rather than go for house loan insurance. Reasons
1) Term insurance cover remains constant for the entire period.. While after each EMI, the housing loan cover reduces. Although the insurance companies claim that they take care of this difference by reducing the premium amount, but if you do the maths and take into account that the insurance premium increases as you age, you will find that the deal is not good enough.

2) Interest Rate fluctuation: Rise of even 0.5% of interest rate would increase the EMI term for additional year, however this insurance does not give you any insurance cover for those EMI. On the other hand if the interest rate falls and the period of the loan gets reduced, the refund from the insurance premium is minuscule. (thanks to their service charges.)

3) Foreclosure: Most of us agree that even though we take a housing loan for 15-20 years, there is always a chance that we will have to foreclose… Reason could be because you have made enough money to pay of the loan dues and save on interest, or because you want to sell the house (move to a different city/bigger place) or you might to switch the loan from one bank to another… In event of foreclosure, the home loan insurance is void.

4) Full fledged term insurance gives you an opportunity to have all the additional extra benefits like disability, critical illness etc… which are not covered in the home insurance.

Hence, although I strongly recommend a person to go for a insurance the moment he takes up a long term financial commitment like housing loan (or marrying and promise to pay the wife’s shopping bills), its best to make it a plain vanilla term insurance rather than an exotic scheme like this. This scheme might look cheaper on the first glance, but due to limited benefits, it only reduces the flexibility.