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What are some of the mistakes of Indians that are destroying their financial lives?
The biggest mistake Indians do is we consider Insurance as an Investment. When I say Insurance it means Endowment policies, ULIP, Whole Life Participating policies, etc.
You should never ever ever ever consider Insurance as an Investment.
Grab a cup of coffee, this answer is long, a real story and an eye opener for you.
This is an incident which happened in June 2012, one of my colleague Mr. Ronad, we both were working in the same organisation and in one of our conversation during lunch he mentioned to me,
“You know Vipul, I have purchased LIC Jeevan Anand policy of 20 lakhs and agent told me that after 20 years the amount would be 45 Lakhs rupees.”
(By the way I call LIC agent as “Messiah”, that’s how you treat them)
I did some calculation on the fly and informed him that,
“It will not give you more than 6% returns which means that instead your wealth being appreciated, it is depreciating day by day and secondly forget about the returns you have constantly kept your family under danger.”
Below Image represents the returns of Jeevan Anand policy.
If you look at the returns of Jeevan Anand (It could be any traditional policy) it is a mere 6% and in past several years inflation was more than 6%. Which means your wealth is depreciating instead of appreciating.
His second question was “How is my family under constant danger in-spite of Insurance?”
I explained to him that imagine if something unfortunate happens to you, your wife will receive 20 Lakhs and so-called bonuses of another 5 Lakhs from LIC.
That is rupees 25 lakhs.
Now your wife doesn’t understand investment so what she is going to do, she is going to keep these money into fixed deposit.
I am talking about 2012 when interest rate were around 8%.
Considering this scenario his wife will receive rupees 2 lakh on 25 Lakhs of Sum insured at 8%.
i.e 25 Lakhs * 8% = Rs 2 Lakhs.
“If you divide this 2 Lakhs by 12 months that is 16,666 rupees per month.
Can your wife survive with Rs 16,666 for her life expectancy of 75 or 80 yrs of age?
Can your wife carry household expenses + Children education expenses with Rs 16,666?”
His answer was a big “NO” (I am sure your answer will also be a NO).
He asked me for a solution.
“The base minimum insurance required is your yearly salary multiply by 100 divided by the current interest rate.”
His salary was 15 Lakhs per annum which means 1500000 x 100 / 8 percentage i.e Rs 1.87 Cr.
But while doing financial planning all worst case scenarios have to be considered.
Interest in 2012 were around 8%, considering a what if scenario I told him what if tomorrow the interest rate comes down to 6%. (Now the interest rate is at 6%)
I replaced 8% with 6% and the Insurance amount required to him was 2.5 crore.
Again the same formula (15 Lakhs x 100 / 6%).
It was suggested to him to purchase a term insurance of Rs 2.5 Crore.
We had a scheduled meeting because of which we could not continue our conversation.
Next day, he told me, Vipul instead of 2.5 Cr I have purchased an insurance or 1.5 Cr.
I forcefully told him to purchase another 1 Cr of insurance because 2.5 crore was the base minimum insurance required to him.
Because we had not factored in inflation for child education, tax component from the proceeds of insurance amount, etc. etc.
He did not listen to me and as usual, Indian typical mentality “Kya Hoga Yaar kuch bhi to nahi hoga” (Nothing will happen)
In Sep 2014, my phone rang and I received the news that my same friend died in a swimming pool.
It was a shocking news to me.
I could not believe what I heard because he was a good swimmer.
A person who used to wake up at 5.00 in the morning, regularly used to do yoga, walking and occasionally swimming. How could he die?
He was just 38, in fact that’s the age to live the life at fullest.
I along with my other office colleagues reached at swimming pool, police was also present.
Police took his body for Post-Mortem at Bhagwati Hospital in Borivali,Mumbai.
I bet you will not be able to stay in post morterm room for more than 30 seconds, They cut the body like we cut a banana. It was terrible.
We received his dead body after few hours and cremated as per Hindu rituals.
His family kept a prayer after 13 days. I wanted to speak to his wife about Rs 1.5 Cr Insurance.
I didn’t had the courage to ask his wife, I mean how could you ask a woman whose husband died just 13 days ago.
I gathered some courage and finally asked her about the term insurance of Ronad.
To my surprise, she was completely unaware of this insurance policy.
I knew Ronad’s email and the insurance company from where he purchased the term insurance.
The challenge was as he died even the password died along with him, we recovered Yahoo email password through OTP stuff and finally the policy details.
Claim was filed while providing all the papers related to death which included panchnama, death certificate, post mortem report, etc, etc.
His wife received Rs 1.5 Crore cheque after few days and that was the day I realized the power of insurance.
After this incident, half of the office staffs came to me for insurance planning because they saw what happened.
This incident made me realize that such a casual advice saved a life of a widow, she will not have to beg in front of anyone, anymore. Imagine the scenario where she would have received Rs 25 Lakhs from LIC. (Can’t even think of it)
That was the day I started spreading awareness towards financial literacy. It gave me a goal in my life. (Majority of you don’t even know why you are living this life)
My mission is now to educate 1 Crore Indians towards financial literacy for which I started blogging, webinars, conducting seminar in society.
There are few societies which pay for tea, coffee and chairs while some don’t. Those who don’t, I pay from my own pocket.
What I learned and you should learn from this incident,
a) Messiah, be it LIC agent or any other Insurance company agent are behind their premium not behind your family security(Exceptions are always there).
b) Insurance is not an investment at all. Don’t do this wealth destroying mistake.
c) Do buy term insurance and secure your family in case of an unfortunate event.
d) All your bank details, Insurance details, Shares, Mutual Funds, email along with passwords should be known to 2–3 family members.
Why 2–3 family members, there are cases where entire family dies in a car crash.
My fight is against of Lakhs of messiah in India, I don’t know by which date I would be able to achieve my mission but I will continue my fight…..
I would like to end this answer with famous quote of Mahatma Gandhi
“First they will ignore you,
then they will laugh at you,
then they will fight at you,
then finally you WIN”
God Bless you
In case if you are looking for a life goal planner whom you can rely and trust,(more details in profile)
Edits : I sincerely thank you all your response to this answer.
Many readers have raised questions and I have tried my level best to answer their query
Your formulae seems to be incorrect. What if interest rate is 1%, say as in US, you suggest 100 times the annual income? At 2%, 50 times? One typically starts around 25 and retire around 60… so anything more than 30 looks like un-necessary. Also lower the interest rate lower the inflation and lower the expenditure… and vice versa… so having interest rate in denominator is flawed.
Ans : I respect your opinion
If the interest rate is 1% then it should be 100% because then only family will have the income in case of death of an earning member.
Further to your query,Insurance can be calculated in two different methods
1) Income replacement method and
2) Expense replacement method
Detailed calculation is almost impossible to explain here.
I also bought one LIC policy similar to above. I paid 5 quarterly premium of around 40 thousand each. After that I realized about this and I stopped it. Then I bought term insurance.
One question I have is, can I get that LIC money back?
Ans : If the premium paid is in 1st year, entire premium is gone
If premium paid is uptill 3 years, you will recieve 30% of premium paid
If it is more than 3 years please contact the Messiah you sold you the policy for surrender value.
One of my friends father dead with high term insurance policy, he still not get the claim amount because company is making different different excuses.
Ans : Most of the claims are rejected because people do not tell the truth while purchasing the policy
For Example : If you are a smoker and if you hide it from an Insurance company just for the sake of saving few bucks in premium, your family will have to bear the consequences
You also need to reveal existing policy details to both the insurance companies
For Example : If you are having 1 Cr policy for XYZ company and you want to purchase another 1 crore from ABC company.
Then inform ABC that you an insurance from XYZ company, after policy is issued by ABC, inform XYZ also.
You can visit insurance samadhan (search in google). It is an insurance Grievance redressal platform.
They charge only Rs 500/- and will not charge you till you win the case.
It is run by Mr Shailesh who worked in Insurance sector for more than 2 decades.
Disclaimer : I am no where associated with this company.
Great Job, if you need help with spaces for free, do let me know, a friend of mine has some cafe listings.
Ans : Thanks for the help, will get in touch with in case of any requirement
Don’t buy it from any one. Chances are the guy who has written the answer will charge commissions. Go to websites of ICICI Pru or Max Life Insurance and buy an Online Policy. Simple
Ans : It seems you are calling me out, I am not an insurance agent
Indeed I am a fee only financial planner which means I get paid for my financial advisory fee from individuals like you to recommend you the right product.
Since I am not associated with any commissions and only concerned with my fees I give unbiased opinion so that we both remain on same page.
Majority of you have asked How to buy term insurance, where should I buy term insurance, What should be the max age to buy?
What should be the max age to buy?
Insurance should be purchased till the time you are going to earn.
If you will earn till 60, purchased till 60 years of age.
There is no economic value after 60 years because in an unfortunate death your family’s income will not be impacted.
Where and How to buy term insurance?
Go to insurance aggregator websites likes coverfox or policybazar.
Select the sum insured, insurance company, check the quote,compare it with insurance companies website.
Where ever premium is low go ahead and buy. Am I right Naman Arya?
If you need a website, just connect with me, and I will provide you one free of cost. It is high time that people know, LIC is a nationwide scam.
Ans : Thanks Aritrim for the help indeed my website would be up in few days.
Can you share the details of Policy your friend purchased?
Ans : I do not want to share the details here in public forum as I do not want to be biased.
I have already mentioned how and where to buy insurance from.
Any particular term insurance plan that you recommend?
It does not matter which Insurance company term insurance you purchase, go with plain vanilla term insurance and do not hide anything from Insurance company.
Can you share the cheque photo to me or any proof of 1.5 core rupees credited?
Ans : Would you give me access to your bank account?
I didn’t knew one day I will post this incident on Quora else I would have taken a photocopy for you
I do not know the rationale behind asking your question but I would like to say
“I got a goal in my life, left my six figure salary job , pay from my own pocket in society seminar”
Such kind of motivation can’t happen in fake stories bro!!!
But I would disagree with the statement that :
“The base minimum insurance required is your yearly salary multiply by 100 divided by the current interest rate.”
Because salary of the demised person can’t be the criteria to judge the requirement of dependents. For eg. Say in Mumbai, Person X earns 15 lakhs per annum whereas other person say Y earns 5 lakhs per annum, than how could we say that minimum amount for spouse of X should be 1.5 cr wheteas for that of Y shoild be 0.5 cr. (considering both families live in same locality)
Please shower further light on same.
Ans : Please refer to reply provided to Nagendra Yadav
I wanted to understand the calculation in the image which cot my attention..
70 per 1000, FAB (70*200000)/1000 equals 4,20,000 for a year
And for 20years, 4,20,000*20 = 84,00,000
I surely think am missing something, could you please help point.
Ans : Final Bonus calculation as follow
Sum Insured 20 Lakhs i.e 2000 (Thousand)
Final Bonus by LIC is 70 Rs per Thousand which means 70 X 2000 = 140000
I hope it is clear now
Well when reading this answer I was not having coffee but a bottle of beer. Thanks for the answer/knowledge sir.
Ans : Cheers!!!
It’s a copied answer of pramod kumar
Ans : Ask pramod kumar
What was my friend’s full name?
In which swimming pool did he died and in which area?
Which was the police station involved?
Where did he used to reside in Mumbai?
Where did his body cremation took place?
What was his mother tounge?
In which company was his working when this incident took place?
Which was the insurance company from which he took Insurance?
What is his wife’s name?
How many daughter/son he had and what were their name?
We were two people engaged in Insurance claim, One was sitting at my friend’s home and another was at Insurance company, Ask pramod kumar to give the name of two people.
It is a real story happened to me and I lost my colleague and a good friend,It is easy for pramod to copy but he can’t feel the pain.
How can I contact you?
Ans : Details are in my profile
Are you an insurance agent ?
I don’t know why , but I feel like you’re hired to write this beautiful answer, which encourages readers to invest even more on insurances.
Ans : I am not an Insurance agent and as far as writing is concerned, I wrote what happened in reality
I agree with u on investment numbers… but, can u swear that the above story is true??
Ans : Please refer to answer provided to Ashish Kapoor, Avdhesh Jha and Barun Ghosh
U r tarnishing name of LIC….ULIP was sold by private companies and exuberant charges cheated people…after that Irda introduced strict terms for ULIP…LIC has highest claim ratio and it’s major income comes from core business only…and after decreasing market share..it’s again commands 70% of market share….don’t bad mouth such a strong brand…
Ans : 70% Market share doesn’t mean it is a good brand, 70% market is because globalization in Insurance took place later compared to 1991 globalization policy introduce by the then finance minister Dr. Manmohan Singh
I am not against LIC, I am against the Messiah who give the wrong advice for their premium
I showed the truth, If it bitter for insurance agents let it be.
Vipul, one genuine question.
What if inspite of paying all premiums on my term insurance (e.g 5 Cr which is a huge amount) , after my death , the insurance company plays dirty tricks with my family behind me ?
Secondly after all this chaos of financial institutions in India (recent ones are PNB & ICICI ) , it is very difficult to trust these private institutions, in this case insurance companies whose sole purpose is to earn money. How I am suppose to trust them ? Honestly my confidence is low in India’s financial system.
(I completely agree with your theory here but the only thing I want to clear is the risk associated with term insurance in these pvt companies. LIC has term insurance of its own but the premiums are expensive. People buy LIC insurances because they are risk-free similar to FDs and its easy to claim the insurance money whereas I am not sure of these pvt insurance companies).
Ans : When you sign on the dotted line of insurance paper it is now a contract between you and Insurance company.
Most of the claims are rejected because insured person lie to Insurance company.
For example : A person is a smoker and does not reveals to save few bucks on premium. Result is Insurance company got a chance to deny the claim.
It is been said never hide anything from Lawyer and Doctor, one more added here is Insurance Company
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