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Here’s what was asked and answered by Capital Advisor in February, 2011. If you have a question on managing your personal finances, send me an email and I’ll respond at the earliest. If your question’s beneficial to a wider audience, I’ll publish it in a future edition of “Asked and Answered,” without revealing your personal details.
Query #1: On continuing a guaranteed-return life insurance policy.
I have a question regarding my TATA AIG Maha Life Gold life insurance policy. For a sum assured of Rs 400,000, I am paying Rs 35,000 as annual premium for 10 years. After the 6th year, which is this year, the policy gives me a small cash dividend of around 2%. After the 10th year, a guaranteed annual coupon of 5% that is Rs 20,000 would be paid to me. I am not sure if its good to discontinue this policy at this point of time. Please suggest.
I ran the numbers on this situation — you can download my analysis here — and the results were quite shocking. (Note: The sheet doesn’t consider the paltry cash dividend. Even if it did, the results would still be shocking.) And as I told the reader, “if you play around with the Excel sheet, you’ll find that all TATA AIG needs to do is park your money in a FD and they’d still make money off you! But since you’re already in the 6th year (and I don’t find a surrender option), I guess you have no choice but to continue this policy.”
I then ran the numbers on a similar policy from Bharti AXA called Bharti AXA Aajeevan Anand — you can download my analysis here — and the results were equally shocking.
I’d stay away from such policies. In my opinion, the minimum guaranteed coupon should be equal to the current risk-free rate of return, but then that wouldn’t make business sense to the life insurance company, would it?
Just put those premiums in a Fixed Deposit and you’d do far far better.
Query #2: On the New Pension Scheme.
Could you review the New Pension Scheme (NPS)? I want to invest in a Pension Plan without being taken for a ride.
In my opinion, most Pension Plans, these days, take you for a ride — so much so that sometimes I wonder who the pension is for: you or the insurance company.
While I have a general sense of the NPS, I’m not intimately familiar with its structure and working. Therefore, I pointed the reader to a recent article on NPS in ET Wealth for further information.
Personally, though, when it comes to financial instruments, the NPS isn’t on my radar.
Query #3: On infrastructure bonds.
Have you analyzed the Infrastructure Bonds from IDFC and L&T?
I haven’t. But reader Nikhil Shah was kind enough to share his detailed analysis of these infrastructure bonds some time back.
(Note: Follow me on Twitter, and you’ll have advance access to these downloads.)
Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.