eServe Newsletter December 2011

Most people hardly plan for life after retirement

22-Nov-2011 Source : Economic Times by Amar Pandit
(The writer is the CEO of My Financial Advisor, a private wealth management firm, with offices in Mumbai and Bengaluru.)

The insurance regulator plans to lay a floor of 55 years of age for a person to draw annuities from pension plans as it moves to reduce risks for insurance companies and revive a pension market that is ignored by private insurers. However, the move may throw a spanner in the works of those planning early retirement.

In ancient times, retirement planning was simple: Have a son. An even better idea was to have more sons. In portfolio theory, this is called diversification, that is spreading portfolio risk across many sons.

A legacy of the same mindset, in our country for most retirement is a distant goal and hence they hardly plan for it. Most employed people contribute to their Provident Fund (PF), their employers also making matching contributions. However professionals and others have no employer or government sponsored social security net unless they work for a government entity or a corporate. Hence, people often end up buying just insurance policies, pension plans from in surance companies and real estate thinking that is all for retirement planning.

For most people, the first fifteen odd years goes in buying a house and providing for their children. It is only after they are into their 40s, and mostly in their late 50s - when the children have grown up - they realize the need for retirement planning. And then they wonder: Have I saved enough? When can I slow down or retire? How much will I need during retirement?

Take the case of Ajay Burman (name changed), an engineer in his late 30s. In his initial days, retirement was like a distant dream for him and his entire focus was on living a luxurious lifestyle and to be seen in a posh house. Besides this, he made sure that they had great vacations every other year. Looking at an elder colleague's situation of having little left at retirement made Ajay worried about his retirement as there was no focus on building a retirement corpus and hence most of the money was spent on living expenses, housing needs, children and luxuries.

Thankfully, he can still accumulate sizeable funds if he is able to work for the next 20 years and is focused on saving and investing prudently.

The problem in retirement planning is that most do not have a written strategy and there are no separate invest ments made with a view of corpus accumulation. In fact most people believe that they still have time to accumulate wealth. However, one of the biggest mistakes that people make is not allowing time to work on their retirement goal.

In other words, compounding and its direct effects will work wonders on your port folio. Let's take an example of just starting early. At 39, if Ajay invests Rs. 10,000 per month in an investment that yields 12%, he will have Rs. 1.12 crore when he is 60. How ever, if he starts at 40, and invests the same amount at the same rate of interest, at 60 he will have Rs. 98.9 lakh. The difference is Rs. 13.8 lakh even though he started investing just one year later. Now consider the same investment at 15% return. The difference is a staggering Rs. 25 lakh. The above figures mean that when it comes to money time is probably the most important factor in the growth process.

State clearly, "I will retire on January 1, 2020 (or any date) and want to have an income of Rs. 2 lakh (as on to day) per month till my age 90"
If you have not bought a house, buy a house as soon as you can afford to do so.
Invest a certain portion of what you earn in debt, long term equity investments like mutual fund schemes, and gold.
Open a PPF account and invest Rs. 1 lakh (The limit has recently been enhanced).
Contribute regularly to EPF and if you can make voluntary contributions to VPF.

With advancements in medical science and technology, one would probably live longer after retirement This means that one must plan for at least 25-30 or more years in retirement during 30-35 years of his working life. And if he plans to retire early, he must plan for at least 40 years of non-working life compared to around 20-25 years of his working life.

Is it the end of ULIP Vs Mutual Fund War?

25-Nov-2011. Source : Moneycontrol.com. By V Vishwanand, Director and Head of Products and Persistency, Max New York Life Insurance.

Much has been spoken and written about whether Mutual Funds or ULIPs are a better option for you to put your money in. However, my question would be - did the war even exist, since both of these financial instruments are meant for very different needs.

While Mutual Funds are for short term needs ULIPs are for long term savings and protection based on ones needs. Despite their popularity with investors, concerns were raised over certain operational aspects of ULIPs. The confusion over who will control the operations of ULIPs-The Securities and Exchange Board of India (SEBI) or the Insurance Regulatory Development Authority (IRDA) - also added to the plethora of confusion. However, the new set of regulatory guidelines, which came into force on September 1- 2010, cleared the air over ULIPs. In fact the new regulation very clearly positioned ULIPs as a long-term savings and protection vehicle and provided a direction to life insurance industry. Clearly Mutual Fund and ULIPs now serve different life stage needs of customers.

However post these changes a question which may still haunt the customer whether the new ULIPs really offer superior value proposition to them. Let's look whether the answer to that question is YES or No. It is important that we examine the intension of bringing about these changes and how they have affected our lives, only then can we decide whether ULIPs have really become more customer-centric. What was the basic purpose of bringing about this wind of change? - I would go with, improving the value proposition for the customer, besides providing a longer term for products and enhanced protection, exactly what a life insurance product should do. Having answered the first part let us now look at the other aspect of how these changes will affect our lives.

The new guidelines have increased the minimum policy term to five years from current three years in case of individual products. Life is not just about living for today or even the next 5 years. Our lives are worth a lot more to look out for. This change makes the customer understand the need for longer term plans and remain invested for the full tenure.

Helps your family remain protected - always.
This change is to reiterate the basic purpose of life insurance - Protection. The minimum sum assured multiple has been increased to 10 times for age at entry below 45 years and 7 times for age at entry above 45 years. At no time can the sum assured be less than 105 per cent of total premium paid including top-ups. All top-ups also must have life insurance cover built into them which will enhance life cover for our policyholders while they are investing their additional savings for their life stage goals. This change reiterates the fact that life insurance is the only financial product which provides protection against uncertainty.

This new guideline stipulates the maximum net reduction in yield every year from 5th year. It is primarily an extension of the earlier stipulation of maximum net reduction in yield of 3% for policy term up to 10 years and 2.25% for policy term above 10 years and will allow you to buy the product with higher confidence on the maximum reduction on account of charges in the product. This change does not make any difference over the long-term but provides flexibility in case of exigency.

IRDA has introduced a cap on surrender charge, now termed as policy discontinuance charge, basis the year of discontinuance and annual premium. This allows us, life insurers, to charge only a small penalty on early surrender of policy and has effectively put a huge value on persistency management in the industry. This leaves life insurers with no option but to sell right and appropriately communicate the features of the product to the customers so that they remain invested till the end of the policy term. However it is also the responsibility of the customer that he/she should not buy a long-term policy with the intent to surrender it after completion of lock-in period. One must buy for a need and stick to it till she or he has accomplished the goal for which they had bought the policy.

Bottomline - ULIPs have now become even more attractive to long-term investors looking for life cover as well as contractual savings options. Therefore a clear role definition for Mutual Funds and ULIPs making it much easier for the customer to prioritize products best suited for their needs.

These are welcome changes and very much in line with the core values of life insurance as a long-term savings and protection product. It is time the life insurers, distributors and consumers to manufacture sell and buy ULIPs for the right reason.