Occupational Licensing Gone Wild

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From the Bloomberg article "Why Is It So Hard to Become a Cosmetologist in America?"

"The average cosmetologist in the U.S. trains for 372 days before earning a license. The average emergency medical technician spends 33 days in training. From this, one might conclude that Americans are obsessed with primping but tragically unprepared for emergencies."

"Actually, the disparity merely confirms what a muddle the process of occupational licensing is. In 1952, fewer than 5 percent of U.S. workers required a state license. By 2006, according to a survey that year by the Gallup Organization, 29 percent of workers said they needed a government-issued license to do their job."

"A study released in May by the libertarian Institute for Justice makes a compelling case that occupational licensing requirements in many states have run amok. Some licensees, including EMTs, have life-or-death responsibility. Others handle hazardous chemicals. Too many, however, are in occupations for which a natural inclination and a short apprenticeship should provide more than sufficient preparation. Why, for example, do florists, funeral attendants or shampooers need a license to work?"

Read more here. 

Classic 1978 Milton Friedman Lecture on Trade

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In the above 1978 lecture at Kansas State University, Milton Friedman discusses free trade, and explains why trade protection and interference in international trade are so widespread, despite the almost universal condemnation of such measures by the economics profession.

Professor Friedman also addresses the political obsessions with: a) increasing exports (e.g. President Obama’s goal to double exports by 2015) and b) achieving a “favorable balance of trade.” 

Here’s a quote from Friedman’s lecture, demonstrating the timeless nature of his economic wisdom, which is as relevant today as it was in 1978:

In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports. And if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, automobiles we can drive, with all sorts of nice things for us to use. The gain from foreign trade is what we import. What we export is the cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things, so we get as large a volume of imports as possible, for as small a volume of exports as possible. 

This carries over to the terminology we use. When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of view of our well-being, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance when you have to send out more goods to get less coming in. It’s favorable when you can get more by sending out less.

MP: Here’s a formula summarizing Milton Friedman’s insights:

1. The stuff we import

MINUS

2. The stuff we export =

3. Our standard of living

In other words, in economic terms, our standard of living is highest when we maximize imports and minimize exports, which is exactly the opposite of the political thinking and policies, which generally seek to maximize exports and minimize imports.

Fire: Environmentalist's Way to Thin the Forests

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From Terry Anderson's editorial in today's WSJ "Environmental Protection Up in Smoke": 

Environmental laws since the 1970s require public input into federal land-use decisions including logging on national forests. This has led to lawsuits challenging efforts by the U.S. Forest Service to prevent forest fires by thinning out trees (most of which are dead or diseased) and brush by machines and carefully controlled burns. This dead wood is the fuel that feeds catastrophic wildfires. 

Removing the fuel reduces the likelihood of fires, and if fires do break out, makes them easier to fight. Meanwhile, the suppression of fires costs the federal government nearly $2.5 billion annually. 

A fuels-management project to log and thin 4,800 acres in the Bozeman, Mont., watershed exemplifies the problem. This project has been held up since 2010 on grounds that the environmental-impact assessment did not adequately protect the habitat of the Canadian lynx and the grizzly bear, both listed as threatened species. 

Now a wildfire threatens the watershed, burning over 10,000 acres and costing more than $2 million to fight. As one firefighter put it, "fire is the environmentalist's way of thinning the forests."

Is your Wife Aware of Your Financial Status?

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That is a stupid question, don’t you think so? I know you are mumbling, oh sure my wife knows about my financial status. After all, she is my wife…

Well my friend, I am not talking about your overall financial status as in whether you are rich, poor, in trouble etc. I am talking about certain details which I am sure your better half doesn’t know about you. Did I catch you by surprise??? Read on to find more!!!

Why this Article?

I was talking to a good friend of mine, a couple of days back when he was telling me something that hit me hard on the head. His colleague’s husband had met with an accident and was hospitalized. The poor lady (I am going to call her Mrs. X) did not know how much money her husband had in his account. Even worse was the fact that, she did not know what investments he had made or what his ATM PIN number was. The hospital was demanding a hefty sum for the treatment and even though the couple was well off financially, she was not in a comfortable position to handle the situation. All she could say ways

My Husband handled all financial matters.

Like most families, Mrs. X too entrusted the responsibility of running the home’s finances to her husband and she concentrated on the more difficult task of running the family.

Well, Mrs. X somehow managed to borrow funds from her relatives and finished her husband’s treatment. Thankfully he recovered within weeks and they were able to repay all the money they borrowed in one shot because, her husband had saved up some money as Fixed Deposits for a rainy day. The day came but he never told his wife that he has saved up for a rainy day. So, she was left to suffer all alone, trying to come up with money for her husband’s medical treatment.

Imagine how good it would’ve been if she knew that he had fixed deposits that could easily cover for his medical expenses? She could’ve happily close those and paid for her husband’s treatment instead of having to borrow from friends or relatives. Imagine the mental agony she could’ve been spared, had she known it?

Now, get the picture???

What must we share with our Better Half?

A lot of women are not so good at dealing with finances (Or so they think) and so entrust the responsibility to the men in their lives. All this is well and good. But, they must ensure that they are aware of the investments that their husband is making so that they are not caught by surprise like Mrs. X was.

Men & Women Both of you can keep a common notebook or a journal where you write down the following details so that, either of you are aware of the financial status of one another and can take decisions at times of crisis.

1. Property Held – This is something 99% of couples know because if a husband is buying a property, there is no way the wife doesn’t know it. But, for the 1% this was a surprise kind of husbands, it would still be a good idea to note down the details somewhere so that the wife can know when she needs to
2. Bank Accounts – Note down your bank account numbers, fixed deposit account numbers along with amounts invested etc. Don’t write down PIN Numbers but make sure your wife/husband knows what your PIN is
3. Credit Cards – Note down the list of all your credit card numbers along with the name of the bank that issued it.
4. Stock Market Investments – Note down your DEMAT account number and atleast the total value of your investments in your account. If you can maintain the nitty-gritty kind of details reg. each of your investments in the DEMAT account, that would be even better
5. Your Employee Provident Fund account information (If you work as a salaried employee for some company)
6. Your Public Provident Fund account information (If you have one)
7. Your National Savings Certificate information (If you have invested in them)
8. Any other loan amounts that you have lent to your friends or family members with details of when and how much along with when they are expected to repay them.
9. Details of Gold and other Jewelry you may own (This point is applicable in 99% cases for women because men usually don’t take care of handling jewelry or gold. It is usually the lady of the house who takes care of it. So, add this entry if this is applicable for you)
10. Details of your Insurance Policies, their numbers along with details like the maturity amount, surrender value etc (If you know them). As a bare minimum noting down which company issued your policy, the agent who sold you the policy and the policy number is required for our family member to use it if they need to.
11. Details of your liabilities – Note down the loans and amounts you have borrowed from others including the amount you owe in return, when you borrowed it, the amount borrowed, borrowing individual/institution etc. The last thing we need is some lender harassing our family members after we are gone on money we owe them. If we owe them money, the responsibility to repay falls on our family members. But, at least if they know how much we owe and to whom, they can plan accordingly and refute claims from bogus individuals about money you owe them.

The list above is not exhaustive. For this week, try to remember all relevant information reg. your investment’s/assets/liabilities/insurance etc and write them down. Going forward, whenever you take any monetary decision, make sure you update the notebook so that you don’t have to spend time recollecting what you did…

It would be a good idea to include our life partner as a joint holder of all your accounts so that they can easily operate our accounts in our absence without much legal hassles.

Some Additional Things You Need To Do

Apart from writing down all this information, you need to do some additional things. They are:

a. If you have selected e-mail statements for your bank accounts/credit cards/DEMAT etc, make sure your life partner knows the password to access that mail account
b. All bank accounts/credit cards/DEMAT/Investments etc accept Nomination facilities when you open them. You can also update the Nominee details anytime you want. So, make sure that you update your wife/husband’s name as the Nominee in all your accounts.
c. Write a detailed WILL outlining what you wish to do with your assets after your life. This is something people don’t think of until they reach their 60’s or maybe even later. But, it is always a good idea to have your will created early. Another important thing is to re-assess your WILL once every 3-5 years to include details of new assets that you may acquire during the period or to add/remove people you may have included/missed in the previous version of your WILL.
d. Write down the contact details of important people so that our life partner can find them in one place easily. Some of these people could include:

a. Financial Advisor
b. Insurance Agent
c. Chartered Accountant
d. Doctor
e. Etc

Last but not least, make sure you leave all the relevant artifacts in a safe place and make it known to your life partner…

Some Last Words:

The whole idea behind this exercise is to make sure our life partner can handle everything even after our time. Think of the state Mrs. X was in when her husband met with an accident and she couldn’t arrange cash to pay for his medical treatment and then ask yourself this question, do I want my wife to go through this trauma in case anything happens to me? The idea or reason as to why I am asking you to do this will become clear and you will do it without any issues or hesitation…

Happy financial planning.

Have you Written your WILL?

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In the last article in this blog titled Is your Wife Aware of Your Financial Status? I had suggested that we created a Will. One of my long time friends Rajesh had asked in the comments section about the “How To” part of creating a Will. Though I am no Legal Expert, from an individuals perspective, did some research on the internet and have come up with the below article. If you find any information below incorrect, please feel free to leave a comment and I will be glad to correct it. At the end of the day, we don’t want to be doing something incorrect…

Why Create a Will?

This is a pretty straightforward question. Just think of this

After our time, do we want our loved ones to fight with one another on who gets what from our property?

If you feel, my family is not the typical movie type family and such petty fights over assets or property will not come up, then think again. Your opinion is based on the current state of affairs in your family. Are you sure that 30 or 40 years down the lane, when the time comes to split your property, will your survivors still be what they are today? Let us hope and pray that our family members don’t end up fighting with one another, but to be on the safer side, it is always a good idea to write down a WILL that says who gets what. This way, they don’t have a choice but to accept your decision. After all, it is your wealth and you have all the rights in the world to decide who gets what.

Another important reason on the “Why” part is that, a friend or a close associate could have been instrumental in your growth and success and to thank them or their survivors you may want to leave a portion of your wealth to them. Or maybe you have a loyal and faithful servant who has served you for many years and you want to reward them for their loyalty by leaving them some cash. All this will not happen if you don’t create a formal WILL. You may orally instruct your family members to carry out your wishes, but what is the guarantee that they will do it? So, the best thing for us to do is, create our WILL while we are alive.

Are you thinking, I am no Tata or Birla or Ambani. All I own is my humble home, some jewels and some cash in the bank. Should I still write a WILL?
The answer is a resounding Yes my friend. No matter how big or small your assets are, it is always a good idea to write down a WILL.

So, the next logical question - What is a Will?

A will can be made by anyone above 21 years of age in India. You can make the will even on plain paper in India. It is not legally mandatory to make-out ones will only on Stamp Paper. However, it is advisable to write our will in our own hand writing, as the same can be verified by experts at a later point in time (After us of course) in case any of our family members or relatives raise any doubts.
WILL – A Taboo Topic in India

Unfortunately in India, the word WILL is extremely sensitive and in many cases taboo. There is a widespread misconception that if someone tells us to make a will, the person is indirectly hinting us that our end is near or that the person is indirectly eying our property.
The fact is, creating a WILL is a must for every individual who wishes to decide what portion or % from his wealth will be inherited by which family member.

What happens if we do not Make a WILL?

Simple, CHAOS!!!

First and foremost, if an individual dies without preparing a WILL, his/her wealth is distributed as per the “Laws of Succession” in India. There are dozens of government rules (As per the law) on how wealth must be distributed among the family members. The laws of inheritance and succession are complicated and diverse in nature and more importantly are different for Hindus and Muslims. Unless lawyers are involved, there is no amicable way of settling the situation.

Second of all, think of the inconvenience this will cause to your family members. In the worst case scenario, one of your family members could sue the others for incorrect distribution of wealth and kick start legal proceedings using a Lawyer. Imagine the chaos this will create. All your family members will be at the mercy of lawyers. Not to forget the time, energy and money that will be wasted for them to go through the Indian legal system.

To summarize, if you spend some time and write up a WILL, you can save your survivors a lot and I really mean a lot of headache.

Creating a WILL

A will has several parts and all of them have to be duly completed in order to create a complete and valid will. Actually speaking, there is no standard legal format for WILL’s that are created by individuals themselves. However, there is a template which has been used widely. It is simple, logical and mostly common-sense. It will contain the following:

Section 1: Declaration

This will be the first section of your WILL. Here you write down your details like name, age, address etc. and then mention that you are making this will in your full senses and free from any sort of external influence.

Section 2: Details of Assets

The next section should contain the list of all your assets like your house, any land, bank accounts and the amounts in it, investments, shares, mutual funds, jewelry, etc and etc. We must also mention the location where the documentary proof like original land documents, bank receipts/pass book etc are stored by you. In fact, your WILL too must be kept safely preferably in the same safety deposit box along with all other valuable documents.

Make sure that you personally share details like the Bank Manager’s name, how to contact him and gain access to the safe deposit box in case of your demise to the Executor of your WILL. Also, make sure that you introduce the Executor to the Bank so that they know who it is and allow him access to your property after your time.

Section 3: Details of Sharing

Now, we are talking business, this is the section that outlines the most important aspect of the WILL.

“Who Gets What”

A point to note here is that, if the person to whom you are leaving some wealth is a minor, say your grand child, make sure you appoint a custodian for the assets until the individual you have selected reaches adulthood (18 years). Should I even mention here that the custodian must be a trustworthy and reliable individual who really cares about the welfare of the minor under consideration here?

Section 4: Sign the WILL

So now, we are the last step. Once we have completed writing our will, the next step is to Sign the WILL in the presence of at least two witnesses. These witnesses will have to sign the will after you sign it, certifying the fact that you signed the will in their presence.

Important Points to Remember:

1. Make sure that the Date and Place, where all this is happening is clearly indicated in the WILL
2. Make sure that both you and the witnesses sign in all pages of the WILL (In case it actually runs to multiple pages)
3. The Witnesses cannot be a direct beneficiary of your WILL. It can be friends, neighbors, colleagues anybody as long as they don’t gain anything from your WILL

Last Step:
The last step in the process is that, after you finish everything, place the WILL inside an envelope and seal it. The Seal must bear your Signature and the date it was Sealed. The Witnesses need not sign on the Seal or the Envelope.
For everyone's benefit, below is a sample will based on the template that was just outlined above:


What is the Role of the Executor?

Did you note the fact that, in the WILL we have appointed somebody as the “Trustee & Executor”. Do you know what his role or responsibility is?

He is the individual who is responsible for dividing your wealth among the beneficiaries indicated in your WILL. He will take possession of all your assets including the WILL from the “Safety Deposit Box” and then distribute them to the beneficiaries one by one.

It is not legally required to get the WILL executed in a court in the presence of a Judicial Magistrate. However, if you wish, the will can be executed in the presence of a Court Magistrate or any Public Notary nominated by the Government Authorities.

Changing the WILL


Have you heard of the old saying “The Only thing Permanent in Life is the Change”?
Your life changes every day, you could buy or sell assets, your relationship with your family members may improve or deteriorate etc. All this may warrant a need to alter the WILL.

Did you note that in the first section of the WILL we mentioned that our current WILL supersedes all the prior ones? The whole purpose of that statement is to ensure that your latest WILL is the one that is executed.

But, do remember to note the Date correctly in your WILL and add this Supersede/Revoke clause. Otherwise, you will be actually complicating things because the sharing ratio could be different in two versions of the WILL and the benefactors could take things to the Court and you know what will happen that, don’t you?

Do We Need a Lawyer to Make the WILL?

Actually speaking, the simple answer to this question is “NO” but it would be a good idea to involve a lawyer. This is because, many of the “I did it myself” kind of WILLs often miss some key components as required by Law. For ex: Missing witness signatures, or no reference to nullify the prior wills, not mentioning all assets etc and etc.

How many movies in Hindi, Tamil, Telugu or whatever your local language in India is, have been made where sons and daughters fight over access to their dead father/mothers property? Have we forgotten the fact that this is perfectly and realistically possible even in our family?

Involving a Lawyer can minimize many of the common mistakes in the “I did it myself” kind of WILLs.

Let us say you have a son named Ramesh and a cousin with the same name and your WILL states the below:

“My 2004 Mercedes S-Class car must be handed over to Ramesh”.

As owner of the car, you thought that by default it refers to your Son but your cousin being a devious person realizes the mistake and stakes a claim on your car. Obviously your WILL is ambiguous and so, there is going to be a lengthy legal battle and god only knows whose side will win the case. God forbid, what if your cousin gets possession of the car even though you wanted your Son to get your Car?
Had a Lawyer been present, he would’ve pointed out this flaw and suggested to you that you mentioned the fact that, the Ramesh here refers to your own Son.

Getting the Probate

The Probate is nothing but a copy of your WILL that is certified under the seal of the Court. The Executor, has to file a probate petition in the court of Law and get it. Practically speaking, getting a Probate under the current timelines as per the Indian Law works to somewhere around 1 year.

You might be wondering, do you need a Probate?

Of course yes. The executor cannot perform his duty of distributing your wealth unless he has been granted the Probate. The Probate will be granted only to the executor appointed in the WILL. The cost of getting the Probate includes legal fees along with stamp duty on the value of the property being distributed per the WILL. A point to note here is that the stamp duty varies from state to state.

Another important point reg. the Probate is that, in case of land or house party, the property will not be transferred to the name of the person inheriting it without the Probate and the Tax Paid certificate. This will create problems especially in cases where our next generation tries to sell the property that they inherited. Without the correct Probate, the prospective buyer may not be willing to buy the property because they may be suspicious about the properties origins or ownership.

Some Last Words about Making the WILL before we Wrap up:

• It would be a good idea to involve one doctor and one lawyer as your two witness. The idea is simple – a doctor signing as a witness means that you were mentally sound when you wrote the WILL and the Lawyer will verify the document and make sure you don’t make silly mistakes (Remember the Ramesh – Mercedes Car example from a little bit before?)
• None of the witnesses or their family members must be beneficiaries from your WILL. For ex: If your doctor is a witness and his son is like your son and you left him your bike, that will be illegal.
• Use good quality paper and pen to write your WILL. The document has to last the test of time, at least a few years.
• Keep your original WILL in a safe place like a bank safety deposit box. You can also make copies and store them separately. However don’t make many copies. One or two copies should be more than sufficient.
• Make sure you mention the date in the WILL. Without this, nobody will know which version of your WILL is the latest.
• Cleary mention the % share that each of your family members must get instead of the value. For ex: The cost of your house could be 10 lakhs today and could be worth 50 lakhs 25 years from now. So, you can’t say my sons must get 5 lakhs each. What about the remaining 40 lakhs?? Instead you must mention that my sons must get 50% of my house’s sold value
• Usually property that you inherited can be inherited by the direct descendants of the person writing the WILL. For ex: If you got your ancestral house from your father, who in turn got it from his dad, you can only leave it to your sons or daughters. No other family member or outsider can stake a claim on this property. Remember that Rights on inherited property is acquired by birth and not by WILL. So, your dads house can go only to your son and not to your favorite cousin.

I think we have covered almost everything you need to create your WILL. However, I am no Lawyer. So, if any of the points mentioned above is incorrect, please feel free to leave a comment and I will correct it.

Happy Writing your WILL!!!

Is Buying Insurance from Private Insurance Co.’s in India a Good Idea?

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It has been just over a decade (Year 2000 to be exact) since the Government of India allowed Private players to enter the Insurance Market in India. In this short span of 12 years the growth in the Insurance Industry in India has just exploded in terms of growth and in fact, it is the fastest growing sector in India. So, at this crucial time, the most relevant question would be “Can I buy Insurance Products from Private Insurance Company’s?”

Well, the purpose of this article is to analyze the Pro’s and Cons of buying Insurance Products from Private Co.’s…

Background as to “Why” this Article came up!!!

A couple of days ago, one of our blog readers had dropped me a personal email asking if it is a good idea to buy Life Insurance policies from a Private Company. He also mentioned that his dad and uncle are strongly urging him to go with LIC since it is owned by the Government and not put his hard earned money in a private insurance company. It brought back memories from about 8 years ago when I bought my first insurance policy and what my dad told me. So, I thought, it would be a good idea to write an article for the benefit of all those younger generation of Indian Citizens who are being advised by their parents to forget private Insurance companies and believe that “LIC” is the only Insurance Company in India…

Why are our Parents Afraid of Private Insurance Companies?

The last generation of people in India grew up with LIC as the only Insurance Company. In fact, until 2000, there were no private players in the Indian Insurance Industry. Another important aspect is “Safety” and as per their belief, if something is owned by the Government, there is no way they will lose their money. What if the Private Company goes bankrupt? What will happen to our hard earned money in that case?

This fear is what predominantly drives their decision in favor of LIC.

Is their Fear Valid?

To be brutally honest, the answer is NO IT IS NOT VALID.

This whole article is about explaining WHY.

Things We Must Check About a Private Insurance Company

There are many things that we must check about a Private Insurance Co before taking or rather buying Insurance from them. They are:

a. The Company’s Financial Strength & Stability
b. Claim Settlement Track Record

Financial Strength & Stability

How will we check a company’s financial strength and stability? By checking its balance sheet, profit and loss statement etc. But, a majority of us either don’t have the time or the know-how to understand such financial statements. So, what is the easy way out?

Who Owns this Insurance Company? Are they a well-established and profitable group?
For ex: TATA AIG Life Insurance is a joint venture between TATA Group (From India) and American International Assurance (AIA, Hong Kong). Both of these groups have a strong track record of successful performance and profit making. So, if they both partner and have created an Insurance company, the chances of the company being financially sound are Pretty High. Isn’t it?

However, this easy way out isn’t fool proof. What more can we check, as a quicker or rather easier way to find out if an insurance company is financially sound?

The answer is: Check the Solvency Margin

What is Solvency Margin?

The solvency Margin tells us how solvent a company is. In other words, how much cash it has as reserves in order to meet unforeseen expenses/circumstances.
Basically, it is the amount the insurer has to stash away in order to pay the claims during emergency. IRDA requires the insurance companies to maintain a particular level of solvency margin for their smooth functioning.

Why does a company need to maintain a Solvency Margin?

During the Economic Crisis a few years ago, AIG, the largest Insurance Company in USA was on the brink of a painful collapse. Had the US government not intervened, millions of US Citizens would’ve been left without Life or Medical Insurance, driving the whole US Economy into a dark hole. Thankfully it did not happen.

It is for such unplanned or unexpected situations that we keep a solid Solvency Margin. What if an Earthquake happens in some part of India and hundreds or thousands of innocent people are hurt or killed? Will the company have enough funds to pay all of the insured people? This is exactly why we have a Solvency Margin. If we keep away enough money to pay all insurance policies we are bound to pay, even in severe situations, we can manage and meet our commitments. Isn’t it?

Do you want to know what the number is in India?

IRDA Mandates that Insurance Co.’s operating out of India maintain a Solvency Margin of 150%. It means that, for every Rs. 1000/- insured by XYZ Insurance Co in India, they have to keep Rs. 1500/- with IRDA.

Now, Go back and ask yourselves, is the fear that our parents have with respect to Private life insurance cos in India, is justified?

Now, the Million Dollar Question – Does this mean that we are Totally Safe?

The whole purpose of having a solvency margin is to meet unexpected events whose chances are very very slim. And even if such events like a Terrorist Attack or an Earthquake occur, the solvency margin can take care of it. However, there is still a very small % chance that a company could fail and unfortunately we have no choice but to live with it.

The fact is, this very small % chance holds good for LIC Too. What if the Top Management of LIC elopes out of India with lakhs of Crores of LIC’s assets? Can the Government of India offset such a huge loss immediately?

You may be quick to defend LIC saying, the chances of something like that happening are very very slim. Well my friend, the same is the case with any other Private Player. The chances of them declaring bankruptcy are very very slim and even in that case, IRDA will have enough assets to settle the people who have bought insurance policies from them.

Trivia:

I am not trying to scare you but, did anyone even remotely think that Satyam Computers would be involved in a scandal of the magnitude that happened a few years back? Everyone trusted Satyam but the unfortunate event happened. As with all monetary decisions, we can only hope for the best, but as smart individuals we must always be prepared for the worst and plan for it…

Claim Settlement Track Record

The Claim Settlement Ratio of the Insurance Company can tell us as to how much % of Legit Insurance Claims have been settled by the Insurance Co. So, what is the Claim Settlement Ratio (CSR) of the Top Insurance Co.’s in India???

As of end of 2011 – the Claim Settlement Ratios are as follows. Note that only the top 8 are available here. The others have a Claim Settlement Ratio of less than 75%.

1. LIC of India – 97.5%
2. HDFC Life – 96%
3. Birla Sun Life – 94.6%
4. ICICI Prudential – 94.4%
5. India First Life – 90.6%
6. Aviva Life – 87.1%
7. SBI Life – 82.2%
8. Max New York Life – 78%
9. Etc.

As Expected LIC of India has the best Claims Settlement Ratio is India but as you can see, the next 3 are very close in terms of % and have equally impressive CSR.

Verdict:

The Verdict is “Yes” buying Insurance Products from Private Cos is a good idea, provided the product you are buying is good and cost-effective. It is always a good idea to compare similar products from more than one company before choosing one.

For ex: If I were to buy Term Insurance for say 50 lakhs, I will do the following:

a. Get Quotations for my age for half my planned amount (25 lakhs) from the Top 5 companies in terms of Solvency Ratio and Claims Settlement Ratio
b. Select the 2 cheapest quotes and buy 25 lakhs worth of Term Insurance Policies from both the companies

This way, I am getting not only the best deal, but also diversifying my risk. Even in the very rare scenario that one of those insurance co.’s goes bankrupt, the other will still be around to settle me. The chances of both of them going bankrupt simultaneously are literally impossible isn’t it?

Happy Insuring Yourselves!!!

Other Insurance Related Articles that may be useful to you:

1. Insurance & Indian Income Tax
2. Life Insurance Cover – Policy Lapse & Revival
3. Insurance Claims Process – Simplified
4. Insurance

Children and Pocket Money

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A few months ago, I had written an article in this blog titled "Children & Money – Can We Teach Our Kids about Finance & Money Early?" about educating our children about finances. It is always a good idea to start financial education early. Home is the first place where kids learn about finance and as parents it is our duty to teach our kid the important aspects. The starting point of financial education for any child is “Pocket Money”. In the Indian tradition, whenever kids take the blessings of adults during auspicious occasions like festivals, the most common way of showing love or blessing is by giving children cash. This article is not going to cover that aspect. We are only going to talk about the regular pocket money that we as parents will be giving our kids…

Before we begin – During Festivals and auspicious occasions, kids usually collect at least a few hundred rupees when they get the blessings of elders. It would be a good idea to buy fancy piggy banks to the kids and motivate them to deposit that money into the piggy bank. For a child that hasn’t reached at least 15 years of age they do not have the know-how to spend that kind of money. So, the best option for the child is to save that money. As a Parent we must not touch the child’s savings. Make sure you open a bank account in the child’s name and deposit this money periodically into that account. DO NOT touch that money. It is the kid’s hard earned money not yours!!!

Ok, coming back to the topic of “Pocket Money”, this not only does pocket money give kids their much needed financial independence, it also offers us our first and probably the best chance to teach them the value of money. Below are some suggestions about this extremely important topic.

Step 1: Decide When to Start

Deciding when to start giving a kid his/her pocket money is the first step. Do not give money into the kid’s hands when it does not know how to differentiate between the different currency note or coins. This usually happens when the kid is around 7 to 8 years of age. So, wait until your kid is around 8 or so in age and then start giving the pocket allowance.

Trivia:

If you feel your kid is not ready to handle the money you have all the right to delay the start of this pocket money thing. Just because your child is 8 years old doesn’t mean he needs cash. Be a responsible adult and take a wise decision. Do not be in a hurry to hand out cash to your kid.

Step2: Fixing the Allowance

Young children almost always spend their pocket money buying candies or items to eat on their way to or from school. As they grow older their needs and interests vary and their spending pattern too will vary. So, as parents we must fix the allowance that wouldn’t be too much to spoil the kid but at the same time not too little to make him uncomfortable.

Example Age-Wise Split:

a. Less than 8 years
b. 9 to 12 years
c. 13 to 15 years
d. 15 to 18 years
e. More than 18 years

Just like at work where people are given mandatory promotions at the end of a certain number of years, it is extremely vital that you give them mandatory increase in pocket money when they move over from one age group to another.

Step 3: Fix the Frequency

Another important consideration is how frequently you are going to give the allowance to your child. Younger children usually spend all their allowance within one or two days of getting their hands on the cash. So, it would be advisable to start out with smaller amounts and higher frequency like Weekly. As they grow older and learn to handle their finances well, you can reduce the frequency to say once in two weeks or monthly.

Trivia:

Decide the Frequency and Amount sensibly. Kids these days grow up in Apartment’s and gated communities where there are multiple kids of the same age group. So, talk to the kids of the other parents and find out how much they are offering as allowance. Make sure to keep your number as close as possible to the general average. If the average is Rs. 200/- per month for the kids in the 10 to 12 year age group in your colony, you can decide to keep your number at say Rs. 50 or 60 per week. You need to also ensure that you don’t give them too much cash to flaunt. Flaunting cash is not a good habit and may be a hindrance in the child’s future as well.

Step 4 – Monitor the Spending’s

The whole idea or purpose behind giving the kid an allowance is to provide them with financial freedom so that they can hone their skills at handling money. Don’t be a micro-manager. Let the kid decide what or how they want to spend their money. Your job is to set the ground rules like the Do’s and Don’ts. Once you establish the ground rules don’t trouble them excessive questions or pointers. Kids are bound to make mistakes. Don’t punish them for that. Instead teach them what they did wrong and help them understand the right way of doing things.

Trivia:

Financial Freedom does not mean uncontrolled or unmonitored spending’s. Make sure that you know what your kid is doing with the money you give them. It is extremely vital and important to ensure that your kid is not indulging in bad habits like gambling or drugs or cigarettes etc. The list of bad habits that are tempting to the adolescent youngster is endless. As parents it is our bound duty to do what is best for our child. So, never lose track of what your kid is doing…

Step 5 – Do Not Bail Them Out Financially Unless it is Extremely Essential

As I said before, kids will make mistakes. After all, even grownups make wrong choices when it comes to finances. So, we need to realize that during the first few months of their new found allowance kids will lose money or spend it on things they don’t need or exhaust their allowance within the first couple of days in the week etc. At such times, don’t bail him out. For ex: If your kid’s weekly allowance is 25 rupees and he treated himself to a cornetto and spent 20 of the 25 rupees on day one and has almost nothing to spend for the remaining 6 days of the week. So, he may come back to you for additional cash. As parents it may be hard to see our kid suffer financially but if you bail him out and refill the additional 20 rupees today, he will never learn to be responsible and be a spend-thrift throughout his life. Let him spend the next 6 days on the 5 rupees he has at hand, the next week onwards he will think and plan his spends so that the money you give him will last the whole week…

On the other hand let us say he lost his money somewhere on the way back home and is stuck and calls you for help, it is your duty to go and bail your son out because he did not do it on purpose. Even adults lose their money once in a while and kids may do it even frequently. If you help him out, make sure to give him some tips on keeping his allowance safely. It will help him be more cautious the next time around.

Trivia:

Dads are usually stringent when it comes to money matters. It is the Mom who is the “AkshayaPatra” for kids. I have done it, you have done it and in all probabilities our kids will do to. But, have a frank talk with your wife about the topic of money. Ask her to take a judgment call about handing out cash to the kid. Let the kid not sweet talk her into giving him additional money regularly. Though mom’s are always sweet and eventually give-in more often than dad’s they must also learn to say No. At least during the first few years of the child’s financial education.

Some Additional Tips:

The following are some additional tips to help you handle your kid’s financial education:

Tip 1: Don’t offer money to kids for doing house-hold work like Cleaning up the Garden or Terrace or Visiting the Grocery store etc. Those are duties of every individual households and not money making opportunities.

Why: Offering cash rewards every time your kid does something for the house will set a bad example and the child may start expecting to be compensated for every minor errand he/she may do. This is not correct. They are part of the family and should not be doing stuff for money

Tip 2: Don’t punish them for bad behavior by cutting on the allowance. Find other means to discipline them.

Why: Good Behavior is something every child needs – irrespective of the allowance they get. If you cut their allowance because they misbehaved, they may mend their ways just for the money involved. Do you really want your kid to be well-mannered just in front of you so that he will get his full allowance and misbehave with everyone else? This is what will happen if you touch their allowance to punish them. There will be little or no behavioral improvement.

Tip 3: Don’t interfere in borrowing or lending among friends

Why: Teenagers borrow and lend money frequently and it is extremely common. So, as parents we need not involve in all those matters. But, as a general suggestion we can advise our kid against the pitfalls of excessive lending or excessive debt so that they can be cautious.

Tip 4: Teach Kids the Habit of Saving – Give him a Piggy Bank and if possible a Bank Account

Why: The first paragraph in this article about kids getting money from elders is very true in India and I am sure you will agree to it. Let us say it is Diwali and your son gets to meet both his grandparents, all of his uncles, aunts etc. and goes on a “Bless Me Please” spree, he will probably collect at least a few hundred rupees or maybe even a four digit number. In such cases, teach your kid not to go on a shopping or spending spree with his new found wealth. Teach him the importance of saving for the rainy day. Tell him to start saving this money for something he has been asking you for a while; say a new Bike or a new Cricket Bat etc.

If he child realizes that spending money is easy and saving it is difficult, he will not take irresponsible financial decisions in his future.

Some Last Words:

The whole purpose of this article is to cultivate financial discipline and wisdom among kids right from a very young age. Almost all of us these days are in the “Working Class” and we have had to work our backsides off to come to the stage we are in right now. As parents it is an admirable trait to think that, I do not want my son or daughter to go through the financial hardships that I had to go through when I was young. But, if you spoil your kids for choice, they will not realize the value of hard work or money. Do we really want our kids to become that typical rich brat who causes trouble in random places and gets beat up by the hero in movies? You will definitely say that, the guy’s wealth and access to easy money is the reason why he is so spoilt. I am sure you don’t want that to happen to your kid, do you???

Be a responsible parent and teach the good things to your child.

Happy Financially Educating the Next Generation!!!

Is National Pension Scheme (NPS) A Worthwhile Investment Option?

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Around a year and a half ago, I wrote an article titled The National Pension System – De-Mystified in which we had taken a detailed look at this National Pension Scheme (We will refer to this as NPS throughout this article) that the Government of India started in 2009. A few days later there was a subsequent article titled National Pension Scheme - All your Questions Answered!!! in which I had tried to answer our blog readers questions on the NPS. It has been over 3 years now since the Government of India started the NPS. The purpose of this article is to analyze if the NPS Schemes have lived up to their expectations and the future course of action for the Indian Investor

How the Different NPS Fund Houses have performed over the Past 3 years

As outlined in the article introducing the NPS, there are several Fund Managers that an investor can choose from when he/she opens the NPS Account. Each of these fund managers may choose to invest in a different set of instruments and hence the returns will not be uniform. As a general categorization, the NPS Fund Managers manage 3 categories of funds in Tier 1:

a. Category E – Equities
b. Category C – Corporate Bonds
c. Category G – Government Securities

Different Fund Managers have performed differently in each of the above categories. After gathering details about the performance of each of the different fund managers, I have shortlisted the best or rather top 3 performers in each category over a 3 year time period. They are:

Equities – Category E Funds:
1. Kotak – 6.82%
2. ICICI Prudential – 6.43%
3. IDFC – 4.98%

Category Average Returns = 5.58%

Corporate Bonds – Category C Funds:
1. Kotak – 12.05%
2. ICICI Prudential – 11.59%
3. IDFC – 9.24%

Category Average Returns = 9.97%

Government Securities – Category G Funds:

1. Kotak – 7.95%
2. ICICI Prudential – 7.7%
3. UTI – 7.5%

Category Average Returns = 7.32%

Note:

All returns above are over a 3 year period. Don’t be amazed by the dismal returns generated by the Equity funds. The Indian stock market has been extremely volatile over the past few years and a positive returns % indicates the fact that the fund managers have done a great job.

As you can see, the funds managed by Kotak and ICICI Prudential have been the top 2 in all of the categories.

Is the NPS Scheme Popular?

The simple answer would be – NO…

If you wish to dispute this claim and say that NPS is popular, stop for a moment and give me an answer to this question – “Do you have an NPS Account?” The answer you will give in response to this question is the answer to the question above as well…

Problem No. 1: Have you seen any advertisement by any fund house about the performance of their funds in NPS? For ex: the schemes managed by Kotak Pension Fund have churned out the best possible returns in all the 3 categories. ICICI Pru has been the 2nd best performer. So, given this fact, have either of these two fund houses advertised their success? This whole phenomenal success has gone almost unnoticed. Nobody publicized the fact that their schemes in NPS were successful. Whereas, the same Kotak and ICICI Pru fund houses always advertise their best performing Mutual Fund Schemes. Why this disparity???

Problem No. 2: Have you seen anybody trying to sell NPS Schemes to investors? The NPS has approx. 25 lakh investors out of which almost everyone is from State & Central Government for whom NPS is compulsory. The distributors are not selling NPS at all. In fact, less than 50,000 people have voluntarily invested in NPS in the past 3 years. Why do you think this is happening?

Why Fund Managers are not advertising their Schemes in NPS?

The simple answer is – MONEY!!!

The fees that fund managers receive for managing the NPS schemes is nothing short of dismal. The fund management charge is 0.0009% which means, a fund manager get Rs. 9/- for managing Rs.10,00,000/- for one year. The average fee for managing a similar number in Mutual funds works out to a 4 digit number and the same for ULIPs is a 5 digit number.

Why Distributors are not selling NPS Schemes?

The simple answer to this question too is – MONEY!!!

I could not find the actual commission/fee that Distributors get for selling NPS but I would assume it will be around the same range as what the fund managers get. If the fee the person who manages the money (Fund Manager) is only Rs. 9/- for a 10 lakh investment, what do you think the distributor will get for selling NPS Schemes? Distributors feel that the profits they earn out of selling this low-cost scheme does not justify the amount of money or resources that go into selling it.

What is being done to fix this?

The PFRDA has been contemplating increasing these fee & commission charges that the distributors and fund managers receive for dealing with NPS. Hopefully this upward revision of fee will be the much needed boost to both the fund managers as well as distributors to take NPS Seriously.

However, a point to note here is that, no concrete numbers have been released by the PFRDA yet. However, it is expected to come out very soon. But, experts from the industry feel that the number would be around 0.25% (Rs. 2,500/- per Rs. 10 lakhs) which is a sizeable increase when compared to the current dismal figures.

Will this affect the Investor?

Of Course, it will. However, the impact will be almost negligible. Mutual Funds charge around 1-2% per year and ULIP’s charge even more. If we consider a 0.25% fee for the fund manager and the same for the distributor, for every 10 lakhs you invest, 9.95 lakhs is going to be effectively invested which is much higher than what happens in the case of Mutual Funds or ULIPs. So, it is safe to say that the impact will be very minimal.

How Increasing the Fee’s will help?

First of all, if the fee fund managers get is reasonable for the effort they spend managing the money, they will start advertising the fact that they are managing X Crores of money for NPS. Second of all, if distributors can make a reasonable income by selling NPS products, they will start advertising as well as selling NPS Schemes to investors. So, it will be a WIN-WIN Scenario.


Is National Pension Scheme (NPS) A Worthwhile Investment Option?

Of Course – YES.

Frankly speaking, the NPS Schemes are managed by the same expert fund managers who manage the top mutual fund schemes of India. So performance wise it would be safe to say that NPS schemes will fare at around the same level as regular mutual funds.

More importantly, the fee’s charged by NPS is the least in the industry. Even if we assume a 0.25% fund management fee and a 0.25% distributor fee, the overall fee’s paid works out to less than 1%. The fees and charges for Mutual Funds and ULIP’s or other Pension Plans is much higher. So, effectively more of our money will get invested and in turn, we will get better returns.

To further substantiate my claim that NPS is a better investment option than a ULIP Pension Plan – due to the lower fee structure, the next article is going to be a comparison in terms of overall returns between the NPS and ULIP Pension Plans.

If you are still not too sure if the NPS is a good investment option in comparison to the regular ULIP Pension Plans that are being sold aggressively, just relax, the feeling is very common. The next article will be a simple returns comparison between the two products to help you decide...

Happy Investing!!!

Returns Comparison – NPS Vs. ULIP Pension Plans

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The previous article was an analysis of the performance at the end of 3 years of the National Pension Scheme a.k.a NPS in India. Towards the end of the article, I had said that, I will post a returns comparison between the NPS and a regular ULIP Pension Plan. So, here we are…

Before we begin: Be prepared for the Shock of your Life when you actually see the number comparisons!!!

Let us say You and I are good friends and decide to invest Rs. 1 lakh every year for our retirement for the next 25 years. You spoke to an investment advisor who has convinced you to select a fantastic ULIP Pension Plan which he says is going to give you absolutely fantastic returns while I decide to invest in NPS Instead.

So, what will our investment be worth at the end of 25 full years?

To arrive at that number we need to make a few assumptions before hitting the calculator. Don’t worry, you don’t need to perform any calculations. I will do it for you and give you all the numbers.

Assumptions:

a. Both of us invest the same fixed Rs. 1 lakh for 25 years making the total investment of 25 lakhs each
b. Both investments are going to give a uniform 9% rate of returns
c. Fund Management fee is payable as a % of the corpus. 0.25% for NPS and 2% for ULIP Pension Plans
d. Premium Allocation Charges is payable as a % of the amount invested (Freshly) every year. 0.25% for NPS whereas the Pension fund charges a Premium allocation charges as follows – 30% in the first year, 20% in the second and 10% in the third. After the third year they charge a flat 2% for all the remaining years

So, if we include all the above information into the calculator, the details workout to be as follows:


As you can see, my investments are worth 88.23 lakhs at the end of 25 years while your investments are worth 61.74 lakhs. A difference of over 25 lakhs which in fact is the amount that we both invested.

Why the Difference?

1. Difference in Fees/Charges – I Paid a flat 0.25% premium allocation charges and another flat 0.25% fund management charge whereas the numbers were much higher for the ULIP Pension Plan
2. I Paid a flat Rs. 250/- every year as Premium Allocation charges which works out to a total of Rs. 6,250/- for 25 years while you paid varying Premium allocation charges that work out to a total of Rs. 1,04,000/- for 25 years which is approx. 16 times what I paid
3. I Paid a flat 0.25% fund management charge (As a % of the total corpus that was being managed) to the fund house every year that works out to Rs. 1.81 Lakhs
4. Though your fund management charge was fixed at 2% per year, the total amount you ended up paying was Rs. 11.91 Lakhs
5. You paid approximately 12 lakhs more than what I paid as fees and this extra amount that got invested against my name too resulted in additional returns

If you want a Year on Year returns comparison between your ULIP Pension Scheme and my NPS, see the tables below:

ULIP Pension Plan Returns:



NPS Returns:


A Word of Caution:
The NPS is governed by the Government of India while ULIP Pension Funds are governed by the respective Insurance Company. So, technically speaking the returns in a ULIP may be 1 or 2% higher than the returns generated by NPS. But, the difference in terms of returns may not be more than 1 or 2%.

This is a big May Be because the Government is closely monitoring the performance of the NPS Schemes and hence, even this 1 or 2% difference too is highly unlikely.

Some Last Words:
Do I need to say that NPS is a better investment option than ULIPS? The main reason being extremely high charges in case of ULIPs. Why pay 12 lakhs to the ULIP Company to manage our money while an almost similar option is available at a much cheaper rate???

Happy Investing!!!

Rep. Luker Introduces Bill To Exempt Current Military and Veterans From Hunter's Education

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If it seems strange that past and present members of the armed forces are required to pass a hunter's education course before obtaining an Idaho hunting license, Rep. Lynn Luker, R-Boise, thought so too. Today he introduced a bill before the House Resources and Conservation Committee to exempt current members of the military and veterans from the hunters ed requirement. The committee voted unanimously to print the bill and put it on course for a public hearing.
http://chumly.com/n/10658aa

Bad News for Insurance Investors and Agents

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Oh yes, you read the title right “Bad News for Insurance Investors”. You may be wondering over the fact that I have used the term “Insurance Investor”. If you have read the other insurance related posts in this blog, I have always been an ardent advisor of the fact that Insurance and Investment are two different entities and should not be clubbed. But, now I have used the term Insurance Investor which is kind of misleading isn’t it?

Don’t be confused my dear friend. The purpose of this article is to share some bad news for all those Indian citizens who have taken Insurance Policies as Investment options.

Why this Article

This article was written for multiple reasons:

1. Indians are one of the very few people who actually buy Insurance policies for Investment
2. Our fathers bought LIC Policies as investments, they advised us to do the same and still feel that Endowment Policies from Life Insurance Companies are the best investment options
3. Insurance Sellers (Agents) are notorious creatures who have been selling all the products that are beneficial to them (while it should’ve been beneficial to us) by wrongly stating the facts.
4. The IRDA wants to ensure that the interest of the normal insurance investor is protected

So, what is this Bad News for Investors?

The Insurance Regulatory and Development Authority (IRDA) has proposed certain changes to Endowment life insurance policies which will greatly affect the common investor who buys insurance products for investment. The Bad News is:

Bad News No. 1: Going forward, big annual bonuses will no longer be paid out.

Why: IRDA has proposed that a minimum death benefit must be set on Endowment Insurance Plans. This means that, in order to accommodate this minimum death benefit the insurance company will be forced to cut-back on the annual bonuses to the policy holders

Impact on Agents: One of the main selling points for Endowment Policies from the Agents mouth is the fact that we will get big fat loyalty bonuses every year for investing. So, if this is not going to happen, their biggest trump card is trumped out…

Impact on Investors: The Bonuses are the reason why the overall returns of Endowment policies try to creep upwards around the 6-7% range. So, if bonuses are cut-back, then the eventual returns from your endowment policy could be lesser than 6%.

Bad News No. 2: Insurance Premiums are set to go up

Why: As a result of the above news, Insurance Cos will be forced to set minimum death benefits for their customers. The current premium rates are not at that level. So, in order to accommodate the higher final values the premium will have to be hiked by the Insurance Co's (Unless they want to go bankrupt)

Impact on Agents: Not Much. Instead of the earlier X amount premium they are going to ask the customer to pay up X + Y amount.

Impact on Investors: The Annual Premium for the same policy with the same maturity amount is set to go up significantly and it will vary based on various factors like the Investors Age, Insurance Co, Policy Term etc

Is this Really Bad News?

Actually speaking – From the Customer point of view, No. This is in fact good news for the customer who buys these policies for the purpose of Insurance. Since the amount of insurance he gets out of these policies is higher, it will be beneficial for his family after their time. So, isn’t this good news? If we think from only the insurance stand point of these policies?

What is this Minimum Death Benefit?

This is the minimum amount an Insurance Company has to pay the policy holder in case of an untimely death when the policy is in force. The number will be calculated as follows:

For individuals who were less than 45 years old when they signed up for the policy:

Of the following – whichever is higher will be paid

1. 10 times the annual premium or
2. Half the Annual premium multiplied by the policy term or
3. 105% of all the annual premiums paid

For individuals who were older than 45 years when they signed up for the policy:

Of the following – whichever is higher will be paid

1. 7 times the annual premium or
2. 25% of the Annual premium multiplied by the policy term or
3. 105% of all the annual premiums paid

What is this Bad News for Agents?

The IRDA has proposed upper limits a.k.a caps on the commission paid out to agents for selling endowment policies. Endowment policies are one of the highest commission paying policies available for agents and hence they sell it like hot cakes. The IRDA has suggested that:

a. For all policies with tenure of 5 to 9 years, the first year commission cannot be more than 14% of the annual premium
b. For all policies with tenure of 10 to 14 years, the first year commission cannot be more than 28% of the annual premium and
c. For all policies with tenure of 15 years or more, the first year commission cannot be more than 40% of the annual premium

Why: IRDA Feel that misselling of insurance products happens predominantly due to the commission that agents earn by selling a particular policy. So, by establishing an upper limit on the money an agent earns by selling a particular policy, IRDA aims at reducing this misselling.

Impact on Agents: Commission Income is the only income that Agents get by selling a particular policy. So, if the commission they get out of selling a particular product is less, they will probably not advise a customer to buy it, if it wont be beneficial to the customer

Impact on Investors: The commission is actually paid from the money we pay as premium. So, lesser the commission that is paid, the more the actual money from our premium that gets invested. So, this means that a bigger portion of our money will get invested and hence a slightly higher returns can be expected.

Final Verdict:

I have said this numerous times and will say it again – Insurance Products are taken for the benefit/use of our family members after our death. If you want to use the money you pay as premium towards your policy before your time, invest that money in other investment options like Shares, Mutual Funds, Bank Deposits etc.

Did you know the average returns an Endowment Policy gives to its customers? You will be shocked to know the fact that it is only 6% on average. This is at least 2% less than a Bank Fixed Deposit and other investments like Shares or Mutual Funds may give you even double digit returns.

So, if you are satisfied with below average returns (Only 6%) then please go ahead and Invest in Endowment Life Insurance Policies.

Happy Insuring Yourselves!!!

Does your Wife Have Insurance?

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Insurance – This is one topic that has been given a lot of attention in this blog. In spite of that, not many of us today still have the know-how to plan the insurance requirements of our family. Many people are under the impression that, Insurance is required only for the “Earning Member” or the “Bread Winner” of the family. Though this statement is not entirely false, it isn’t entirely true either. The purpose of this article is to analyze and find out if your Wife, who is the “Home Maker” or the more commonly used term “House Wife” needs Insurance…

Before we Begin – These days a lot of women, esp. in big cities are taking up lucrative jobs and hence they have access to financial advisors who teach them the importance of insurance. So, this article does not cover them. Our article here is going to exclusively concentrate on the “House Wives” of India who make up at least 70% of the female population in this country.

This article is not about Health Insurance. Health Insurance is Mandatory for every individual in the family irrespective of their age or what they do. So, don’t confuse the general term Insurance used in this article with health Insurance. We are only talking about Life Insurance.

Importance of the House Wife

In a country like India, the house wife contributes to the family/household in the form of cooking, educating the children and truck loads of other work. But, their importance or the value of the services they provide (In Monetary Terms) is greatly neglected.

Think this way, let’s say our Mother, who has been single handedly taking care of all household chores for the past 20 odd years is ill and cant do things that she used to up until a few weeks ago. So, you intend on hiring a maid, a cook, a cleaner etc. to help her. If you think of the monetary contributions we need to make to hire all these extra staff to run the family, you can realize the monetary worth of the contributions our Great & Sweet Mom has been doing for years without complaining even once.

We all know how much impact the loss of the home maker will have on families. The impact will be even worse if the family is in the low or the middle income earning group where they may not have the luxury to hire multiple people to help with the household chores.

Something that nobody can replace is the mental guidance and support that Mothers give their kids or that wives give their husbands. Unless we find a capable psychiatrist, this guidance and support will be greatly missed. This love and affection that the Mother or the Wife gives is priceless and CANNOT be replaced.

Does the House Wife Really Need Insurance

Let me start off by saying that NO ONE can replace a home maker mother and her loss will definitely have a significant impact on the rest of the family. To answer this question let us look at the things involved in the decision:

• Without a Mom at home, the child has to be left in a day-care center which would involve significant costs. This may not be easily feasible in low or middle income group families
• Without a Mom at home, we need a cook, a maid to take care of cleaning of the home, to take care of gardening work etc. The list will be pretty long and all these people will expect Salary in return for their services
• Without a Mom at home, children may need additional coaching (like Tuition) in order to excel in studies which again will require fees to be paid

Now, you ask yourselves the same question “Does the House Wife Really Need Insurance?”

I am sure the answer will be a Resounding YES.

Reason is pretty simple: The value of the services our mom gives to our family in monetary terms is incomparable. Every household activity will require a dedicated individual to handle it in the absence of the mother and they will expect a salary. In low or middle income families, this sudden onset of expenses may not be immediately feasible given the fact that the husband’s salary will not change by much immediately. So, at this scenario, if there was insurance, the family will at least have some surplus funds to utilize to try to bridge the huge gaping hole that the loss of the Mother leaves in a family.

Deciding the Value of Insurance for the Home Maker

There is a term called Cost Replacement Analysis in finance that can be used to calculate the value of something or someone for a certain duration. Simply put, you will calculate how much money is required to run the family in the absence of the Home Maker on a per month basis and then multiply it by 12 to get the annual number. Finally you multiple this by 10 or 15 in order to arrive at the figure that will be required for the next 10 or 15 years. This should be the monetary value of the Insurance that the Home Maker will need.

Some Last Words:

Proper Financial Planning is essential for any family. Open discussing and fairly calculating the insurance or investment requirements will not only build a prosperous family, it will also cultivate better understanding between the family members. The Home Maker is an integral part of any family and CANNOT be replaced. In their absence, the family has to try to keep going because life doesn’t stop. However, insuring the home maker will give the family the required monetary cushion to absorb the impact and try to recover from the devastating loss.

Happy Insuring!!!

Public Provident Fund (PPF) De-Mystified

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Public Provident Fund or PPF as it is more commonly called has been the staple investment avenue for thousands of Indians over the past two decades. Not only is it a good investment option, it also gives us tax benefits which makes it doubly attractive for an investor. We have covered the PPF as an investment option at a high level multiple times in this blog. Remember the articles covering Investments and Income tax like Best Tax Saving Options Available for Investment or Saving Income Tax through Investments?
The purpose of this article is to dive deeply into this great Investment Option. Lets get started!!!

What is PPF?

Public Provident Fund or PPF is a scheme that was introduced by the Government of India in the year 1980. Ever since that year, PPF has been a preferred choice for investment for the risk averse investor. Assured and Tax Free Returns make PPF even more attractive.

The PPF is just like the regular Provident Fund Account that salaried employees get throughout India. The only difference being, the PPF account can be opened by anyone and contributions can be made as per their preferences. The money saved in the PPF Account is backed by the Government of India and hence it is practically Risk Free. The money in the PPF Account earns interest just like the PF account which will be credited into our account by the Government.

What Makes PPF different from the Regular PF?

The Regular PF Account is available only for Salaried Employees in which case the contribution towards the PF Account will be made both by the Company where the person is working as well as the individual himself whereas, the PPF Account is available for anyone and everyone. It is available even for self-employed professionals or businessmen. The other difference is that, the contribution towards the account is made only by the investor and no one else.

Why Choose PPF?

There are multiple reasons as to why we must choose PPF as an investment option. Some are:
a. The Returns are Tax Free
b. The Money is backed by the Government of India. So, it is totally safe
c. The Investments made are exempt from Income Tax under Sec 80C (Up to 1 lakh per year)
d. One can open a PPF account in any bank or post office. Some banks even give us online options to open PPF Accounts through Internet Banking.
e. The Rate of Interest offered is very good. The current rate is 8.6% which is very good. The average rate of interest offered is around 8% which makes it above average returns for the risk averse investor.

If an investor contributes 1 lakh every year for 15 years, he will be left with around 31 lakhs at maturity (If the rate of interest goes at around the same 8.6% range). Your money has doubled at the end of 15 years which is amazing considering the fact that the money is totally safe and tax free.

Trivia:

If we consider the Tax Benefits that an investor will gain by investing in PPF along with the returns offered by PPF, the Returns work out to be more than 15% and would vary based on which tax slab the investor is in.

Some Key Points Reg. PPF Investment:

• PPF is a Long Term Investment Option (15 years Maturity)
• Maturity can be extended by an additional period of 5 years to make it a total of 20 years
• There is a minimum investment required every year (Rs. 500) to keep the account active
• There is an upper limit on the amount of money that can be invested every year (1 lakh) by an investor
• One Investor can have only one PPF Account. However, you can have one more in your spouse’s name without having to worry about tax liabilities even if the spouse is a home maker or has no income.
• If you have more the one PPF Account (In your own name), you need to close the others. When the other accounts are closed, there will be no Interest paid on the balance in the other accounts.
• Interest is earned on the PPF Account based on the minimum balance in the account between the 5th and the 30th of the Calendar month. So, if you contribute 10,000 towards your account on the 4th of this month, you will earn interest on it that month as well but if you invest on 6th, the 10,000 will start earning interest only starting next month.
• The interest is credited into our accounts annually (Once every year)
• Withdrawal is allowed once a year after the 6th year only and that too is only a % of your total balance. Full withdrawal is allowed only after the 15th year.
• PPF Accounts can be held or owned by only one individual. This is not like a bank account which can be jointly owned by two or more people
• The Balance in your PPF Account CANNOT be used as Collateral for loans that you may take
• Nominees can claim the balance in the PPF Account along with the interest accrued on the death of the account holder. The account has to be closed when the account holder dies.
• The PPF Account cannot be transferred from one person to another. Even in case of death of the account holder his/her nominee/legal heir cannot continue the account. They will be forced to close it.
• Loans are available against your PPF Money but the rate of interest has been hiked recently by the Government to discourage investors from dipping into their savings. The Government decides the Loan Rate every year just like the interest rate it pays to us.

PPF and Inheritance

We covered the concept of WILL and Legal Succession in one of our older post titled Have You Written Your WILL?. So, the question that arises now is what happens to the money in the PPF Account if the account holder died with no Nomination or WILL?

If the subscriber dies and there is no nomination at the time of death, the balance in the account, if it is up to one lakh, will be paid by the Accounts Office to the legal heirs of the deceased on receipt of application in Form G supported with necessary documents without the production of succession certificate. If the balance is more than one lakh, the production of Succession certificate will be necessary.
Verdict

In a Nutshell, the PPF account is a great investment option for anyone residing in India. If we consider the Tax Benefits that we may get out of the investments into the overall returns, the number stands at an astounding 15% or more which makes it one of the best debt investment options available in India. Contributing a good amount into our PPF Account every year can help us build a good Nest Egg for retirement.

So, if you do not have a PPF Account now and are reading this article, Please go ahead and open one for yourself and make investing in the PPF Account a disciplined activity every month or year. You will not regret the decision at all…
Happy Investing!!!

Rep. Luker Introduces Bill To Exempt Current Military and Veterans From Hunter's Education

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If it seems strange that past and present members of the armed forces are required to pass a hunter's education course before obtaining an Idaho hunting license, Rep. Lynn Luker, R-Boise, thought so too. Today he introduced a bill before the House Resources and Conservation Committee to exempt current members of the military and veterans from the hunters ed requirement. The committee voted unanimously to print the bill and put it on course for a public hearing.
http://chumly.com/n/10658aa

Representative Lynn Luker Is Among Twelve Appointed By Governor Otter To Study Health Insurance Exchange in Idaho

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Governor Otter announced appointments to two study groups focused on Medicaid and Health Insurance Exchanges in light of the US Supreme Court's June 28th split decision on Obamacare. Under the decision states cannot be penalized for rejecting the Medicaid expansion contained in the law, however, states still must decide whether to create their own Health Insurance Exchange or have the Federal Governement do it. www.spokesman.com/blogs/boise/2012/jul/13/otter-na...roups
https://chumly.com/n/151c8b5

2012: The Year of the Housing Recovery, Update

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DataQuick -- "An estimated 41,280 new and resale houses and condos sold in California last month, making it the strongest August since 2006. Last month's sales total was up 4.5% from 39,507 in July, and up 9.4% from 37,734 sales in August 2011."

"The median price paid for a home in California last month was $281,000, the same as the month before and up 12.9% from $249,000 in August 2011. The July and August median was the highest since September 2008, when it was $283,000. August marked the sixth consecutive month in which the state's median sale price rose year-over-year." 

"Of the existing homes sold in August, 20% were properties that had been foreclosed on during the past year. That was down from a revised 21.7% in July and down from 34.3% a year earlier. Last month's figure was the lowest for any month since foreclosure resales made up 18.3% of the resale market in November 2007."

MP: Isn't this exactly what a housing recovery looks like? 

California home sales were the highest in six years for the month of August and up almost 10% from a year ago, the median sales price was the highest in almost four years and up almost 13% from last year, median prices have increased year-over-year for the last six months, and the share of foreclosure sales in August was the lowest in almost five years.  

If this isn't a real housing recovery in California, how would a real recovery be different?