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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Guaranteed Income Insurance Plans Misinform Misguide Mislead

Warning: Guaranteed income insurance policies are GUARANTEED to harm your financial health.

Don’t believe me?

Check it out for yourself...

For your easy understanding, I have divided this whole drama into three Acts.

Act 1: What do we NORMALLY understand by the word ‘Return’ or ‘Benefit’

Suppose you have a surplus of Rs.1 lakh, which you invest in a Bank Fixed Deposit.

Let’s say the rate of interest offered is 8% per annum.

So, after one year, you will receive a sum of Rs.8,000 (= Rs.1,00,000 * 8/100) as interest income.

This is how we calculate our returns.

This is what we mean by the term 'returns'.

It is nothing but the yield on our “investment”. [Remember the word “investment”]

Now suppose I offer you 10% rate of interest — but only on Rs.70,000 (and not the entire Rs.1 lakh). You think you will refuse this offer. But you don't. You are fooled into investing in this inferior offer.

How? Read on... 

Act 2: How to sell an investment that offers lower interest rate

Suppose an investment offers only 4-6% p.a. returns. Would you put your money in such a scheme?

Definitely not!

Why should you go for an investment with lower returns, when you can safely earn much high returns elsewhere?

This is where the jugglery — financial and lingual — comes into the picture.

Many people have a phobia against numbers. Plus, THICK legal documents in FINE print bore them. That is why the levels of financial literacy are abysmally low... not only in India, but in advanced economies too.

This makes life easy for the unscrupulous companies and sellers of financial products.

First, they create a rather complicated and confusing product. (The outcome is sometimes so complex that even the sellers fail to fully understand it.)

Then, they create a beautiful, emotional and captivating story around it. (The sales promotion and advertising is so brilliant that sometimes even the experts are tempted by it.)

End result: You are lured into putting your hard-earned money into a sub-standard investment product.

I sincerely hope you spill coffee over guaranteed income insurance form.

Act 3: Is it good to buy an insurance policy offering GUARANTEED income or benefits

Indians have a fascination for investments that offer “guaranteed” or “assured” returns.

What they fail to realize is that such guarantee or assurance often comes at a steep cost. (Simple... why would anyone take risk on your behalf and take a hit if things go wrong?)

In this context and the Acts 1 & 2 that unfolded earlier, let’s analyze one such typical and extremely alluring "guaranteed income" insurance scheme — 

One. You pay a premium of Rs.50,000 per year for 10 years
Two. You are insured for a sum of Rs.3.15 lakhs
Three. You receive
a. Guaranteed Annual Income of 8% p.a. of the Basic Sum Assured PAYABLE MONTHLY FOR THE NEXT TEN YEARS (i.e. Rs.2100 every month from the 11th to the 20th year); plus
b. Guaranteed Maturity Benefit of 200% of the Basic Sum Assured (i.e. Rs.6.30 lakhs in the 20th year)

Sounds really great!

A fixed rate of 8% every year, when the interest rates on bank deposits are falling day-by-day PLUS double the Sum Assured on maturity.


Did you read the above guarantee carefully and understand its implication? This is where you will find the financial and lingual jugglery I mentioned earlier.

The guaranteed rate of interest is calculated NOT ON the amount invested by you, which is how the returns are normally understood and calculated. 

Instead, it is calculated on something else… in this particular case it is the Sum Assured. You invested total Rs.5 lakhs. Whereas 8% income is calculated only on Rs.3.15 lakhs Sum Assured. In other words, ZERO returns on the balance Rs.1.85 lakhs.

Accordingly, proper calculations will show that your total returns (i.e. annual income for ten years + maturity benefit) would EFFECTIVELY be around 4% p.a. only… yes, you read it right… it is as bad as a Bank Savings Account.

In short, you can expect to earn at best 4-5% returns from such Guaranteed Income Insurance Plans.

Even a simple Fixed Deposit would be a far better alternative to such pathetic insurance policies.

So, what's the solution?
Legally, you can’t find fault with such schemes or its wordings. But surely, it is ethically wrong to paint a rosy picture and mislead the innocent unaware investors. 

It is not possible for many investors to understand such nuances of the policy wordings. Just how many people can make this distinction between the ‘Return on Investment’ and ‘Return on Sum Assured’? Very few indeed!

Worse, I have seen many reputed newspapers carry misleading articles and provoking headlines. These imply as if you will earn high “real” return on investment in such policies. This is definitely not expected from the supposedly informed, neutral and impartial media.

In short, it’s a big bad world out there. There is no dearth of people ready to take you for a royal ride. 

If you don’t want to be scammed, you have to become financially savvy (or, at least, hunt for a rare breed of trustworthy and honest financial mentors).

Alternatively, make a simple pledge I Shall Never Buy Insurance For Investment Purposes.

There is simply no excuse for inattentiveness, illiteracy and indolence.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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