Category: Insurance

28 Aug 2017
Is this Diamond worth your money

Is this Diamond worth your money?

Life Insurance Corporation of India (LIC) is aggressively marketing its insurance policy, LIC Bima Diamond Plan, as a ‘Diamond for Life’. Let’s see if this ‘Diamond’ is worth your money?

LIC Bima Diamond Plan is a typical non-linked, with-profit, limited premium payment money-back life insurance plan. Non-linked means it is not ULIP or your money will not be linked to equity market movements. With-profit means, it is like investment product where you get returns on your investment based on the product feature. Money back means at a different interval of the policy term, you will receive some money from this policy.

Highlights of the policy

  1. It is a fixed tenure insurance policy. There are three tenure options – 16 years, 20 years and 24 years.
  2. The premium paying term is less than the tenure of the policy e. g. for a 16-year policy you have to pay only for 12 years.Money-Back (Survival Benefits)every 4th year.
  3. The premium rate of LIC Bima Diamond is one of the highest.
  4. It gives life cover even aftermaturity of the policy. It gives extra protection up to half of the policy tenure additionally. For example, for a 16-year policy, you would get life cover till 24 years. However, during the period of this extended protection, the sum assured would be half of the original amount.
  5. It gives life cover even after you stop paying the premium (called Auto Cover). This relaxation is up to two years.
  6. Itvdoes not give annual reversionary bonus. You would get loyalty addition after a certain tenure.
  7. This plan hasa loan facility.
  8. You can take accident & disability rider and new Term Assurance Rider.
  9. The maximum sum assured is Rs 5 lakhs, minimum 1 Lakh and entry age is minimum 14 years completed.

Positives of Bima Diamond Plan

  • It gives life cover even in case of non-payment of premium for up to 2 years. This feature does not leave you vulnerable at the time of financial distress.
  • The death cover continues beyond the policy maturity and can keep you insured till the age of 76 years.
  • You can add term assurance and accident rider to enhance your death cover.
  • You can avail loan from this policy for up to 80-90% of surrender value.

Negatives of Bima Diamond Plan

  • The premium rate is too high. For a sum assured of Rs 5 lakhs, the premium is up to Rs 46,000 per year.
  • Maximum sum assured is Rs 5 lakhs. This amount is exceedingly low for a normal middle-class family.
  • Though touted as a benefit, the sum assured gets halved in extended protection period which is grossly insufficient for a family after 20 years.
  • The maturity benefit would be very low as it pays the basic sum assured less the periodic money back payment already done. Thus if the sum assured for a 20-year policy is Rs 5 lakhs, the maturity sum assured would be only Rs 2 lakhs.
  • The returns from LIC Bima Diamond is less than the market rate. LIC is still giving 5-6% return. One would be in a better position by opting VPF and PPF for saving purpose.
  • Auto Coveris highlighted as a unique benefit but in case of death during this period, the due premium is deducted from the benefit payable. So it seems the idea is to run the policy as much as possible instead of showing in their books as LAPSED policies.
  • At maturity you are eligible for Maturity Sum Assured, which is 55% to 40% of Basic Sum Assured and Loyalty Addition. Hence, do notthink that the maturity benefit will be full sum assured as is the case with other plans.
  • Extended cover is showcased as a unique benefit. But, head-to-head, LIC’s New Jeevan Anand seems to be better in this aspect as offers the extended cover forever and full to the value of sum assured. In this plan, it is only up tohalf of policy term and half of sum assured.

Final Verdict

Any Endowment insurance plan of LIC is primarily an investment product, wherein you actually neither get good insurance cover nor satisfactory investment returns. It is sold as a good combination of protection and returns while all endowment insurance policies of all insurance companies fail on both the counts. In fact, the problem is mixing insurance with investment. Such a combo product never benefits the investor but only the insurance companies and the agents since the premiums are high, commissions are high and when time you discover this after taking the policy, you realise it has been structured in such a way that you can exit only at prohibitive costs (losses) to you.

Hence, we would recommend you to consider only a good term insurance plan for death cover, if you do need such a cover. For tax saving purpose, choose Equity Linked Saving Schemes (ELSS) or PPF/DSOPF. For investments, nothing better than a good portfolio of mutual funds.

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03 Apr 2015
Can Your Bank FD or PFDSOPF match this

Can Your Bank FD or PF/DSOPF match this?

We are generally comfortable investing our money in bank FDs, PF/EPF/DSOPF and other fixed income instruments, always smug in the belief that our money is safe and will grow up adequately to meet our aspirations regarding self, spouse and children. However, we neglect the combined damaging effects of Inflation & Taxation from our calculations.

If your safer investments are tax-free (generally the PF/EPF/DSOPF, and Insurance policies), they should generate at least 8% per annum to merely neutralise long-term inflation and your money actually grows only if you earn beyond this. If the investments are not tax-free (all your bank and post office instruments including savings accounts, FDs, PO MIS, SCSS and RDs) and say, you are in 30% tax bracket, your investments should give at least 11.43% annualised returns for you to ‘break-even’. For 20% and 10% tax brackets, the minimum returns to break even are 10% and 8.88% respectively. We call this these the ‘Tread-mill’ rates! When you are earning this return, you feel you are moving fast. But when you get down from this tread-mill and take a reality check, you find you are not even  reaching the place where you started from – you’ve actually lost due to inflation and tax.

Have you ever considered Debt Mutual Funds as an investment? Debt funds generally invest in Govt Bonds, equivalents of bank FDs and Company FDs. They have no component of stock investments. When interest rates go down, while your FDs will lower the rates, the returns from long-term debt funds will actually rise. Even without that, currently long-term debt funds are clocking returns between 11-13% per annum. Also, if you remain invested in them beyond 3 years, you are likely to pay a tax of just about 5-7% after 3 years and maybe Nil tax after 4 years, going by the past 3-4 years’ performance and inflation statistics.

What about Equity Mutual Funds? You take stock market risks and get the risk-premium there. A large number of investors continue to believe that stock market movements can lead to a complete loss of your money if the markets do not behave. This happens only if you try very hard to achieve such a complete loss!Consider this – what was one of the worst financial year for Indian stock markets? Undoubtedly 2001-02. Twin Towers attack in USA took place on 11 Sep 2001 (9/11, famously) and the Indian Parliament attack on 13 Dec 2001. The BSE Sensex was 3604 on 30 Mar 2001 and 3469 on 28 Mar 2002. So if you kept your head when everybody else was losing theirs, there was literally no effect even in the worst of the crisis.

See the returns chart for the last financial year (FY 2014-15) published in Economic Times of 03 April 2015. Do you still think you can afford to leave out mutual funds from your portfolio if you want to meet your future financial commitments comfortably?The Best Performing Assets

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25 Dec 2014
nsurance is Not Investment-

Insurance is Not Investment

Insurance is a key part of every individual’s financial planning but far too many people are thinking of it as an investment…

‘I invested Rs2 lakh last year, out of which Rs 80,000 was in insurance.’ The genesis of the article you are reading was this one single sentence in an e-mail that was sent to Value Research recently. There was nothing unique about this e-mail–we get many every day asking us for investment advice. The fact that the writer, without any hesitation, considered insurance to be investment was also not unique. What has really caught our eye is that we are seeing more and more of this attitude.

An ever-increasing number of people are ‘investing’ in insurance, driven, no doubt, by the sharply higher amount of insurance advertising and marketing that they are exposed to. Over the years, we have been bombarded by insurance pitches at a rate that is far higher than used to earlier. This is a natural by-product of the competition in the insurance industry and by itself there is nothing wrong with this.

Whereas earlier, insurance marketing was driven solely by competition between insurance agents and agents’ own drive to make more money, today the marketing hype is driven by insurance companies competing with each other. Insurance advertising in the mass media, which was almost non-existent once, has grown hugely. By some measures, mass media advertising of insurance products is around eight times what it used to be three years ago. On the face of it, there’s nothing wrong with this. After all, it’s an uncertain world and most people sleep better at night knowing that they’re well insured. Actually, there is something deeply wrong about the way the whole activity of insurance is evolving.

Here’s the problem: a bulk of the money that flows into the insurance companies’ coffers is not payment for insurance but for what are essentially investment products. Generations of Indian have been brainwashed by insurance agents into thinking that buying term insurance is a stupid thing to do.

Here’s how it works. An insurance agent chases you, usually referred to by someone just to get rid of him (insurance agents serve a useful purpose but hardly anyone in this world is ever able to talk to one without instantly developing an urge to get rid of him). When he finally traps you, he never mentions term insurance on his own and if you bring up the topic, he immediately warns you that you will not get anything back. ‘No benefit’ is the phrase he normally uses. Since you certainly don’t want to do anything that carries no benefit, your thinking veers towards policies that supposedly carry a benefit.

They do carry a benefit of course, but this benefit is largely for the agent and the insurance company. The reason for this is a secret of the psychology of insurance-buying that every agent understands but few insurance buyers (or ‘life’, as they are called in the insurance business) do. Here’s the secret: the ‘life’ thinks in terms of the cover he or she gets, while the agent and the insurer make money in terms of the premiums that the life pays. The ‘life’ will come to a purchase decision that is something like, “If I die, Rs20 lakh ought to be adequate for my family”. Once such a number has been put to what the life’s life is worth, it’s in the agent’s interest to steer the life’s thoughts away from the cheaper term insurance policies and towards more expensive policies.

You can easily verify this by conducting a little experiment. Call a life insurance agent, pretending to be a ‘life’. Tell him that you would like to insure yourself for Rs20 lakh and ask him to suggest a policy. Now, call another agent and say that you would like to spend Rs 3000 a month on insurance and ask him to suggest a policy. In the first case, the agent will either never mention a term insurance or will talk you away from it. In the second case, once the agent is sure that you really are not willing to spend more than Rs 3000 a month, he will be just as glad to sell you a term insurance.

This combination of factors–the business model of insurance selling plus the insurance buyers’ hunger for ‘benefit’ has resulted in a situation where too many otherwise money-savvy Indians are not thinking clearly about what insurance is, how it is different from investment and how they should best go about insuring themselves.To be sure, there are many superficial similarities between insurance and investment, and this is what causes the confusion. Loosely speaking, both involve giving money to a financial service provider in exchange for a future benefit but there the similarity ends.

Let’s take a systematic, back-to-the-basics look at what insurance is and how it should be bought and compare this to investment. The purpose of insurance is to cover the financial aspect of risk. The risk can be of property, life, health, legal liability and of many other kinds. The only logical kind of life insurance that makes sense is term insurance because only in that case are you are insuring against a risk that is insurable. The moment you buy any other kind of insurance, you are actually making an investment that is disguised as insurance.

The problem with buying investment disguised as insurance is that there are many characteristics of insurance that are most undesirable in investments. Here are some major problems.

Illiquid: Investments ought to be liquid. After all, it’s your money and if you really need it, you should be able to get your hands on it. However, the investment part of your insurance policy is locked in for enormous periods of time. Sure, there are investments like public provident fund and other tax-saving investments which we recommend. However, those offer a far better deal in some other way, either in tax exemptions, or in sovereign guarantees or in the relatively short period of lock-in and often a combination of these. The investment part of insurance offers moderate returns and decades-long lock-in. This just doesn’t make sense.

Lack of transparency: We believe that transparency should be followed like a religion in every kind of financial service, most of all in insurance on which people depend so totally. Malpractices, inefficiency and poor performance in any kind of financial service are almost always rooted in lack of transparency.In this regard, the insurance industry in India just doesn’t measure up to the standards that are followed by the mutual fund industry. There is absolutely no valid reason why you, as an investor, should have less knowledge about what your insurer is doing with your money than you have about what your mutual fund is doing with it. Daily NAVs, change in key personnel, procedural rules about justifying investment decisions and the myriad other rules that mutual funds follow need to be imposed on insurance companies as well.

Cost: Compared to what agents selling mutual funds, Reserve Bank of India and other bonds and Post Office deposits get, the commissions received by insurance agents are a scandal. The commissions are enormous, generally around 15 per cent of first year premiums and 7.5 per cent in the second and 5 per cent from the third year onwards. For a financial product that is supposed to be an investment, this is a shocking level.At the end of the day, these commissions are probably the strongest argument against investing with an insurance company. Given what safe investment earns these days, this commission alone ensures that this ‘investment’ is an incredibly bad deal.Sure, insurance is necessary, but at these commission levels, it is a necessary evil. The only way to go about it is to calculate how much cover you need and then find a good, low-cost, term insurance.

Investment and insurance just don’t mix.

(Source:, 24 Dec 2014)


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