What's your real return?
Insurers tout 12-15 per cent of the sum assured as the annual rate of return in money-back policies. But, the actual numbers are much lower
Dec 06, 2013
Source : Business Standard

 

MUMBAI : This tax-saving season, before buying a traditional money-back insurance policy, ask a vital question to the insurer or the agent — what is the internal rate of return (IRR)?

Typically, an insurance or agent quotes numbers such as 10-15 per cent of the sum assured. But if this were true, a product that has a tenure of 10-20 years would compete with a good mutual fund or blue-chip stock. It is likely the IRR will be much less, at two-four per cent.

Financial planner Suresh Sadagopan says: "These kinds of products are such that you need to pay a premium every year and receive a lump sum at the end of five years, 10 years, 15 years, etc. For such kinds of products, the buyer needs to calculate the internal rate of return (IRR)." IRR, or the effective rate of interest, is the actual rate your investment is earning. There are enough websites that help one arrive at this number.

Let's consider an example: A 30-year-old non-smoker buys a money-back policy of a sum assured of Rs 2 lakh. The annual premium, for 20 years, is Rs 15,304. The policy also provides a bonus of Rs 35 for every Rs 1,000. The money-back component ensures you will get Rs 40,000 in the fifth, ninth, 13th and 18th years. In other words, you earn a total of Rs 1.6 lakh till the 18th year. In the 20th year, you will get the rest of the money, as survival benefit. That's another Rs 40,000 and the bonus of Rs 1.4 lakh — overall, you will receive Rs 3.4 lakh.

However, consider an investment of Rs 3.06 lakh as premium through 20 years. The IRR, as a result, is a dismal 1.84 per cent, lower than even the bank savings rate of four per cent (some banks offer even six per cent).

Of course, the next pitch from sellers is it gives tax benefits. But many other products do so, too. If you are willing to wait for as long as 18 years to get your money back, why not look at products such as the National Pension System, the Public Provident Fund, bank fixed deposits (of five years and above), tax-free bonds, etc? The list is too long. There rates are in the range of eight and nine per cent.

So, what explains the popularity of such products, or why do investors buy these at all? Deepak Yohanan, chief executive of myinsuranceclub.com, an online insurance comparison portal, says most investors like the fact that such policies protect their investment and offer fixed returns. "In money-back policies, it is difficult for investors to understand how much the actual returns are, in case of a non-participating plan. In case of participating plans, there is bonus you may or may not get. In that case, you have to check the bonus-paying history of the company," he says.

Ideally, your investment needs and insurance ones should be separate. And, even if you are tempted by fixed-return products, there are many better options.

Latest Realty News

Home away from home near Mumbai
Dec 06, 2013
MUMBAI: Driving out of the city on a weekend to the beautiful landscape in the western ghats within a 200-kms distance from Mumbai is now seen more than a weekend getaway. Given the plethora of options in housing available in the scenic spots nestled in the hills, people increasingly prefer the option of driving to their second homes and relaxing over the weekend. With the Konkan coastline with its verdant landscape and lush greenery on one side and the Arabian Sea on the other, a second home in
Destination development: First mover advantage
Dec 06, 2013
PUNE: Beyond the oft-repeated developers’ rhetoric ‘location, location and location’ as the USP of the project, lies the fact that today’s prime location was once a deserted area that most developers were not ready to bet on with the kind of huge investment that realty projects demand. It has not just been the huge investment involved but the infrastructure, or rather lack of it, which often made them play safe. Though, in some of the cases, the government authorities took the initiative to prov
Pune-based property tax system on cards
Dec 06, 2013
NAGPUR: The Nagpur Municipal Corporation (NMC) is all set to implement Pune Municipal Corporation's (PMC's) ready reckoner plus rental-based system to calculate property tax. "There will be upper and lower ceilings on increase or decrease of tax. It will not increase beyond double the monthly rent prevailing in the market nor will it fall below 50% of this amount," said NMC's tax committee chairman Girish Deshmukh.
Metro and monorail: A boon for Mumbai suburbs
Dec 06, 2013
MUMBAI: P Nagarajan, a resident of Andheri, is upbeat about both, the monorail and the metro project, even though the projects have been delayed. For many like him residing in the suburbs, these projects are going to make life much easier. According to property analysts, these projects are being envisaged as game-changers in terms of connectivity and will reduce both, traffic congestion and commuting time.
Godrej Properties buys out PE firm in Kolkata project
Dec 05, 2013
MUMBAI: Godrej Properties Ltd has bought out private equity (PE) firm Red Fort Capital’s 49 per cent stake in its subsidiary Godrej Developers Pvt Ltd (GDPL) for an undisclosed amount.
Why India needs REITs?
Dec 05, 2013
MUMBAI: A real estate investment trust (REIT) is a fresh investment mechanism being planned by the Securities and Exchange Board of India (SEBI). A REIT manages and owns income-generating developed property and is intended to offer common units to the public as an option for investment. These units represent ownership in the business of managing income-producing properties. REITs will make available away to real estate developers to commercialise developed property, providing an exit path. It wi
Conditions on RTI access to building plans lifted in Maharashtra
Dec 05, 2013
MUMBAI: State information commissioner on December 4 withdrew an order issued last month that imposed certain qualifications on obtaining building plans approved by the BMC under the Right to Information (RTI) Act.
Single-window clearance will cut housing cost, Pune realtors says
Dec 05, 2013
PUNE: Higher input, finance costs, non-availability of bank finance for real estate projects and exorbitant taxes are some of the problems that will be debated in the forthcoming Credai Conclave 2013, which will take place in New Delhi on December 13 and December 14.
Focus on delivery makes Mumbai realty realistic
Dec 05, 2013
MUMBAI: A perception is gaining ground in Mumbai that the city’s property market has reached a saturation point, with critics citing the standing inventory of 48 months as evidence. However, a closer look at the market suggests that even though it is facing the effects of an overall slowdown, like any other part of the country, the high inventory level is not necessarily a sign of stress at the project level or with developers’ balance sheets.
Buying a house? It’s right time for realty check
Dec 05, 2013
MUMBAI: A recent report from property consultancy firm Knight Frank says that real estate prices in certain Mumbai areas have declined by 10%. The same report says almost 45% of the new properties that are coming up in the city are unsold.

Latest Realty News Of State

Realty Talk's