Financial Planning in Brief

Buying Insurance? Pick By Value, Not Price

We are always looking for cheaper options for things we need, and insurance is no exception. Such an approach may, however, not be in your best interests all the time, says our experts

The Indian psyche is hardwired to try and get good deals. Hence, it comes as no surprise that we want to buy insurance at the lowest rate possible all the time. Of course, cheap life insurance can be purchased from most providers since there are many ways to cut down a policy's price. However, if you are buying life insurance with the sole intention of taking care of the needs of your family in unforeseen circumstances, it is paramount to identify the right insurance company as well as the right product.

Here are some of the factors that you should consider before signing an insurance agreement:

Are the service levels satisfactory?

This parameter can be experienced only once you have purchased the policy. Hence, it makes sense to check with friends and relatives who are already dealing with the company you are considering instead of going by the element of low premium alone. There are also certain other thumb rules – in case of a health insurance policy, it is better to choose a company that handles claims itself rather than outsourcing to a Third Party Administrator (TPA).

Who should you buy from?

Agents generally sell products of a single company. Hence, it may be a better idea to approach a broker who deals with multiple companies, as dealing with an agent will limit your choices. Also, as a buyer, it’s always a good idea to get the necessary information from the broker, while simultaneously checking the details with some online portals before taking the final decision. 

Some of the other aspects to consider are product simplicity, ease of paying the insurance premium through offline and online channels, and the company’s history of dealing with policies distanced by agents so that you are not adversely affected in case your agent suddenly moves out of the picture. Ensure that the agent/broker answers all your questions and read every word of the policy before signing on the insurance agreement. Integrity and honesty of the intermediary is an important factor while making a decision.

Are grievances addressed adequately?

The experiences of friends and colleagues who hold policies in the same company are helpful in understanding whether the company you are considering has an effective grievance redressal mechanism

What is the claims settlement ratio?

The claims settlement ratio, although an important parameter, cannot be the sole criterion to choose an insurance company. Every year, the report released by the Insurance Regulatory and Development Authority (IRDA) lists the claims settlement, rejection and pending ratios of all life insurers. However, the claim settlement ratios of general insurers are usually over 100 per cent, which can make it confusing. In such cases, you should look at the claims rejection ratio, which is a measure of the number of claims rejected as against the total number of claims. Also note the claims pending ratio, which refers to the outstanding claims of the company.

The claims settlement ratio may be more pertinent in case of general insurance companies with respect to health, motor or home insurance, which are more claim intensive in nature. In case of life insurance, death claims are usually accepted except in the most extreme of cases or if the death occurs under suspicious circumstances within the first year or so of the policy.

Of course, it must be remembered that the claims settlement history of new life and general insurance companies cannot be comparable to those of older life insurers which have been in the business for a long time.

Have you seen the policy long form and short form?

The company/agent may not openly agree to share the policy long form. However, if you ask for a copy, they cannot deny the same. This is important, as without the policy long form you may miss out on the finer details of the policy during final negotiations.

For instance, if you have mentioned any family medical history, the policy may include a cooling-off period with respect to those medical conditions. These would be over and above the general terms and conditions related with pre-existing conditions of the health policy offered by the insurer. Similarly, in case of accident riders, each company may follow a different definition, which can again work against you in case of lack of clarity.

How strong is the insurance company financially?

The solvency margin is an extra capital/provision an insurance company has to maintain to meet claim requirements. Solvency margins are declared by every company to the IRDA, and this helps you understand the company’s ability to meet unforeseen contingencies in terms of claim settlements. For example, a major accident is a tremendous liability on the insurer but a higher solvency margin should cushion such extreme situations comfortably.

MLM or Multi Level Marketing (Fool Proof shcheme)

How Multi Level Marketing (MLM) schemes with Pyramid Structure works ?

Today we are going to talk about MLM or Multi Level Marketing Schemes which have a pyramid kind of model. For years and decades, these kind of schemes are active and a lot of people get trapped in these Pyramid Schemes and lose their hard earned money. In this article, we will see the common mechanism they work on and their characteristics. We will also create a dummy Pyramid scheme to show you the traps & pitfalls. Before we move ahead, get this fact that we are talking about those pyramid schemes which also have different levels of people one on top of other and where one guy pays money which gets passed on as reward to another.

How Multi Level Marketing schemes work?

Multilevel marketing schemes are generally network based marketing schemes, in which a person has to add more people under him. The people obviously pay some money to “join” the business and then they add more people under them. In almost all the schemes, the person is incentivized for adding more people under them.

You all must have heard about the AMWAY business model, which is nothing, but a great example of Multi Level Marketing, while the business is legitimate and there is no fraud in it, still it also falls under a pyramid model. Even I have attended its meeting once . The business model looked so easy, just pay Rs 5,000 to join the business and then keep adding more people to “business” and you get some percentage from the entire sales under your Tree. There are various ranks like Silver, Gold , Diamond etc., and the higher your rank, the more you make. Lot of people make money in it through legal way, and more you work harder , the money you can earn, but the point is , people who get in early make more money and the people at bottom struggle a lot.

Why most people lose money in Fraud Pyramid Schemes?

Guess what?!  A lot of people make money in these Multi Level Marketing business models, and they become the ambassadors of the business. They flaunt the cheques and the money they make and believe me, some of them are real!. They really do make money and we will quickly see more on that, but the point is, that the majority of the people lose lot of money and struggle in these kind of get rich quick pyramid schemes. And that happens, because there is a limit to adding people. You can’t add more people in the tree after a certain point and when the tree becomes bigger, than it’s trouble point, it’s reaches a  kind of saturation level when the biggest chunk of people who are at bottom lose all the money. Here is an example graph which will give you a good idea of what I am talking about.

Example of SpeakAsia

You must have heard about the recent craze called Speak Asia Online! I will really not be surprised if you tell me that you were part of it! I will not be even surprised if you tell me you made lot of money too! That might happen if you started earlier! Because then, the scam was still in the making! If you joined at the end, you were at the bottom of the tree you lost your money. This is how it worked!

A person can join SpeakAsia by paying Rs 11,000 and becomes a “panelist.” He then starts getting 2 surveys per week and getting Rs 500 for filling up each of them. That’s around Rs 4,000 per month and 48,000 per year and that was how Speakasia was promoted by its member to lure other members. This was at the start and though the amount of money  coming IN was less than the amount of money which went OUT, and the whole model was unsustainable in long run, it was definitely sustainable in short term. Just think about it! Is it not easy to pay 10 smaller bakras if 100 bigger bakras join the next batch?

And after all that, it crashed! But still there are innocent people out there who claim that it was genuine and it worked for them. They are not wrong! It really worked for them and they made money, but that was part of the game. They wanted you to make lots of money so that you can bring more people in and then one fine day when they make a really big pile money that they can just vanish! Poof!

Breaking Relationships !

The biggest other bad thing about these pyramid schemes are how the relationships become sour and messed up when the person who is part of MLM tries to add all their friends and relatives into the MLM, suddenly they start looking at humans as “targets” 

MONEY MADE SIMPLE MLM Scheme – Lets create a SCAM Plan right now

Let me know you how simple it is to create a pyramid scheme and it will look so attractive . Say we have an book named “MONEY MADE SIMPLE ”.

Now here is a scheme

·         Pay Rs 1,000 and become a member of the scheme

·         You get the book FREE on signup

·         Make a person join the pyramid scheme and get Rs 250 for each person

·         You can add any number of people to this scheme

You realize that if you add 4 people to the group, you will get a 1,000 bucks and a Free Book! So it’s extremely easy for you if you join the scheme early.

Let’s say 10 people join under me.

Level 1 – Add 10 people

So 10 people will pay 1,000 each and I will make Rs 10,000 total , and I will send back a FREE book to all the 10 people. I incur Rs 5,000 expenses and make a cool profit of Rs 5,000.

Level 2 – Add 100 people 

Now let’s see… Each of these 10 people persuade 10 more people under them, and 100 more people join the scheme. They will pay Rs 1,000 each to me;, that means Rs 1,00,000. I will spend Rs 50,000 for the 100 books , and I will be left with Rs 50,000. But out of this 50,000, I need to give a share to each member at level 1, for 1 person the incentive is Rs 250 , so for 10 people, the incentive is Rs 2,500 for each person at level 1, and because there are 10 people at level 1, I will have to pay Rs 2,500 to each at level 1, and I will have to share 50% out of 50,000, that’s Rs 25,000. But I still keep Rs 25,000 with me.

So now you can see, I made a total 5,000 from 10 people at level 1 and Rs 25,000 from 100 people at level 2. And each of the 10 person at level 1 made cool 2,500 from 10 people they added under them, they not only recovered their 1,000 back, but also got extra Rs 1,500 and a FREE book! Wow! This business model is amazing!

Level 3 – Add 1000 people 

So the business is expanding and the word is spreading and my book ambassadors are in the market advertising this scheme and showing the kind of money they are making and the free book they get! Dude! They also have a valid cheque with them! No fraud! . So the word has spread like wildfire now and everyone wants to join this business.

Now, lets say each person at level 2 adds 10 more people under them again, because the word is spreading about this awesome business. There will be 1,000 people at level 3, paying 10 lacs to me and I will incur 5,00,000 expenses. I will pay 2,500 to each person at level 3,  that means 2.5 lacs in total, but I will still keep 2.5 lacs with me.

Level 4 + 5 + 6 

Can you see, how it’s growing? And how people are making money? From 1 person to 10 people, and from 10 to 100 and them from 100 to 1,000? But what next? Level 4? Level 5? Level?

When this reaches level 6 , there will be 10 lakh people under this scheme and they will be paying 100 crores to me! . You guys are going to hate me at that level! . Because you will never see me again! . Neither will I send any more books to anyone!, Nor will I send any share to anyone. I will just run away and you wont be able to trace me! . Any person who would have joined in at the start would find it easy to grow and spread the business. But people at bottom will just not be able to do anything, they are the last batch of fools!

A Multi Level Marketing is different from Direct selling. Any company selling directly to the customer, removing all the supply chain management commissions behind, will be governed by Indian direct selling association, http://www.idsa.co.in (within India) and world federation for direct selling association, http://www.wfdsa.org . There are many companies like Avon Cosmetics, Amway, Oriflame, Herbalife, Tupperware etc.. registered under these federations. These companies work under the ethics defined by the IDSA or WFDSA and are very harsh on the people who dont adhere to these ethics. Many people reading this article will agree that the quality of the products they produce are amongst the best in the world. Many people are under the impression that these companies are similar to the other ponzi schemes.

PICTURES SPEAK LOUDER THEN WORDS...!!!

Dirty tricks that are played on consumers while selling of Insurance Products

1. Insurance: Mis-selling of endowment plans

              Thanks to a dearth of pension products in the country, insurance agents often mis-sell endowment policies to the same policyholder year after year, citing a regular income stream after retirement. Their cut: commission on every policy sold.
The damage. An endowment policy takes at least 6-7 years to break even, courtesy the high costs attached with the product. What that effectively means is that you keep giving the insurance company wads of cash in lieu of a measly sum assured (SA) and low returns.
The pre-emptive strike. Eschew the temptation to invest through endowment policies as they typically offer returns of 6-7 per cent per annum (p.a.). If you are risk-averse, go for Public Provident Fund (PPF)-it currently offers 8.6 per cent p.a. However, those open to risk can look at systematic investment plans (SIPs) in equity mutual funds (MFs) to negate the impact of inflation over the long term.

2. Insurance: Miss-selling health plans

              Not many are aware of the benefits of a family floater (FF) policy, which is way cheaper than an individual health plan (IHP). Taking advantage of this, many agents sell separate IHPs for all family members. The motive: selling more policies means more commission.
The damage. Though IHPs serve the purpose of health insurance well in case of a mishap or an illness, the flip side is that you end up paying a much greater amount in premiums compared to what you would have paid for an FF policy.
The pre-emptive strike. Prefer an FF policy to an IHP. In an FF policy, the proposer can get health coverage for his spouse and children (up to 21 years old). If you have already bought an IHP, you can supplement your health cover with an FF, and include family members and dependents in it.

3. Insurance: Bypassing medical check-ups

                      While selling life covers, agents often advise you to keep the sum assured low so that you can dodge medical tests. That's because if the results are unfavourable, the underwriter (insurance company) can decline the policy, and the agent will miss out on commission income.
The damage. There is nothing more nightmarish than your family struggling to make its ends meet after you have hit the proverbial bucket. An insufficient cover defeats the whole purpose of buying insurance.
The pre-emptive strike. Go for a higher cover even it means undergoing medical tests. There is nothing scary about it anyway-even if an ailment is discovered, it will make sure that your claim is not repudiated at a later stage.
SMART TIPS
Eschew the temptation to invest in endowment policies  since they typically offer measly returns of  6-7 per cent per annum
- Go for a bigger life insurance cover even it means undergoing medical tests   

Q & A on Investments & Stock Markets during seminar at Walchand College of Engg, Sangli on 4th Feb 2012

Q) STUDENT:  What are the investment options available to start with for an amount of as low as Rs.1000 per month ?
 A) MOIZ: i) Recurring Fixed Deposit
                 ii) Mutual Funds
                 iii) Post Office Savings Scheme



Q) STUDENT: I have always wanted to trade in shares & I have heard about demat acct? What should I do to open a demat account?
 A) MOIZ: For trading in shares you need to open a
                 i) Demat and a trading account      OR
                 ii) All in one acct (Demat + Trading + Banks)
The 2nd type of acct is usually provided by banks like ICICI & HDFC e.g. www.icicidirect.com
For the 1st type you can approach a share broker like
                 i) India Infoline
                 ii) Geojit
                 iii) Motilal Oswal, etc
For opening such an acct the documents required are
                 a) Photograph (Own & Nominee)
                 b) Pan Card Copy
                 c) Address Proof
                 d) A/C Opening cheque
                 e) Filled up demat & trading form
Usually it takes around 15 to 20 days for the entire procedure



Q) STUDENT: What is a demat account ?
 A) MOIZ: Demat stands for dematerialization of shares. i.e. Conversion of physical shares into electronic form.
The account in which these demat shares are stored is known as demat a/c.
Demat acct are provided by NSDL & CDSL in India.



Q) STUDENT: What is Inflation & Why should I be even bothered about that ? They say it affects ,but if there is more income than only there is more inflation so how does it matter ?
 A) MOIZ: Inflation is good for an economy if it is under control, the problem arises when there is lot of liquidity (Cash) available, which leads to Disruption/Imbalance of Supply and Demand of cash in the economy.



Q) STUDENT: What is better directly investing in shares or investing in Mutual Funds ?
 A) MOIZ: For a person who does not have knowledge about the stock markets and experience in the finance sector it is always advisable to invest in Mutual funds ( which is indirect way of investing in stock markets via a professional guidance).

Investment Options for AAM AADMI

Sr.No	OPTIONS	Minimum Investment Amount(Rs.)	Returns per year(%)	Risk Factor	Income
1	Savings Bank  Account	1000 in govt banks	4	None	Fixed
2	LIC (Jeevan Anand, Jeevan Saral,etc)	Rs. 250 per month	7	None	Fixed
3	Post Office Savings Scheme	Rs. 6000 per year	7.5	None	Fixed
4	Public Provident Fund	Rs. 500 per annum	8	None	Fixed
5	Govt Bonds( IDFC Infra Bonds, REC,etc)	Rs. 5000 upto  Rs. 20000	9	None	Fixed
6	Bank Fixed  Deposits	Rs.2000 upto  Rs.10000	9	Bank Dependent	Fixed
7	Corporate Fixed Deposit (Mahindra Finance)	Rs. 25000	10	Company dependent	Fixed
8	Mutual Funds	Rs.100 per month	Variable	Market Dependent	Variable
9	ULIP Policies	Rs. 500 per  month	Variable	Market Dependent	Variable
10	Physical Gold, Gold ETF	As per Availability	Variable	Market Dependent	Variable