Don’t give in to agent push on traditional policies

The rules are for the new products which will come in post 1 October.

New rules for endowment plans are all set to kick in from 1 October. Monika Halan, editor, Mint Money, and Vivek Law, editor, Bloomberg TV, discuss the changes that are expected in their weekly show, Smart Money. Edited excerpts:

Vivek: Monika, you have never been a great fan of endowment policies, but post 1 October, do you think the balance will turn in their favour?

Monika: They become a little bit fairer, but I still don’t like them. They work for investors who are very careful about capital and are okay with 4.5-5% tax-free returns. But we can definitely recommend better products for viewers of Smart Money.

Let’s understand what is happening in the market today. There are two kinds of life insurance plans—unit-linked or market-linked and traditional plans, including endowment, money-back and whole-life plans. Both products had extremely unfair rules governing them till a few years back. In 2010, rules for unit-linked insurance plans (Ulips) changed and they became much fairer products than what they were before. The rules for endowment plans are set to change from 1 October 2013. The regulator has gone a little distance but not far enough. The product will offer lower commissions, which is a function of the tenor, and will give a better surrender value. The product does get a little better. But right now, we are seeing a push from not just the agents but also the insurance companies into investing before October. You are hearing all kinds of things—the agents are calling up and saying that the service tax will be levied or that the products will not exist after 1 October. That is all incorrect. If you are holding a policy right now, that policy will continue as it is. The rules are for the new products which will come in post 1 October.

If you are in the market for an endowment plan or a money-back plan, it is a good thing to wait till 1 October.

If you are not in the market for traditional plans, then you should not be buying it in any case, whatever the push. If they are talking about the 1 lakh 80C tax benefit, remember that you get that benefit even on your provident fund, Public Provident Fund, National Savings Certificate, the principal of your home loan and on equity-linked saving schemes.

Vivek: Monika, if I have an endowment plan and want to continue with it, should I try to surrender it now and take a new endowment plan post 1 October.

Monika: Oh no! Not at all because these plans have very high commissions in year one. So if you have a traditional plan, you have already paid the agent a 35-40% commission in year one. If you surrender the policy now and get into something else, you will again pay that front load. If you have an endowment plan and you like it, please hold on to it and go on funding it. Do not switch.

Vivek: We have our first caller today.

Monika: Joy, I understand from your mail that the money does look a little tight. What I want to tell you is that at 29, it does feel tight to most people. This is an age and stage of lot of expenses. Most people get an income kicker by the time they are in their mid-30s to early 40s.

The advantage is that you have begun early. I see a well-constructed money box. Your saving ratio is high, you have opted for an increase in voluntary provident fund, you have a term plan for 1 crore, Kisan Vikas Patras and recurring deposits. Plus, you have a really good medical benefit plan from the government which will go on even after retirement.

You have asked whether you should get rid of the term plan that you bought a few years earlier. The answer is yes; it is very expensive. With a term cover of 1 crore, you do not need the earlier policy.

On your emergency fund query , I do want you to put in place a three-month fund (and not six months) because yours is a secure job. But if a career choice comes up suddenly, you may want to have that cushion. Remember to review your medical cover when you hit 38-39 years, especially if you move out of the government job.

Now let’s come to the question of you being in a dilemma over paying 20,000 for the accommodation that the government gives you. At this stage, it is important to be happy in the home you have. You are paying that money as a rental. Just build that into your monthly expenses and don’t worry about it. There is a long time ahead of you where the opportunity to construct a house will come. Just think about what you would have to pay if the government was not giving you that accommodation. I am sure it will be a multiplier of what you pay right now.

Your last question was around investing in mutual funds and you have picked an online aggregator to do that. It is okay to go through your bank or online portal. You can start with a balanced fund. But also remember that since your job is secure, you can take higher risk than most other people. I wouldn’t worry about building in a small- and mid-cap fund very early in your portfolio. You could look at the Mint50 list. Never put more than 6-8 funds in your portfolio. So Joy, there’s a lot to look forward for you with a new addition in the family soon.

Write to mintmoney@livemint.com OR sms at 9773270010. Type SM, give a space, and write your query.

Catch the show on Friday: 08:30pm, Saturday: 06:00pm, 08:30pm, Sunday: 10:00am, 12:30pm and 05:30pm on Bloomberg TV India.

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