Saturday, July 28, 2012
Recently, a private life insurance company launched a media campaign offering to financial planning services for free for everybody. Out of curiosity, I enrolled for the service. To my utter astonishment, I was briefed about a product over telephone call that I had got to fix up an appointment with a company representative. I went ahead with the appointment anyway. The company representative that called on me, asked for my date of birth, my monthly income, and my preferred choice for life insurance. AND BEHOLD, the financial plan was ready! Based on my income, I was suggested to subscribe to the child plan of the company (although my preferred choice for life insurance was term assurance). It took no more than 10 minutes for the advisor to make the so called financial plan---consisting of an insurance plan ONLY.
Gone are the days, when people were mis-sold a particular investment/insurance product. With Regulators getting strict on the financial advisory front with focus on financial literacy of consumers, product sellers are increasingly adopting Financial Planning concept to push products. Mutual fund companies, banks, insurance companies are coming up with new software, forms etc. which capture specific financial data of the consumer and present a target amount for the consumer’s goal and the investment that the consumer has to make to meet the said goal. This is the financial plan for the consumer.
Spreading financial literacy can and will prove costly for such insurance, mutual fund companies and they are aware of this hard fact. Hence, they have started to adopt increasingly popular concept of financial planning to meet their sales targets by pushing products. Since there is no bar on using the words Financial Planner besides your name, even insurance or mutual fund agents can call themselves financial planners.
So if financial planning is not buying only either an insurance policy or a mutual fund schemes, then what is financial planning all about?
--Financial Planning is about managing your finances in such a way, that you can achieve your life’s goals comfortably. Income and Investments are just one aspect of a financial plan. It also factors in your liabilities and expenses. Financial planning is a road to financial nirvanaa, a process and not an end in itself.
--Check whether the financial advisor follows the steps laid down by Financial Planning Standards Board, India (FPSB) viz; gathering data, setting life’s goals, examining your current financial status and suggesting a strategy to meet them.
--There should be a formal client engagement letter at the beginning of the relationship which sets out terms and conditions for both the planner as well as the consumer.
--A financial planner should look at your cash flow in detail. He should be able to portray the correct financial position and recommend solutions that are in your interest. Recommendations should not cover only insurance or investment products but encompass other aspect of your financial position like debt management, tax, and retirement planning etc. also.
--Financial planning is not a one-time activity. Financial position, requirements, family position keep on changing and your financial plan should be regularly re-visited to keep it in sync with your current financial position and future goals.
Financial planning is not one-size fits all plan/process. It is a customized to every person’s needs and financial position. However, more often than not, in order to get quick solutions at lowest or better still no cost at all, people fall for the trap laid out by product pushers in guise of financial planners and end up buying product rather than getting a solution to their requirements. After all it’s your hard earned money that is involved here and so do your children’s education and your retirement. BEWARE of the so called financial planners!
Sunday, July 15, 2012
What if we say that by subscribing to a health insurance plan, you are actually protecting your wealth!
There is no such health insurance plan which can protect your health. Health can be protected only by following a proper diet and exercise regimen.
Actually when you buy a health insurance, all that you are doing is buying a protection against those situations which demand big amount of hard cash at very short notice towards medical expenses. So rather than treat it as an expense (hence, best avoidable), it’s time that you look at it as an investment towards your wealth protection—since health care expenses have become costly.
The most common notion amongst investors we’ve interacted with is that a life and health insurance are sunken cost- and hence avoided. The logic is that they believe they are not going to suffer any eventuality and that they are not going to fall seriously ill. It’s human nature after all.
In a particular financial plan that we were making for one of our clients, we had suggested subscribing to health insurance of Rs. 10 lacs. The suggestion was summarily rejected by the client. He was adamant about not buying health insurance citing very high premium and since he was quite healthy, he believed that he was not going to be sick!
Since as a financial planner, it is our job to recommend what is good for the client, we told him that by not buying health insurance, he does not want insurance company to pay for his medical bills should the situation arise. As a corollary, he is prepared to bear the entire cost of his medical treatment –be it Rs.5 lacs, or 15 lacs or even say Rs. 30 lacs(after 10-15 years).
People fail to realize that probability of medical eventuality raises many folds with increasing age. At that time, the wealth that has been so painstakingly accumulated is needed for life’s other milestone payments—viz; your daughter’s marriage. To divert that wealth towards your medical expenses would be unfair to your daughter. A protective shield in the form of medical insurance can be very useful.
Moreover, with medical re-imbursements having been made subject to a ceiling, meeting a part of cost is better than meeting the entire expenses.
So can we suggest that if you love your wealth, better buy health and term insurance first and then go about wealth accumulation.
So protecting wealth is much easier than protecting health!
Q.E.D. (Latin for Quod Erat Demonstrandum)