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Why Life Insurance is the Best Investment Product Amongst All Financial Products

Why Life Insurance is the Best Investment Product Amongst All Financial Products. N. Ashok Kumar The Institute of Insurance Sales Training, Pune. The Common Perceptions. Mutual Funds give very high returns Life insurance gives low returns

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Why Life Insurance is the Best Investment Product Amongst All Financial Products

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  1. Why Life Insurance is the BestInvestment Product Amongst All Financial Products N. Ashok Kumar The Institute of Insurance Sales Training, Pune (c) The Institute of Insurance Sales Training, Pune

  2. The Common Perceptions • Mutual Funds give very high returns • Life insurance gives low returns • Low risk savings give returns less than the rate of inflation • HNIs do not need life insurance • Long term needs can be met with short term investments (c) The Institute of Insurance Sales Training, Pune

  3. Common Perceptions • We all believe this • We do not any more handle the objection that mutual funds give better returns • If you can’t beat them join them – our agents have started selling mutual funds (c) The Institute of Insurance Sales Training, Pune

  4. What are the Facts?Not Perceptions (c) The Institute of Insurance Sales Training, Pune

  5. Where do Indians Save? Components of Household Savings in India (c) The Institute of Insurance Sales Training, Pune

  6. What do we learn from the Table? (c) The Institute of Insurance Sales Training, Pune

  7. Attitudes to Investment Risk Fact • Indians prefer low risk investments to high risk investments • Out of every Rs. 100 saved by Indians, more than Rs. 90 is invested in low risk investments • Data taken from India’s most authentic source for financial data – the RBI (c) The Institute of Insurance Sales Training, Pune

  8. What does the media say? • Indians have switched to high risk investments • Low risk investments are outdated • Those investing in low risk investments are financially illiterate and ignorant • Mutual funds give big returns • Low risk investments do not even cover inflation (c) The Institute of Insurance Sales Training, Pune

  9. So who is right – the media or RBI? • Who is financially illiterate – the media or RBI? (c) The Institute of Insurance Sales Training, Pune

  10. Why Individuals Invest in Low RiskReason 1 • Individual’s productive life span is limited • E.g. in employment, retirement age is 60 If saved money is lost in risky investments it cannot be recovered within the productive life span (c) The Institute of Insurance Sales Training, Pune

  11. Why Individuals Invest in Low RiskReason 2 • Time lost can never be recovered • Suppose a person saves for 20 years and then money is lost in an investment, either partially or totally • These 20 productive years will never come back – they are lost forever • Retirement is at age 60 in any case (c) The Institute of Insurance Sales Training, Pune

  12. Further Facts from RBIHolding Duration of Investments • Short term investments {less than 10 year holdings} (Currency, Banks, Claims on Government, Shares and Debentures, Non-banking Deposits): 67 % • Long term investments {more than 10 year holdings} (Life Insurance and Pensions, Provident Fund): 33 % (c) The Institute of Insurance Sales Training, Pune

  13. What Do We Learn from the Data on Duration of Holdings? For Every Rs. 100 saved indians save Rs. 33 for long term needs (c) The Institute of Insurance Sales Training, Pune

  14. Why Individuals Invest Short Term? • Individuals have many short term needs • Purchase of household items such as fridge, washing machine, computer • Annual obligations of education, clothes • Travel to native place, festivals, marriages • Emergency medical requirements • Down Payment for purchase of house, vehicle • Money for the above is required at short notice (c) The Institute of Insurance Sales Training, Pune

  15. Why Individuals Invest in the Long Term? • There are many long term needs • Higher education of children • Marriage of children • Post retirement living expenses • Purchase of land to construct house • Post retirement medical expenses • People invest in long term instruments for long term needs (c) The Institute of Insurance Sales Training, Pune

  16. Asset-Liability Matching • Wise and prudent financial management means • Long term needs are met by long term investments • Short term needs are met by short term investments • Indians have shown that they are wise in investing Rs. 3 out of every Rs. 10 saved in long term investments (c) The Institute of Insurance Sales Training, Pune

  17. What is our market niche? • We are selling for the long term • Our customers want low risk • Our market is long term, low risk • We hope to get Rs. 3 out of every Rs. 10 saved • We are not interested in the remaining Rs. 7 (c) The Institute of Insurance Sales Training, Pune

  18. What about other financial products? We Are NOT in: The Rupee Seven Market • Low risk, Short duration: Banks, NSCs, KisanVikas Patra, Post office deposits • High risk, Short duration: Shares, debentures, mutual funds, chits • High risk, Long duration: No financial products for individuals We Are in: The Rupee Three Market • Low risk, Long duration: Provident Fund, Life Insurance, Pension funds (c) The Institute of Insurance Sales Training, Pune

  19. Let us take a look at other Objections on Low Risk Investments (c) The Institute of Insurance Sales Training, Pune

  20. ObjectionInflation and Low Risk Investments • Life insurance endowment is a long term investment, typically 20 years • Fixed Deposit Average Rate, 1988 to 2007: 9.6% (Source: www.rbi.org.in) • CPI Inflation Average Rate, 1988 to 2007: 7.5% (Source: Consumer Price Index, Ministry of Statistics and Programme Implementation, GOI) (c) The Institute of Insurance Sales Training, Pune

  21. Why is the interest rate higher? • The RBI targets an objective to keep policy rates above the rate of inflation • The long term average repo rate will always be such that inflation rate is lower • The interest rates are determined by formulas • So when we say 2 + 2 = 4, there can never be a situation where 2 is greater than 4 (c) The Institute of Insurance Sales Training, Pune

  22. ObjectionHNIs do not Need Life Insurance How many times have you heard this HNIs have land, buildings, huge business enterprises, large incomes, lots of gold that they do not need life insurance And Many Had No Answer (c) The Institute of Insurance Sales Training, Pune

  23. First Things First Back to Basics • Life insurance protects future income, not past wealth • If the customer is likely to earn money in future there is a need for life insurance • Loved ones will also get a benefit from future income apart from past wealth HNIs need life insurance to protect their future income for their loved ones (c) The Institute of Insurance Sales Training, Pune

  24. Financial Reasons • Investors take investment decisions for FINANCIAL reasons • Financial Basis of Investment Decisions • Risk & Return • Liquidity • Duration (c) The Institute of Insurance Sales Training, Pune

  25. Find the Financial Reason Only High Risk Investments High + Low Risk Investments (c) The Institute of Insurance Sales Training, Pune

  26. The Financial Reason • In a falling market a portfolio with high risk investments is protected if it is also combined with low risk investments • Depending on the portfolio proportion of high and low risk, the portfolio returns may in fact go up, as in our example (c) The Institute of Insurance Sales Training, Pune

  27. The Market Language • The new language is yield, return, risk • This is the language of investments • Customers get convinced in the language of investments • The old language is the language of savings • Do not sell in the language of savings • Try the language of investments instead (c) The Institute of Insurance Sales Training, Pune

  28. Why life insurance is a great financial product • Life insurance protects dependents from life’s risks of early death of the bread earner • Life insurance protects the policy holder in the event of living his full life • Life insurance also protects investments from eroding when financial markets are falling Life insurance is the only financial product that does all three in one endowment product (c) The Institute of Insurance Sales Training, Pune

  29. What is Risk? (c) The Institute of Insurance Sales Training, Pune

  30. Risk is Volatility of Returns (c) The Institute of Insurance Sales Training, Pune

  31. Volatility Explained • Share C is most risky because it has shown the widest fluctuation of price • Share A is the least risky because it has shown the smallest fluctuation of price • The greater the fluctuation the greater the risk (c) The Institute of Insurance Sales Training, Pune

  32. SENSEX Volatility Source: Business Standard, Personal Finance, 1 May 2017 (c) The Institute of Insurance Sales Training, Pune

  33. SENSEX Volatility • In 8 years SENSEX has fallen 8 times • Every fall represents a loss to the shareholders • If an investor had saved in shares or mutual funds the chances of loss are as good as the chances of gain • The SENSEX basket of 2008 is very different from the basket of 2016 • This is called risk (c) The Institute of Insurance Sales Training, Pune

  34. Comparing High and Low Risk • High risk and low risk investment returns cannot be directly compared • SENSEX Volatility shows even (-) 65 % • If we project 15 % on SENSEX for next year not sure how much we will be earning • Projecting bank FD rate of 7 % is a certainty • FD rate is certain, SENSEX return is not • The two rates cannot be compared directly (c) The Institute of Insurance Sales Training, Pune

  35. Adjust the degree of risk The method of comparison is to adjust the high risk return for the risk the investment carries (c) The Institute of Insurance Sales Training, Pune

  36. Risk Adjusted Rate of Return (RARR) (c) The Institute of Insurance Sales Training, Pune

  37. RARR of Select Funds Source:http://economictimes.indiatimes.com/marketstats/period-r1year,sortby-sharperatio,sortorder-desc,pageno-1,pid-124.cms (c) The Institute of Insurance Sales Training, Pune

  38. Do mutual funds really earn a high rate of return? (c) The Institute of Insurance Sales Training, Pune

  39. RARR as on 30 June 2016 – All MFs Table 1 Source: http://economictimes.indiatimes.com/marketstats/period-r1year,sortby-sharperatio,sortorder-desc,pageno-1,pid-124.cms (c) The Institute of Insurance Sales Training, Pune

  40. RARR as on 13 April 2017 – All MFs Table 2 Source:http://economictimes.indiatimes.com/marketstats/period-r1year,sortby-sharperatio,sortorder-desc,pageno-1,pid-124.cms (c) The Institute of Insurance Sales Training, Pune

  41. Table 3.1 3-Year (Not Risk Adjusted) Returns of Mutual Funds for all Scheme Categories As on 28 October 2017 Source: https://economictimes.indiatimes.com/marketstats/fundtypeid-1,pageno-1,period-r3year,pid-127,sortby-r3year,sortorder-desc.cms (c) The Institute of Insurance Sales Training, Pune

  42. Table 3.2 3-Year (Not Risk Adjusted) Returns of Mutual Funds for all Scheme Categories As on 28 October 2017 Source: https://economictimes.indiatimes.com/marketstats/fundtypeid-1,pageno-1,period-r3year,pid-127,sortby-r3year,sortorder-desc.cms (c) The Institute of Insurance Sales Training, Pune

  43. Table 3.3 3-Year (Not Risk Adjusted) Returns of Mutual Funds for all Scheme Categories As on 28 October 2017 Source: https://economictimes.indiatimes.com/marketstats/fundtypeid-1,pageno-1,period-r3year,pid-127,sortby-r3year,sortorder-desc.cms (c) The Institute of Insurance Sales Training, Pune

  44. Table 3.4 3-Year (Not Risk Adjusted) Returns of Mutual Funds for all Scheme Categories As on 28 October 2017 Source: https://economictimes.indiatimes.com/marketstats/fundtypeid-1,pageno-1,period-r3year,pid-127,sortby-r3year,sortorder-desc.cms (c) The Institute of Insurance Sales Training, Pune

  45. Long Term Returns on MFs 5-year Nominal Returns Source: Economic Times Wealth Magazine (c) The Institute of Insurance Sales Training, Pune

  46. Long Term Returns on MFs 5-year Nominal Returns on MFs Source: Economic Times Wealth Magazine (c) The Institute of Insurance Sales Training, Pune

  47. Do Mutual Funds Really Give High Returns? (c) The Institute of Insurance Sales Training, Pune

  48. How do we know at the time of purchase whether a particular mutual fund will give high returns or low returns? (c) The Institute of Insurance Sales Training, Pune

  49. So Where Does Life Insurance Endowment Stand?Positioning Life Insurance Endowment amongst all Financial Products (c) The Institute of Insurance Sales Training, Pune

  50. Investment Risk On the Basis of Risk/Duration Duration (c) The Institute of Insurance Sales Training, Pune

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