Dear Policy Holders,
I do always tell my clients in the first meeting that they may understand it fully well that any long term saving can not should not be kept in banks as deposits and these should necessarily get pooled through a policy with an Insurance Co. . You have seen the melodrama on world financial stage and the collapse of banking institutions and investment bankers. The insurance companies have been unaffected in this melt down. In the next para I tell you as to why an Insurance Co is immune to financial upheaval and why the banks may go down under over a longer period.
The difference lies in the ways you leave money in hands of Insurance Co and in hands of Banks. While the money gets transferred to banks, it is given without any future control over its uses. The are supposed to pay you interest which they offer to pay at competitively high rates due to the need to get more money than the peer banks. To service debt they have to lend at the earliest point in time as other wise they would have to invest in govt securities at lower rate and would not be able to service debt together with meeting the cost of establishment. While lending the banks have to further face competition and do it at best rates to the best borrowers. If there is more money to deploy they dilute norms and lend to weaker borrowers. In times of bad economic cycle borrowers default in paying back . The default may be wilful or compulsive. The wilful defaults rise due to some compulsive defaulter getting concessions ( the farmers loan waiver is the case in point and in late nineties many industrial borrowers did the same and a new act had to passed enabling banks to take possession of collateral security bypassing the courts). Coming to know that banks are in trouble the depositor take back their deposit and make difficulties compounded. Some weaker banks fail and the depositors of some limited amounts are left with the deposit insurance corpn's promise to pay which is fulfilled over a long-long period of time. The big money depositors have no where to go and forget they had money. Now, look at Insurance Co's case, here the money is invested in govt securities to the extent of 85 pc and rest goes to infrastructure projects or municipal bond leaving just 5 pc at the discretion of insurance co (in case of traditional policies under the govt rules) . Now under the more popular unit link policies you remain the master of your money ie it is as per your own decision to keep it invested in govt securities, in high rated secured bonds, in call money market or in equities . You have freedom to decide the proportion ( between different pockets) and have freedom to switch at will and without cost (in case of HDFCSLIC policies particularly).
Even if the insurance company fails to make profits out of its fees and decides to go out of business, the policy holders money remains safe. The accounts and record are handed over to another company and the policy holders are given back their money along with returns on maturity or when demanded. You may now have the full realisation as to why it only best to go for long term pooling of funds through insurance companies only.
You may wonder what will happen to life risk cover part. Here also the companies already have an arrangement with the re-insurers and carry little risk with themselves. Further more the returns are not taxed by govt and this remains the only pocket where tax relief is available and for all time come.
As for the switching advice, I would say better to be in equity pockets because what is going on all over the world is that the money supply is being increased and interest rates are being lowered. When this will have effect, it will dilute the currency values and increase the profitability of corporates and raise the value of their assets. The equation is simple. When there is credit crisis and the borrowers have to be given some comfort, it is buy lower the interest cost to them and let the real value of money go down. So, please be comfortable with equity investments, here you become owner of asset yourself and are not a creditor in some entities books which may or may not be strong enough to pay back. In case of equity holdings you do not have to file suit for recovery, you are paid your share automatically on liquidation of a company. I may remind you here Indian businessmen are quite conservative and after years of good profitability they have reduce leverage and have too little debt on their balance sheets. I have had to write all this at length but the occasion demanded it.
Wishing you brighter festive times ahead,
HariOm,
Krishnakumar Khandelwal
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