All you want to know about Term insurance and Endowment policies with suitable examples

One of my good friend had a small argument with me, that she would not invest in Term Insurance, because she will not get any “returns” out of it. I believe investing in a term plan looked a very unprofitable thing to her as she never gets back the money she paid as “premiums”, if she survives.

Endowment plans looked nice to her, because they provide money if you are dead and even if you survive. You get back money as the prize for not dying !!!.

term insurance


With respect to Term insurance, she understood the fact that her family will get the money from insurance company in case of her death, but she was concentrating on the fact that she would not get back anything if she survives.

What is the return in that case? Nothing !!! and looked like some one is fooling you with a product called “Term Insurance”, where you are “investing” premiums to get nothing at the end.

Let me now tell why this happens and some give you some insight on this matter.

I have already talked earlier in my last post “Life Insurance and how to go about it”, about Term Insurance. Let me now take more deep dive into it and talk about the reasoning part.

I will first talk about fundamentals of Insurance and then talk about Endowment Policies and why are they popular, and what people don’t realize about them. and how Term insurance is the right thing for most of the people.

Basics of Life Insurance

What happens in a average family :

There is someone who earns and his family comprises of wife, kids, parents. if not all there is a subset of these family members. The head of the family earns and his family lives happily. All the expenses are met from the earnings of this main member, most of the time the husband. Now consider this person dies in an accident or for that matter because of any event.

What happens?

What happens to his family members other than the psychological trauma. If they don’t have money to take care for them selves, either some one from family have to take up the job and start working which may not be possible for them, or They have to decrease their standard of life to maintain the expenses.

They are now totally unsecured from future’s point of view. In short they are totally messed up, which should not have happened. I gave this detailed explanation for the circumstances because i wanted you to understand how bad can happen and proper measures must be taken care for this.

What is the Solution?

Adequate Coverage !!! this cant be compromised… You must have a backup plan which can give your family the same kind of income which confirms that they are not short of money in case the main earner is gone. If there are some debts like Home Loan, or any other tasks which need money apart from regular income, the cover must be good enough to cover that too..

why it is necessary to buy life insurance

For example :

Robert has a family expenses of 25,000 per month and there is a Home loan of Rs.25 lacs to be paid within 10 yrs. He is 27 yrs old. He has a wife, 2 kids and parents. All of them are dependent on him financially. He has investments of 5 lacs. Now in this case. In case he dies, who will take care of Home loan, how will provide them enough money to live life comfortably. They need 25k * 12 = 3 lacs per year.

Which they can get per month if they have 35-40 Lacs of money. If they put this in bank, they will get Rs.25,000 per month as interest which they can use. Considering inflation it will not be enough after some years, but lets leave it now for this example.

Add home loan of 25 lacs to this 40 lacs and what we come to know is that this family must be covered with minimum Rs 65 lacs . Rs 75-80 Lacs is a decent cover for this family. Now if he takes a cover of 80 lacs for his family, from that day he can happily live all his life without any tension , thinking what will happen if he is not there.

He will be attain peace of mind , and not be worried for it.

He must get a lot of internal peace because his Family is protected with a good enough cover to take care for them. And this is what you get in “return” from Insurance. No monitory return can give you more satisfaction than peace of mind.

So before doing anything else, his first step is to give adequate cover to his family and that’s the most important responsibility for him as a Husband, Father, Son. He must understand that this is not an investment for monitory benefit later in his life, but its for his family happiness and future.

Life insurance under MWP act is also one of the better option for married man. One point to remember and not forget is that this is the minimum cover required for family and anything less than this will be taking risk with family future.

Endowment or Money back Policies

Lets discuss the problems with these plans with respect to the above example.

High Premium : For an 80 lacs cover for say 30 yrs, the premium payable will be At least 2-2.5 lacs/year (this is a conservative figure). So now premium so high is not possible for anyone like Robert, so what they do?

They go with a kind of cover for which they can pay premium easily, can then they take cover for 5 lacs, 10 lacs or maximum 20 lacs. And guess who suffers in case of his death : HIS LOVED ONE’s.

It might also happen that they are compromising on a lot of small things which are important at that moment in time, like buying a bike for son, which they cant buy because of the insurance they have to premium, or some vacation they could have gone to with family, but compromise on that because of premium.

Money back at the end of the maturity is like a penny after so many years :

This is some thing most of the people overlook. They just see the numbers, 5 lacs 10 lacs or 20 lacs. And at the time of taking Insurance it looks good figure to them, because they see numbers, they dont see its value after many years, They don’t consider Inflation into account.

In case of above example, if Robert takes a cover of 15 lacs by money back policy, what happens if he survives the tenure. He gets 15 lacs at the end, Great Money after 30 yrs. Isn’t !!!

Lets see how great this money is? His monthly expenses will grow from 25,000 per month to 1.5 lacs per month (considering inflation of 6%). Now this money will help him survive for not more than 10 months … For so many years he pays high premium each year, just to get back money to cover his 10 months monthly expenses? What the hell !!!

Under Insurance :

Because of the fact that people want money back on survival and because of high premium, people end up taking policy for which they have to pay premium under there budget, which means less cover.

Without realizing the fact that they are highly under insured, the reason for this is that they see Insurance as investment product and not a protection cover for there family. When they die, there family get the money from Insurance company, but most of the time its not enough for them and it erodes very soon.

Term Insurance Policies

Lets discuss the features of Term Policies with respect to above example.

Cheap Premium : The premium is very low for Term insurance Policies. For above example. The yearly premium for Rs.75 lacs cover for 25 yrs is just Rs.20,000 yearly or just 1,600 per month !!! .

This is in any way affordable for most of the people. Its providing the fundamental requirement of Good cover and low premium and if you think of returns, Good cover and low premium can themselves be seen as good enough return. You family protection at low cost is the return you get.

Watch this video to learn more about Term insurance and it’s benefits :

Opportunity to invest rest of the money in High return Investments :

With term Insurance you save a lot of money in premium and now you can invest this money as per your wish in high return instruments, anyways in Endowment policies you put money for long term and you get it after so long time. So you can now always put your saved money in things which are long term investment products and return great returns.

One of those things is Equity Diversified Mutual funds and Direct Equity (depending on persons ability and interest). In long term Equity Diversified gives fabulous returns (15-20 yrs) and the risk is minimized because of long term.

And if you consider India growth story , it looks great in long term , hence Equities for long term is the most obvious choice. They will give you return of 15%+ CAGR. (15-20 yrs)

Also it will be flexible , you can not invest for a year or two, if you want to use the money for your family vacation or some important event.

Conclusion :

Insurance is not an investment product, its a Protection instrument for your Family or any one your want to cover. There are other products for your investments.

Let your finances be the way you want your life to be , SIMPLE !!!

Don’t mix Insurance and Investments. There are products like ULIPS(What are ULIPS) and Endowment or Money Back policies which never excited me. They complicate things, confuse people. They can be good if you understand how to make most out of it, but it require knowledge and expertise. They offer some flexibilities, but still they are not worth it.

Read more on Term Insurance at my Old article. I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Disclaimer: All the opinions are personal and shall be taken as knowledge sharing and not as encouragement

All you want to know about Options trading – For beginner investors

What is an Option?

Option is a contract which gives buyer the right, but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. An option has an Expiry date, when its automatically exercised if it has any intrinsic value left.

When you buy an option you have to pay some premium at the time of buying it.

options trading

You can buy or sell Options just like you buy or sell Shares. They are traded in real time. An option value depends on some underling, which can be a stock or an index or even interest rate, The scope of this article is restricted to Stock options or index options.

An example of index option is Nifty option, so its underlying is Nifty.

You must know that its a kind of Derivative : Derivatives are any instrument whose value are derived from some other thing, there value depends on some other thing, like In case of options in stock market, there value depend on either a stock or an index.

Futures are also a kind of Derivatives, The minimum money required for trade in Futures are much more than Options. You can trade in options with as little as 2,000 or 3,000 (depending on the option you are trading in).

Types of option: CALL and PUT

CALL option gives you the right to BUY something anytime before expiry at a predetermined price. The value of the CALL option increases as the Price of the underlying thing increases. The reason for this is because you can still buy it at the fixed price and the difference is your profit.

PUT option gives you the right to SELL something anytime before expiry at a predetermined price. The value of PUT option increases as the price of the underlying Decreases. The reason is that you still have the right to SELL it at fixed price and difference will be your profit.


Exercising an Option :exercise an Option means to Buy(CALL) or Sell(PUT) the stock on the expiry date if they are European style else Buy or sell anytime on or before Expiry if they are American Style.

Expiry Date : The date on which an option will expire and then it will be exercised automatically if it has any intrinsic value left.

Option Style : Options are of two styles, American style (It can be exercised any time before or on expiry date) and European Style (exercised on expiry only).

STRIKE Price : Strike rate is Stated Price for which the underlying stock can be purchased or sold on expiry date.

SPOT Price : The current price of the underlying at a particular time.

LOT : Options are traded in lot size, you can buy 1 lot, 2 lot or any number of lots, and a lot has a particular number of shares in a single lot, Like Nifty options have lot size of 50.

Premium : Every option has some premium which users have to pay when they purchase an Option. So for a CALL option, the premium increases when its underlying price increase and decreases when its underlying price decreased and just opposite of PUT option.

How does an OPTION look like?

Example : CHAFER 90 CE 1.95, EXPIRY 26th June

CHAFER is the symbol for a stock called CHAMBAL FERTILIZERS, so its a Stock option. The expiry date of this option is 26th June (current year).

90 CE means its a CALL (C) option, which is European Style (E, can be exercised on expiry date only) and the Strike rate is 90, means that you have right to buy 1 lot (3450 shares, it depends on the option how many shares a lot has) of chambal fertilizers shares at Rs 90 on the date of expiry if you want.

What are the Profit and Losses you can make?

The Losses are always limited to the extent of premium you pay (in worst case you do not exercise the option and you let your premium go), On the other hand the profits are theoretically unlimited, because the option price can keeps increasing when underlying increases or decreases depending on the type of option.

What is time value and option value ?

The Premium you pay for the option has two components
– Time Value
– Intrinsic value

Premium = Time value + Intrinsic Value

Intrinsic value is the true worth of the option (premium) and Time value is the value which is there because of the time left for the expiry, because as the Expiry time comes near the risk of loosing the money is high. So time value keeps decreasing as the expiry comes closer.

There fore you will see that even if STRIKE price is closer to SPOT price, the option price will be very high if the expiry is after many days.

For CALL option price moves towards 0 if SPOT is less then STRIKE price and expiry comes closer.
For PUT option price moves towards 0 id SPOT is higher than STRIKE and expiry comes closer.

Watch this video to learn more details about Options trading:

How does it works?

You can either sell it at the profit or still hold it.

Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiry and the current price of premium is suppose 10, you can sell it at loss, because you don’t want it to become 0.

Suppose you didn’t sell it and market really closed above 4300 on expiry date, then you loose whole your premium (as SPOT Options used for Hedging

Example 1:

Suppose you buy CHAFER 90 CE EXPIRY 26th June, at a premium of 1.95 (you will have to pay Rs 1.95 * 3450 to buy this option), and the SPOT is 78, means currently price of Chambal fertilizer share is Rs. 78, now the price of option will follow the price of the share price.

If price increases to say 85, then the option may increase to 4.5 (depending on demand and supply), and at this point you can sell the option and earn a profit of 4.5-1.95 = 2.55 Per share, profit of 130%.

Now suppose on 26th June (Expiry day), the price of Chambal Fertilizer is Rs 100, then the option will be exercised and who ever has the option at that time will receive the profit of Rs 10 (total 10 * 3450) and the option will not be exercised if the SPOT (current price) of share is below 90, because then he will make loss if exercised.

(Remember, its not your obligation to exercises the option (you exercise if its in profit, or you loose your premium)

When do you buy Options?

Example 1 :

Suppose Infosys is at 2000 today (1st June) and you are optimistic that its price will go further go up 10% or 15% (2200 or 2300). so you buy a CALL option of Infosys which is going to Expire in approx 1 month, say INFOSYS 2200 CE 10.5 26th June is available and lot size is 1000, so you pay 1000 * 10.5 = Rs 10,500 for this option.

Now option price will move the same way as the price of Infosys share. At the end of the Expiry date if Price of Infosys share will be more than the 2200 then the option will be called “In the Money” as it will be in profit when exercised Else it will be out of money.

So suppose Price of Infosys share is 2280 at the end of Expiry then you exercise the option and get 1000 * 80 = Rs 80,000, you can also sell the option anytime before Expiry date if you want to make profit and convinced that the option price has reached at a good point.

Example 2:

You think that Economy is not doing well and markets as whole will fall because of high inflation news and political issues (or for any reason), Suppose Nifty is at 4600 and you believe that it will fall to 4300 in 2-3 months, Suppose current date is 1st June then you can buy NIFTY PE 4300 AUG , assume premium is Rs 15.

Case 1: If markets fall badly and reaches 4500 in 1 month and the premium increase to 330. You can either sell it at the profit or still hold it.

Case 2: If market does not fall as per your expectation and still is at 4400 before 10 days of expiry and the current price of premium is suppose 10, you can sell it at loss, because you don’t want it to become 0.

Suppose you didn’t sell it and market really closed above 4300 on expiry date, then you loose whole your premium (as SPOT Options used for Hedging)

The main use of Options is for hedging, So if you have bought some 1000 shares of company ABC at Rs 20 , and think that price may fall to 15 in one month ,you can ABC PE 20 or 19, and pay a small premium, Now you are covered for the loss you will make on shares, because you have right to sell the shares at 20 or 19 (depends on the price you bought the options at).

Some other important points

1. Options are very risky and very rewarding, it can give returns of even 100% or 200% in day, or can give negative returns of 50% or 80% in a day.

2. Options are very volatile, so its a good idea to be patient with options.

3. Buying Options near its Expiry dates are highly risky, because if they go in wrong direction they don’t have time to come back.

4. Its not a good idea to buy a option with strike price very far from the SPOT price unless there is some good reason for it. Options with more gap between between STRIKE and SPOT have less premium, but very risky (and can be very rewarding too).

5. Its not a good idea to put a Stop loss for your option very near to the current price, because its highly probable that it will come to Stop loss point and then again bounce back because of there high volatility.

6. Its a good idea to set a target to book profits and get out, rather than trying to get maximum out of option. If you don’t exit at a good point, the chances are that value will again bounce back to normal price and you will miss a chance.

(I sold Chambal Fertilizer CALL 90 option when it price went up to 6.5 though 8-9 looked achievable target next day, but i thought its a great return and didn’t miss the chance of booking 250% return in 2 days, Buy price was 1.95).

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

How to evaluate Returns from Investments

Which return is better return, 40% or 30% ?

There is no doubt that 40% is more better return. But is it a right way to judge the return just by seeing the number. we ignore another important factor called as “RISK” involved. In most of the cases, people really don’t consider evaluating the return in relation to RISK taken to earn that kind of return.

Which is better?

1. 30% with High risk
2. 20% with moderate risk

In this case , 2nd is better than 1st , as the Return per unit of risk is better than the 1st case. (considering High risk is 3 units , and moderate is 2 and Low is 1 .

So the actual measure of return should be, Return per unit of risk


There are many balanced mutual funds which have given little less return than diversified equity funds , and hence can be called as much better investment tolls because there was much lower risk involved with them , in case there was any fall in markets , these mutual funds would have fallen less than equity funds. Many mutual funds advertise there products only on the basis of returns and don’t care to tell investors that there is high risk involved with the products.

If you are given 2000 for climbing a tree and 5000 for jumping from one building terrace to another , the first choice is much better. In that case you don’t go for the second option just looking at 5000.

If today all banks start giving 12-15% assured return on Bank deposits, Equities investments will fall to great extent , because bank deposits will have much better returns considering the risk involved.

I would be happy to read your comments or disagreement on any topic. Please leave a comment.

Tax Treatment of Equity , Gold and Debt

Tax Treatment

Equity Mutual Funds and Shares

Short Term Capital Gain : If you sell it before 1 yr , the profit is called STCG and taxed at 15% (revised in 2008-09 budget) ,So if you make profit of 10,000 on shares or Equity mutual funds , you pay 1,500 as tax.

Long term Capital Gain : No tax

Other Points

– Dividend income from any kind of mutual funds are not taxable.

Profit from Sale of House or Land

Long term Capital Gain : If you sell it after 3 years , its Long term Capital gain. and its taxed at 20% on profit.

Your profit = Sale Price – (Cost price after adjusting indexation , as per the cost inflation index)

Long term capital gain tax can be saved by investing the capital gains in some other residential property or in bonds of the Nabard, National Highway Authority of India, Rural Electrification Corporation of India or SIDBI redeemable after a period of three years.

Long term capital loss can also be set off against any Long Term Capital Gain in next 8yrs.

Short term Capital Gain : If you sell it before 3 yrs, its considered as STCG and added to your income and taxed accordingly.

Short term capital gains can set off against any LTCG or STCG within 8 yrs.

Other Points

– Capital Gains from Agricultural Lands are not taxable.

A person holding more than one residential property would be liable to Wealth Tax on the market value of the second property.

Profit from Jewellery

Short term Capital Gain : 20% tax on the profit if sold before 3 yrs (1 yr in case of GOLD ETF) .

Long term Capital gain : 30% tax on profit if sold after 3 yrs ( 1 yr in case of GOLD ETF)

Don’t know what is GOLD ETF ? Read this article , CLICK HERE

Profit from Fixed Deopsits , PPF , NSC

Fixed Deposit : Interest Earned added to the income and taxed accordingly.

PPF : Interest earned not taxable

NSC : Interest earned taxable

Things you didn’t knew


There are many things we hear and believe , but they are little different in reality, which helps if we know.

– Do you know that When you take an SIP for 6 months or 1 years or for any period , the first installment (which you make by cheque) is not counted for inside the tenure of your SIP. So if you take a SIP for 6 months , you make 6 payments other than your initial payment with cheque , so total is 7 payments.

– The short term capital gain period is 1 yr , means 365 days , but it does not work exactly that way , its 12th month other than your buying month. Means if you buy shares or MF on 12th May , 2008 and sell on 13th May , 209 it is still short term capital gain , to call it long term capital gain , it must see it after 12 months after May , 2008 (your month of buy) . which means you shall sell it on or after 1st June 2009.

– Suicide is also covered in Life Insurance after 1 yr of policy (atleast its there in my policy with SBI Life Insurance).

– ULIPS : The deductions availed under sec 80C is taken back if you surrender your ULIP before 5 yrs. If you surrender your policy in 4th or 5th year , then all hte premium paid till date will be added to your salary for that current year and you will have to pay tax on that too. ULIPS just put restriction on paying of premium fr the first 3 yrs, but offer tax benefit under 80C if you hold it for minimum 5 yrs.

– If you repay your housing loan by taking another loan , you can continue to claim tax benefit on the interest amount paid for new loan under sec 24.

– Tax deduction is available for the prepayment charges paid for the home loan .

– If you face any problem or defecieny in service from banks, you can complain at same as

– Dividend distribution tax is levied on the Dividend which you recieve , and it also affects the fall in NAV . So NAV falls not just to the extent of the dividend declared , but also by the tax which mutual fund company pays to govt (12.5% on dividend + 2.5% surcharge also , under sec 115-O )

I would be happy to read your comments or disagreement on any topic. Please leave a comment.