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SHANBHAG'S WONDERLAND A prescription for a low-cost, high-return policy. By A.N. Shanbhag
Dr Bhat, our family doctor and a friend, had a problem. One fine day, he remarked to me: "If I am able to carry on with my practice for another 30 years, I'm sure I'll have assets of around Rs 1 crore. But if I were to die earlier, I would still want my family to have that much money. I think I need a low-premium, high-risk insurance policy." I had always insisted that with the kind of money the hard-working doctor had made and invested, his family would not have to go through any hardship in the unlikely event of his premature death. And I had always told him that he did not need to bear the high cost of insurance. But before I could repeat my standard line, he overruled my objection. "I want my son to have Rs 1 crore whether I am alive or not. I have some investible funds now. You have often told me that open-ended mutual fund schemes are the best investment vehicles for people like me. The incidence of tax is low, and I can withdraw as much money as I want whenever I want. I want a self-sustaining scheme, which will pay for the annual premia while the deposit shrinks to zero as the payments are made. I would like you to assume a growth rate of only 14 per cent per annum as a measure of abundant precaution," he stated. After quickly working out the details on my PC, I told him: "Doctor, you need only around Rs 7 lakh to own Rs 1 crore." After allowing the logic to get the better of his scepticism, I said that if I were him, I would choose the Life Insurance Corporation's Jeevan Griha Triple Cover Policy. "But," he complained, "I thought you always advocated Bima Sandesh since it was a low-premium, high-risk policy. Why this sudden switch?" I explained quietly to him that Jeevan Griha offered three times the target amount in the case of death during the tenancy of the policy. That is, if he paid the premia on Rs 33.33 lakh, the cover would actually be Rs 1 crore. But if he was fortunate enough to survive the full term of the policy, all that he would, unfortunately, get would be Rs 33.33 lakh. I had touched the right nerve. I continued: "Let's suppose you have around Rs 6.82 lakh. You pay the first premium of Rs 80,957, and invest the rest in a debt-based, open-ended, pure-growth mutual fund scheme, or in the bonds of the public sector companies yielding 14 per cent a year. At the end of the first year, the amount will grow to Rs 6,85,162. You withdraw Rs 80,957 from the capital for the payment of the second premium. You continue the process for 30 years. By which time your deposit will become nil. While you do not have to pay the premium out of your business income, you will earn the full benefit of the tax-rebate upto the ceiling of Rs 60,000. But don't forget the additional rebate of Rs 10,000 available for infrastructure companies." Dr Bhat thought he had me. "You have not provided for the taxes on long-term capital gains. I will have to pay that on the amounts I withdraw from the mutual fund scheme," he argued triumphantly. I told him that I had neglected this on purpose. "The premia on Jeevan Griha earns a tax-rebate, and that will save your annual contribution, to that extent, to the public provident fund," I replied. "I will buy Jeevan Griha tomorrow," the good doctor gushed. The right prescription, I nodded. |
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With doctors, you need to be patient. 