Future Plans and Insurance

Hi. After a really longtime I am writing this post. Because of a lack of proper subjects, boredom, and sleep addiction I was not able to put any thoughts on writing a post. Now that I have woken up and started reading novels serially (one every weekend) I thought let me start posting again.
Completing my MBA and joining work brought with it the necessity to plan, plan for future. It’s something that I didn’t want to, because every plan needs formulation, which means work. But when you start earning, a lot of bank agents, investment agents, relatives, and friends give you suggestions on planning for your future. I can only say “I agree but not now” or “I will take a decision on it sometime later” so many times. When a suggestion turns out be a call for action one has to make a decision. In this case Yes or No. Saying a yes meant agreeing to the suggestion and not being asked any more question but just signing in some ticked boxes. But I like arguments so it was time to shrug off my indolence and get to work.
The first thing was insurance. I personally dislike life insurance. It means I think my family cannot take care of itself if I am not there. That means underestimating my family’s ability ;). In this day and age where women can stand on their own foot and are equal to men I shouldn’t be thinking like that ☺. But seriously I thought the probability of an untimed death for me is too low to keep paying monthly premium and I was willing to take the risk. This was my explanation. But then people at LIC,Bharti AXA etc had different insurance plans the one that is combined with some kind of retirement plan.
One such plan was that I pay a premium of 7.1 lakhs for the next 10 years and after the 10th year the agency will start paying me Rs.50000 every month for the next 15 years. This also has a life insurance in case of my untimely death anywhere close to 7-8 years of premium pay for no further premium my family will get the monthly income for next 15 yrs plus some life insurance amount (4-5 lakhs). Not only this I will get a guaranteed bonus of 25 lakhs at the end of the policy term.
Now for a normal calculation this looks like I would pay in total of 71 lakhs and receive 1.15 crores plus life insurance. A premium that guarantees returns albeit at a premium ☺. For me to give a No to this I needed logical reasons. So I started my calculations. For any money that I save I can be assured of a return of 12% per annum compounded over a 10 year period. This means the 7.1 lakh investment that I am making every year should be worth a total of 1.25 crores at the end of 10th year. Now the agency starts paying me 50k per month. All of us know that if we take a bank lona of 1 lakh our total EMI payments at the end are more that that because of interest rates and Banks calculate something call Present value of all the EMIs. That means adjusting it by interest rate the total amount of 1.3 lakh or whatever you pay at the end of loan period is equal to 1 lakh today (because all money saved offers returns in this case equal to interest rate). Now instead of me paying and EMI this situation is equal to the Agency paying an EMI for the loan I have given. If now I calculate the worth of the loan amount it comes to 40.1 lakhs add bonus to this and it comes to 65.1 lakh at the end.That means the Agenc’s payments of 50000 per month for the next 10 yrs plus bonus is only worth 65 lakh at the start of 10th year. But my investment was worth 1.25 crores. The agency makes a clear profit of 60 lakhs. I can expect a bank to use my lona and get more than 12% return as normally lending rates or higher than savings or fixed deposit rates right? So for me to even contemplate taking this policy the agency should have guaranteed a payment of Rs.1 lakh per month (double their initial offering) and almost double the bonus amount. I am also enclosing an excel sheet (https://docs.google.com/open?id=0B5senRMGKBIgODNiOTM2NjktZDNmNi00ZjI5LTlhODYtOTFkODMxY2IyNGZh ) for you guys to evaluate any such plan offer you might have got or may get in future. But then again you may attach significance to payment you may get in case of death and still take it. It purely becomes subjective (most insurance plans are). If any of want to buy Insurance premium please let me know I know a few close agents and I can give you their contacts.
Next I was thinking future. In this regard I remember a dialogue by Roberto Di Niro in the movie “The Score”. In a conversation with Edward Norton he says “Figure out what you want (materialistic) and spend the next 25 yrs getting there slowly but steadily” or something to that extent. The idea was not be in a hurry but to be scrupulous. Our government as already gone someway into guaranteeing that we will be crorepatis. If you continue to save 1 lakh per annum that is need for tax benefit purpose and don’t pull that investment out then you can expect to be a crorepati(in nominal terms) in 21 years. I am enclosing a small calculator excel sheet for you to play around (https://docs.google.com/open?id=0B5senRMGKBIgZTMxY2VkODktM2NlMi00YjAxLWI4M2UtODViNTkwNjU2N2U3 ). You can calculate for yourself to be having XXXX money with a particular saving and investment every year how many years you need or given a certain number of years to have XXX money how much saving and investment you need to do. Hope you all have fun using this.
P.S. Some cells in this excel sheet are locked only the cells in which characters are in Blue font can be changed.

To buy or not to buy a house in a big city

Most of us travel away from our hometowns to one of the busy traffic laden cities for jobs. I have had conversations with many friends on whether to buy houses in such in a well-developed city. From the top of the head one can quote many reasons as to why one should buy. It would be a great investment. Real estate prices in these towns always keep on increasing. Tax breaks on interest. Doesn’t have to pay rent anymore. The joy of being the owner of a house. It is not easy to list negatives. Tope of the mind people said investment upfront is very high.
I tried to search of mathematical and subjective reasons for why one should not buy a house in busy towns. Lets talk about numbers first. I have attached a simple excel sheet also for you to play around (https://spreadsheets.google.com/spreadsheet/ccc?key=0ApsenRMGKBIgdEs4X2hVYkJOdHdWV2ZxZzBrX0dDcGc&hl=en_US&authkey=CP-a0-UI). I am posting an example case here
Loan 5000000
Number of years 15
Interest rate per month 0.7500%
Monthly Installment 50713.32921

Rent of the same house/month 10000
increase every year 6.00%
Number of years 15
Total rent paid 2793116.386
Present Value 967282.6116

If I am buying say a Rs. 50 lakh house in Bangalore I will end up paying around 50 k per month in installments if I plan to clear the loan in 15 yrs. While at the same time if I rent a similar such house I may be paying Rs.10 k per month. Lets assume that this rent increases by 6% every year. By the end of the 15th year I might have paid close to Rs. 28 lakh in rent. But this is same as investing Rs 10 lakh today in a bond that yields at 9% and paying of the rent with the returns. Now my Rs. 500000 lakh house has to be worth at least 1.82 crores for it to break even with bond returns at the end of 15 yrs. If for any reason the real estate price fetched me less than this then I would have wasted a considerable amount of money and energy. To more subjective reasons. Is it worth forgoing a huge amount of salary and live in austerity for a long time just to have a house in a big city? Can the youth life be returned to me at the end of 15 yrs. What if at the end of 15 yrs I wish to go back and settle in my hometown or some other calmer place. Is it worth it? These are some questions to ponder over.