An open letter to all who love their lives
Hi Ramesh,
It was a great trip to Pune. I always thought the drive would be great but really it was scary, to say the least. It actually set me thinking about you and your risk taking abilities. To summarize, you and your three brothers are the driving force behind the family business of tyre retreading business. When I reviewed your assets, I was impressed by what I saw. However, when I saw the list of liabilities, I was stuck by the lack of financial discipline – in your financial life, your business life and in your driving. Your new Toyota Corolla is surely a good car, but constantly driving it at 170 km (yes on the Mumbai –Pune expressway, it is possible). I got scared, and Dr. Prakash was too polite to comment about your driving.
Let’s enumerate your ‘assets’. Your house in which, you are living with your nuclear family – your wife, two daughters and a son. Your new Toyota Corolla, your wife’s Honda city and your son’s Ikon. You have also committed to a new house in Mahabalipuram on which you have made a down payment.
Asset Cost Loan Market Value
Home Rs 180 lakh Rs 120 lakh Rs 225 lakh
Toyota Corolla Rs 14 lakh Rs 12 lakh Rs 9 lakh
Honda City Rs 9 lakh Rs 2 lakh Rs 3 lakh
Ikon Rs 7 lakh Rs 1 lakh
Investment house Rs 68 lakh Rs 60 lakh Rs 74 lakh
Apart from these assets, you have a loan against property of Rs 30 lakh taken for your son’s education – for his acturial education at Oxford. His education has just started and he will complete his education in 2009, and start earning in 2010. Your daughter will start her medical education in 2009, and she wants to do it in US. That, adjusted for inflation will cost you Rs 1.5 crores, and your current level of investments, of Rs 8 lakh in mutual funds will be nowhere near sufficient. And I am not even talking about the amount of money that your twins will need when they pass 12th standard – they are about six years away.
This set me thinking on your ability to comprehend and handle risk in your business and in real life. All the assets that you have are invested in your business and I know that the current level of borrowing in your business is also quite high. You have also guaranteed a Rs 14 crore term loan and a Rs 5 crore working capital loan.
Now, let us turn to the life insurance cover that you have. You have an endowment cover of Rs 10 lakh on which you are paying a premium of Rs 32,000 per annum. You have a life insurance cover of Rs 5 lakh (on your wife’s life) for which you pay Rs 85,000 as a premium and a cover of Rs 5 lakh on your daughter, and a term insurance of Rs. 10 lakh on your son. And lets take a look at why you bought these policies. The first policy was bought ten years ago by your father to please the bank manager who sanctioned his working capital loan. The policies on your wife and children to keep your wife’s brother happy – since he has quit this ‘business’ and the term policy on your son, because the bank giving the education loan insisted on the same.
Thus, no life insurance of yours was bought as insurance. You only have insurance of assets which are predominantly owned by the lenders – so your cars, your factory, your house, are all fully insured. Since nobody owns you, maybe you are not insured. If you are the asset creating all these minor assets, I am appalled that you are not insured.
Also read - Busted: 10 insurance myths that can prove costly
I now wish to ask you the following questions:
How long are you planning to be dead?
At your current level of insurance, your wife will not be able to keep the cars or the house. So if you plan to be dead for a period exceeding 30 days, you need more insurance. Why do you drive so fast?You drove the car like a maniac. I know you do not care about your life, but some of us in your car do. When we did stock picking, you were more careful, what happened?When we did pick stocks together, you would be so risk averse, why do you flirt with risk in your real life? You asked for the dividend history, quality of management, market leadership, return on capital employed, and so on, what has changed in your real life? When I suggested term insurance of Rs 5 crore at a premium of Rs 4 lakh, you scoffed at the idea of this money goes down the drain. My travel with you allowed me to do an exercise in the amount of insurance you need.
Now let us look at how much insurance, I think you need
You need life insurance cover to repay all your loans – that amounts to Rs 204 lakh. You need life insurance to cover all your children’s education that, unadjusted for inflation is about Rs 4.5 crores.
You need life insurance to cover the personal guarantees that you and your brothers have given to the bankers that is about Rs 19 crores. You need life insurance to let your family spend about Rs 3.6 lakh per month – I am assuming that the annual vacations in India will be in five star hotels and the foreign jaunts will continue. That means you need a capital of about Rs 12 crores.
In sum, you need about Rs 37 crores of life insurance. Given your current cash flows, I suggest you get your brothers also insured for a Rs 19 crores each – as a key man insurance in your private limited company, and take a Rs 18 crores in your personal capacity. Does this look too high? Lets look at the cost of not having this insurance. What will your family do if you died tonight?
Your son will not complete his acturial studies in UK.
Your daughter will have to forget her MBBS course.
Your wife’s boutique will close down.
All the three cars will be taken away by the lenders.
Your wife will shift to a one BHK rented accommodation; down scale the education plans of the younger kids. No IB school for sure.
Your brothers will not be able to pay her much money on a monthly basis – your salary may continue for say, two years, but what after that?
Your brothers have no clue of the Dubai operations – they even do not know the local partner – so your most profitable market will vanish.
Your wife’s policy, and your children’s policy will lapse because you will not be here to pay the premium.
Your children will decide on how your spouse should retire. There are enough Hindi movies that you have seen to understand this option.
Weigh the premium of Rs 16.5 lakh term premium versus the cost of not having the policy, I am sure you will understand.
Have you read - If you died tonight, what will your family do?
The author, PV Subramanyam, is a financial domain trainer. He can be reached at pv.subramanyam@moneycontrol.com.
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