Insurance helps create wealth over long term

Jayant Dua, Financial Chronicle 23/2/2012

source: http://www.mydigitalfc.com/personal-finance/insurance-helps-create-wealth-over-long-term-228

We all have dreams and want to achieve key milestones of our lives like building our home, funding education of our children, providing the best lifestyle to our families and many more. In order to achieve these dreams, one should have a financial goal in mind and work towards achieving it.

All of these goals can be achieved over a period of time and, hence, need robust planning. Wealth-with-protection solutions from insurance companies have been designed to ensure that you can save for these long-term goals in a systematic manner to receive the benefit of life cover and provide protection to your family.

Wealth-with-protection solutions play a tripartite role of regular savings, protection and providing tax benefits.

How much insurance does one need? While there may be many ways to protect family against uncertainties of life, none has the charm of insurance products — the surest way to mitigate risk. Not just that, for working individuals, it is the best way to regulate savings. Some of the important things one must consider before investing in any insurance policy are – coverage, benefits in the long run, term and the premium amount to be paid and your income so that you do not face a concern over premiums.

Would it be a good move or a bad move? We need to first talk about fundamentals of insurance and then mull over the policy decisions.

Young professionals, today, are financially independent. They manage their finances and they also support their families, either partially or totally. In such a scenario, planning of your life insurance needs is absolutely critical so that in case of any unfortunate event like an accident or a sudden demise, the family doesn’t go through a financial trauma and plans for the family are not disturbed.

Why should I start planning my wealth savings now? Most people tend to push this investment for their older age, but one must realise that there are many benefits from buying these policies early on. When you opt for life insurance, you qualify for multiple benefits such as tax deductions, protection and capital gains over a longer period of time. It also instills the habit of saving, and builds financial discipline, thus, ensuring peace of mind in the long run.

The plans could be based on either traditional or unit-linked insurance policy (Ulip) platform. Types of wealth-with-protection solutions available in the market are as below:

>> Whole life plans: These plans enable one to meet financial goals and also gives financial security over an entire lifetime.

>> Single premium plans: Single premium plans strive to give a guaranteed return on maturity that is tax-free and the financial security of a life cover. Some plans give customers a choice of the single premium amount they want to invest.

>> Endowment policies: An endowment policy is a life insurance contract designed to pay a lump-sum after a specified term (on its maturity) or on death. Typical maturities are 10, 15 or 20 years up to a certain age limit. Some policies also pay out in the case of critical illness.
Policies are typically traditional with – profits or unit linked (including those with unitised with-profits funds).

>> Highest NAV products: As an informed investor, you appreciate the potential of equity markets to generate wealth over the long term. You also understand that market volatility can impact your investments and, hence, you are looking for investment options that enable you to diversify your risk to suit your investment needs. These policies can lock in your gains and safeguard your investments from potential downsides.

What make these policies so convenient are the other joint benefits that come along. The illustrations in the policies make these policies easy to understand and provide an overview of how your life insurance policy may perform over the years. Apart from creating wealth in the long run, these solutions also offer key benefits like death benefit and survival /maturity benefit. Riders or the special benefits can be availed by the policyholders in addition to the life insurance cover by paying a little additional premium. In some life insurance policies, you can also avail a loan against the life insurance policies.

Plans as per needs: You can avail insurance plans as per your needs and requirements. If you want to save for your child, you can go for children insurance plans providing you with returns at certain important milestones of your children’s life like their education and wedding. If you want to save for your retirement, you can invest in pension plans either in Ulips or in simple endowment plans depending upon your risk appetite.

Multiple investment options: There are two primary investment options within wealth-with-protection solutions in case of a Ulip, self-managed option and guaranteed option. The self-managed option gives you complete access to invest your premiums in well-established suite of investment funds, ranging from 100 per cent debt to 100 per cent equity. Guaranteed option is where your investments are fully managed by your insurance provider. Apart from these conventional options, companies also offer unique choices like trigger portfolio, lifecycle option to best manage your investments.

Begin doing what you want to do now. We are not living in eternity, we have only this moment, sparkling like a star in our hand and melting like a snowflake…wrote philosopher Francis Bacon Sr.

It is said that destiny is not by chance, but by choice. While this may or may not apply to all aspects of life, when it comes to financial security of our near and dear ones, it isn’t very far from the truth. One of the many steps to shape our financial destiny is to provide adequately for the future. That’s where insurance comes in. It is time we take steps to paint a fair picture of what one needs to provide for.

(The writer is a CEO of Birla Sun Life Insurance)

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As the life industry contracts, why Irda may be feeling Sebi-ish

Degrowth in the life insurance industry has brought the knives out. Its finally the industry vs the regulator. And that’s how it should be

Monika Halan, Mint 15/2/2012

source: http://www.livemint.com/2012/02/14214613/As-the-life-industry-contracts.html

The Rs2.9 trillion Indian life insurance industry has, for the first time since privatization in 2000, seen contraction over two consecutive financial years. Fiscal 2010-11 saw a shrinking of 20% and the full year 2011-12, estimates the insurance regulator, will contract 15%. This means that enough of us did not buy an additional policy last year or this year, or did not renew an ongoing policy, or that new investors were not found by insurance sellers.

It is a cause for worry when an industry stagnates. But if there is contraction, the worry changes to a call to action. While in most industries, it is the companies that get active and lobby the government for sops and policy relaxations, when it is the life insurance industry that sees the contraction, the wrinkle is equally on the brow of the government. You wouldn’t have guessed that the Rs1 lakh you did not fork over for another junk policy was going to cost the government its disinvestment plan. And that is partly the reason for the ministerial worry and action. A bit of history first. For decades the life insurance industry in India was synonymous with the Life Insurance Corporation of India (LIC) and being government-owned, this meant that its crores of assets became a sort of a default sovereign wealth fund for the Indian government. Market falling at an inconvenient time would see the call going from North Block to the office of the LIC chairman. The need to drum up interest for a public sector IPO would see help from the defacto investment chest for the government. With the entry of private sector firms, though the market share of the state-owned behemoth has fallen, its clout surely has not within the government in terms of the quantity of assets under management. The falling business numbers in life insurance in general and LIC in particular, therefore, have worried the ministry of finance mandarins enough to call for an industry meeting in Delhi. And the regulator was not invited.

The meeting held in Delhi two weeks ago with the life insurance chiefs saw the knives coming out. Unlike other times, this time it is not the media or the capital market regulator that was the target, but the Insurance Regulatory and Development Authority (Irda) itself. For an industry that is wary of going public against the regulator (insurance companies are not even allowed to form an independent association, they need to work through the Life Insurance Council, an Irda-constituted industry body) the mini free-for-all saw a public venting against the regulator. The industry is angry over flip-flops in regulation and knee-jerk reactions to issues. It accuses the regulator of killing the pension product and of not thinking through some of its decisions. A part of the angst has been about the attitude of the regulator that, they say, wants to project itself as a messiah of consumers and sees all companies as offenders. But, says one insurance CEO, hurting the companies may end up hurting the consumers.

I agree that some of the consumer-interest communication that goes out from Hyderabad, where Irda is based, is immature. Take, for instance, the TV ad that showed the consumer being saved by the super-man like regulator or the calls that the regulator’s staff seem to be making to customers to scare them into changing a unit-linked insurance policy (Ulip) to a traditional plan—but to be fair, some part of the clean-up by Irda, that was pushed by the government to do so in 2009, has been good for consumers. The Ulip product has got cleaned up to a large extent and no amount of mis-selling of traditional products will expose investors to the risk of short-term market movements. Given my past run-ins with the regulatory body, I did not think the day would come when this keyboard would bang out words in defence of the insurance watchdog, but I don’t see why Irda should be blamed for the insurance sector shrinking. The contraction has happened because companies greedy for business used the faulty Ulip product to cheat consumers. Twin pressures of losing the trust of investors and of the changed regulatory environment that makes mis-selling the Ulip not worth the effort have caused the dip in revenue and not the regulator.

Since its battle with the Securities and Exhange Board of India (Sebi) two years ago, Irda today may be more empathetic to its elder sibling, the capital market regulator. Accused of causing a decline in mutual fund assets under management two years ago for making mutual funds no-load, Sebi stuck to its stand and eventually the industry has settled down. Irda should remember that once the froth subsides and genuinely consumer friendly rules begin to take over, the business stabilizes and gives the industry a strong base.

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IRDA plans end to deceptive policies, upfront commission

Shilpy Sinha, Economic Times, 24/10/11

source: http://economictimes.indiatimes.com/personal-finance/insurance/insurance-news/irda-plans-end-to-deceptive-policies-upfront-commission/articleshow/10470480.cms

The Insurance Regulatory and Development Authority (IRDA) plans to ban misleading products and staggered commission for agents to ensure that policy buyers are not shortchanged.

The insurance industry, which is still evolving a decade after privatisation, needs new rules to ensure that consumers get the best and don’t get carried away by products that only promise high returns on paper, the regulator has said.

"One important problem is that what you mean by highest NAV,” J Hari Narayan, chairman, IRDA, told ET in an interview, referring to many insurers promising highest net asset value of the policy period to holders. "In certain markets, certain products are prohibited. That may be the best way to go.”

Insurance companies, bitten by the slump in sales after new rules curbing the Unit Linked Insurance Policies, are peddling many policies that on close scrutiny could be termed deceptive. One such is the promise of highest net asset value. But what they do not publicise is the calculation behind the NAV. These policies also charge 25 to 75 basis points as additional fees. A basis point is 0.01 percentage point.

"Suppose a company had Tata in its portfolio, over time it may change,” said Narayan. "At the time of maturity, which highest NAV are you talking about – the portfolio, or Tata. One of the major problems with the product is that how do you communicate to the policyholder. He may be thinking of the highest NAV of the Sensex. So, this is the whole issue.”

Prudential ICICI, Birla Sun Life, Bajaj Allianz, SBI Life, Reliance and Aegon Religare are some of the insurance companies that sell policies promising the highest NAV. These policies have tenure of 10 years with limited premium paying term of 5-7 years.

Though the highest NAV guarantee gives the impression that such products are pure equity products and pay the highest return during the course of the tenure, that is not always the case. When a 100 investment gains by 10-15%, a portion of the corpus is shifted to debt. At regular intervals, when there are gains, some funds are shifted to fixed income securities.

In a way, this could be a strategy where investors don’t get the highest NAV they would have received if they had remained invested in equties. The portfolio manager, to avoid liabilities for the company, could actually depress returns for investors.

Another area where investors lose out, commission to agents, could also be plugged.
As high as 40% of the policy premium in the first year on traditional products while 7-12% in Ulips, are paid to agents as commisssion. But once the policy gets running, the agent loses interest in serving the policy holder. So, to ensure that customers are serviced, the commissions could be rear-ended and paid at the later stages of the policy, than in early years.

"Korea has found that front-ending commision has led to unhealthy practices. So, the question is should we rear end it. A lot depends on the sales history and culture of the country,” Narayan added.

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Insurance is essential to control healthcare costs

Neeraj Basur, Financial Chronical, 28/9/2011

source: http://www.mydigitalfc.com/personal-finance/insurance-essential-control-healthcare-costs-749

Life is full of surprises. Take for instance a hale and hearty 20-year-old college graduate who discovers that he has type-1 diabetes or the severe back pain a 35-year-old software engineer, a father of two, faces because of bad sitting posture. Two different incidents, but with the same repercussion on long-term health consequences that impacts one’s quality of life and not to forget the costs associated with such medical treatments that remains forever.

The importance of good healthcare is manifested when one comes across such incidents and adopting healthy lifestyles cannot be overemphasised. Though, in the unfortunate event of hospitalisation, the only viable way to reduce the impact of financial consequences arising from such incidents is health insurance.

Life insurance covers the risk of death and has gained in popularity over the years. What about the risk of poor health and the expenses incurred on it? One tends to forget that as important as it is to take care the financial needs of one’s dependents in the event of death, it is equally important to look at de-risking one’s poor health in their lifetime with health insurance. Health insurance guards against financial loss from illness or bodily injury and provides coverage for medicine, visits to the doctor or emergency room, hospital stays and other medical expenses.

Unlike life insurance, where one can arrive at how much cover one needs based on one’s assets, liabilities and an estimated number of years that one wishes to protect one’s financial dependents for; health insurance has no straight-jacket ways to arrive at the quantum of cover one should take. A lot depends on how much one can afford towards premium and realise the value of this insurance.

For instance in the 20s, one should definitely look for an entry-level basic health insurance plan starting with a minimum cover of Rs 2 lakh. Not only is the premium on health insurance low when you start early, it also builds a healthcare record for you that can go a long way in determining future policy benefits and premiums. Likewise, when you are married with children, your responsibilities increase and so do financial commitments. In such a situation, you should consider a family floater health insurance, which is a single umbrella policy protecting all the family members, including dependent parents, providing a coverage of at least Rs 3 lakh or more per member depending on your premium paying ability.

Despite offering great value, health insurance penetration is low in our country because of poor awareness and also the perception that there are no tangible benefits with this policy. A way out to increase penetration beyond the tax benefits could be to encourage those who are fit to buy health insurance with lower rates and offer the unhealthy the policy at a higher rates, rather than declining them complete cover. After all, taking a health insurance policy does not mean that you can keep illnesses and accidents at bay. But at least you can ensure that if they strike your family, you will be able to avail the best possible treatment without having to worry about the costs.

(Neeraj Basur is the chief financial officer of Max Bupa Health Insurance Company)

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Times of India, 14/3/2011

Alife insurance policy is a key component of a financial plan. Chosen well, it safeguards the financial future of a family if the breadwinner passes away. If, however, it is bought for the wrong reasons, the same policy can become a drain on resources and prevents the policyholder from meeting crucial financial goals. Bangalorebased marketing manager Jitendranath Patri is paying a premium of `1.06 lakh a year for six policies that give him a combined cover of `20.4 lakh. "I feel I have overinvested in insurance. These plans take up a huge chunk of my savings. I must resort to some course correction here," he says.

In Kolkata, Meraj Mubarki is agonising over his inability to save enough for his dream house. "I’m in a financial mess. My insurance policies take up too much of my savings, leaving me with very little for my house," says the 33-yearold college professor.Worse, it leaves this sole breadwinner grossly underinsured. Mubarki is covered for `6.75 lakh, though he needs an insurance of at least `60 lakh.

In Mumbai, software professional Amit Kolambkar is thoroughly miffed with the returns from his Ulips and feels cheated.

"The agent didn’t explain how the plan works and how I can decide my allocation to equity," he says. Getting stuck with an unsuitable insurance policy is a malady as widespread as the common cold. There’s one wrong insurance policy in almost every household.

What do you do if you find that you have the wrong insurance? Escaping from an insurance policy entails a very high cost. You can lose up to 50% of what you have paid. In extreme cases, you might have to forfeit your entire investment.

This is what keeps people from junking a plan, however unsuitable it is. "There is a psychological barrier of losing money, which is why people avoid exiting an insurance policy. But it is better to incur a loss at the initial stage rather than continue and compound the mistake," says Arvind A Rao, chief financial planner, Dreamz Infinite Financial Planners.We look at the options for policyholders who want to junk their insurance plans and explain the circumstances in which each should be exercised.

OPTION I

Let the policy lapse Don’t pay the premium and the policy ends automatically.

This is the easiest way to exit a policy. It is also the costliest if the policy has not completed three years. The premium paid in the first two years is forfeited and the policy ends. You also stand to lose the tax benefits availed of in the first two years on the premium payment. You get nothing, except freedom from the policy. Financial planners say this option should be chosen only if you realise that the policy is grossly unsuitable to your needs. "If the policy doesn’t meet your objective, it is better to let it lapse even though you stand to lose the premium for 1-2 years," says Pankaj Mathpal, managing director, Optima Money Managers. The rule is different for Ulips. Even if it is discontinued after the first year, the policyholder is entitled to some amount after paying surrender charges. However, this sum comes to him only after the lock-in period of five years (three years, if bought before 1 September 2010). The fund value, after imposing all charges and penalties, is frozen in the account and earns 3.5% returns till this period.

OPTION II

Surrender the policy

After three years, an insurance policy fetches a surrender value. If you have paid the premium for three years, your insurance policy would have built a reasonable corpus value. So, if the plan is surrendered after this period, the policyholder can get some money back. It will, however, be a fraction of what he has paid over three years because of the surrender charges levied by the insurer. In the third year, the surrender value is roughly 30% of the total premium paid, but this figure goes down as the term of the policy progresses. Till last year, insurers used to levy very high surrender charges on Ulips in the first three years. But last year, the Irda put a cap on these charges. This is `3,000 or 20% of the annual premium in the first year. For plans with a premium of over `25,000, the cap is higher at `6,000 or 6% of the annual premium. The surrender charges come down progressively to zero in the fifth year. "No surrender charge is levied on policies that are more than five years old," says Tripathy. Surrendering a policy gives you some money back, but it also ends the life cover. So, before you decide to junk your policy, find out if you have enough cover. Also, calculate the cost of a fresh insurance policy at the time. You might discover that the premium is very high because you are older.

OPTION III

Turn it into a paid-up policy Stop paying the premiums, but don’t discontinue the policy.

A better alternative to surrendering your insurance policy and losing the life cover is to turn it into a paid-up policy. As in the case of surrendering it, you can use this option only if you have paid the premium for three years and the policy has built up a minimum corpus. Instead of returning the money to the investor, the insurance company uses it to offer him a life cover. Every year, it deducts mortality charges from the corpus.

However, in case of traditional endowment and money-back plans, this cover is proportionate to the number of years for which the policy was in force. For instance, if a policy offers a life cover of `10 lakh for 20 years and the policyholder converts it into a paid-up plan after five years, the life cover will be reduced to about `5 lakh. On maturity of the plan, the diminished corpus and the accumulated bonus are given to the investor. This feature has been widely exploited by agents to mis-sell Ulips to gullible investors. Last year, the Irda issued new rules for Ulips. If the premium of a plan bought after 1 September 2010 is stopped, the policy will be discontinued.

This is meant to reduce the incidence of mis-selling. The paid-up option is by far the best way to exit an insurance policy because it gives the policyholder the best of both worlds. He is freed from the burden of paying the premium that are a drag on his finances, but continues to enjoy the life insurance cover that was the primary objective of the plan.

OPTION IV

Let it continue

If close to maturity, pay the premium till the full term. Of course, if the insurance policy is only 2-3 years away from maturity, one should continue with it for the full term. This is because the painful period of high charges in the initial years has already gone and it doesn’t make sense to let go of the accumulated benefits at the fag end of the term.

If you are finding it difficult to pay the premium, withdraw from the Public Provident Fund or any other longterm investment to pay the premium for your policy. You could also consider taking a loan for this. The Life Insurance Corporation of India, for instance, offers loans against the policy for paying the premium.

http://articles.timesofindia.indiatimes.com/2011-03-14/india-business/28688017_1_policy-ends-policy-lapse-premium

VRIDHI’s view:

We frequently get calls from anxious investor’s who after buying a product are clueless on how much returns they would get, and at times when they want to exit the scheme it becomes a big hardship.

Not just calls, literally on every TV show of ours we get atleast one call on such topics.

Investors need to be Cautious with people who act as “One Medicine Doctor” What ever may be your requirement they would end up giving you only one solution!

Hence you may want to invest for retirement, you may need a protection, you may be trying to save for your children… whatever… A Insurance agent will give you one or more Insurance product for your needs & a Mutual Fund agent will give you one or more Mutual Fund solutions for all your needs!

Hence we repeat… “Play caution when dealing with One Medicine Doctors”

Thanks

VIVEK KARWA, CFP^CM

Investment Strategist & Retirement Planner

Desk Mobile: 98405-40575