Why do I need Insurance?

Youth makes us feel immortal and invincible. It is all about dreams not about death and disease. But this is the best time to think of insurance so that the dreams are not shattered by death.

Life Insurance provides risk cover which no other investment option offers. Following are the advantages of Life Insurance:

  • It provides full protection against risk of death.
  • Encourages and forces compulsory savings as the saved money cannot be withdrawn and premium has to be paid regularly.
  • Provides loan to tie over a temporary difficult phase and is also acceptable as security for a commercial loan.
  • Provides tax benefits to policyholders.
  • Hedges risk against uncertainty.

Risk cover

Life is full of uncertainties- accident, illness, theft, natural disaster might happen anytime. Human beings do not have much control over life’s risks and uncertainties however they can at least be prepared for them and their aftermath. Life insurance can be a big support to a family in troubled times, to meet their financial needs, to fulfill their dreams of -another child, a bigger home, a new business, college education, travel, retirement… Life insurance is all about making sure your family has adequate financial resources to make their future plans and dreams come true.

Insurance provides you with that unique sense of security that no other form of investment provides. By buying life insurance, you buy peace of mind and are prepared to face any financial demand that would hit the family in case of an untimely demise. Insurance also provides a safeguard in the case of accidents or a drop in income after retirement. An insurance policy can lend timely support to the family in case of an accident or disability. It also comes as a great help when you retire, in case no untoward incident happens during the term of the policy.

Investment

Insurance can be an attractive option for investment too. A lot of Insurance products yield more compared to regular investment options, with the added advantages of providing incentives. No other investment schemes can offer financial protection from risks.

The premium you pay for an insurance policy is an investment against risk. Before comparing it with other schemes, one must remember that a part of the total amount invested in life insurance goes towards providing for the risk cover, while the rest is used for savings.

Also life insurance provides you get maturity benefits on survival at the end of the term. i.e. if you take a life insurance policy for 20 years and survive the term, the amount invested as premium in the policy will come back to you with added returns. In case of death or disability within the tenure of the policy, the family/insured will receive the sum assured.

Now, let us compare insurance as an investment options. If you invest Rs. 10,000 in other investment options like PPF or Bonds, your money might give better returns but you cannot access your funds. One can withdraw 50 per cent of the initial deposit only after 4 years. The same amount can give you an insurance cover of up to approximately Rs 5-10 lakh (depending upon the plan, age health, etc) and this amount would be immediately available to the nominee of the policyholder on death.

Thus insurance provides sound returns in addition to risk cover.

Tax Planning

Insurance can be used for tax planning too. Under Section 88 of Income Tax Act, an individual is entitled to a rebate of upto 20 per cent on the annual premium payable on his/her life , life of spouse and life of his/her children .This benefit is available to an individual or a Hindu Undivided Family.

If the gross income per annum is less than Rs. 1.5 lakhs per annum maximum benefit available is 20% of the eligible amount i.e Rs. 14,000. If the gross income per annum is between Rs. 1.5 lakhs per annum and Rs. 5 lakhs per annum maximum benefit available is 15% of the eligible amount i.e Rs. 10,500.

More Options & Products

The entry of new players after opening up of sectors has helped in more ways than one.

  • Aggressive advertising has improved awareness levels.
  • Many new and innovative products have been launched. Customers have tremendous choice from a large variety of products from pure risk insurance to unit-linked investment products.
  • Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional money-back policies.
  • Advice and need based selling is emerging through much better trained sales force and advisors.
  • There is improvement in response and turnaround times in specific areas such as delivery of first policy receipt, policy document, premium notice, final maturity payment, settlement of claims etc.

At present there are 14  life insurance companies in India.

  • Bajaj Allianz Life Insurance Company Limited
  • Birla Sun Life Insurance Company Limited
  • HDFC Standard Life Insurance Company Limited
  • ICICI Prudential  Life Insurance Company Limited
  • ING Vysya Life Insurance Company Limited
  • Life Insurance Corporation of  India
  • Max New York Life Insurance Company Limited
  • MetLife India Insurance Company Pvt. Limited
  • Kotak Mahindra Old Mutual   Life Insurance Company Limited
  • SBI  Life Insurance Company Limited
  • Tata AIG  Life Insurance Company Limited
  • AMP Sanmar Life Insurance Company Limited
  • Aviva Life Insurance Company Pvt. Limited
  • Aegon Religare

How do I compare life insurance policies?

There is such wide range of policies that it is natural that a person would feel lost in the jargon. To make the right decision, compare the following features of different policies:

Premium – the amount of money you have to pay regularly to continue your insurance coverage. The premium amount is depends on age, policy, premium payment options and policy term.

Term – the number of years the policy is valid. The longer the term the lower the premium. The policy term varies from a minimum of 5 years to a maximum 55 years.

Term of premium payment – the number of years you have to pay premium on your policy. It may be the same as the policy term or less. Some policies have the options wherein one can select the premium payment term.

Sum Assured – the amount received on death of the policyholder. A lot of policies offer a larger amount of sum assured than other benefits .So, if you are concerned more about leaving a bigger amount for your family for the same premium select a policy with more sum assured

Bonus – is declared as a proportion of the sum assured, by the insurance company each year depending on the profit made by the company. It is paid only as a lump sum either on maturity or to the family upon death.

Maturity – It is the amount of money you receive from the insurance company if you survive the policy term.

Cover – is also known as death benefit. It is the amount of money your nominee receives from the insurance company upon your death. It is the sum assured plus the bonus.

Returns – the amount of money realised at the end of the term of the policy calculated in percentage terms every year. It can be compared to the rate of interest that you receive from other investment.

Riders-Insurance companies offer some options in addition to the regular policy features for a small increase in premium like personal accident benefit, waiver of premium rider etc. Thus, for a small increase a larger benefit can be obtained. For e.g. you want to have a policy for 10 lakhs. This would mean a large premium however if you buy a policy of 5 lakhs with a term rider which pays additional 5 lakhs in case you die in the next 20 years would cost much less.

Therefore, for a given sum assured and term compare policies on the basis of these parameters and choose a policy depending on your insurance objectives. – risk cover or  returns or both.

Factors to consider while taking insurance

  1. How much insurance can you afford?
  2. What is you motive for taking insurance?
  3. How much insurance you need?
  4. How much insurance can you afford?
  • Low premium high cover
  • Cover for short term
  • Higher cover with high returns

Low premium high cover

In case you are looking for a policy that is relatively inexpensive but provides a death benefit that is guaranteed for life, it is advisable to select whole life policies or term policies. They offer zero or low returns.

In Whole Life policies ,the Sum Assured is payable on death of the life assured and premiums are payable throughout life. It is available with the following variations:

  • Option for maturity with or without profit
  • Facility of paying the premium for a limited period.
  • Single premium payment also possible

This policy provides just risk cover. Examples of some policies:

LIC

  • Jeevan Rekha
  • Whole Life Plan

Max New York Life

  • Whole Life Participating Policy (eligible for bonus)
  • Whole Life Non-Participating Policy (not eligible for bonus)

A term insurance policy provides only risk cover for a specified period of time. The sum assured is payable only if the policyholder dies within the policy term. If the policyholder survives the term, he is not entitled to any payment; the insurance company retains the entire premium paid during the tenure of the policy. Some of them are:

LIC

  • Anmol Jeevan
  • New Bima Kiran

Max New York Life

  • Level Term
  • Term Renewable and Convertible

ICICI Prudential

  • LifeGuard

Cover for short term

Some people feel that when they grow old their number of dependants will reduce or they will have sufficient wealth to meet the needs of their dependants. Hence in such cases it is best to take a limited term policy which would meet the short and medium term needs of the individual. These policies have a lower premium. LIC’s Two Year Temporary Assurance Plan, Anmol Jeevan and Max New York Life’s Level Term policy are some of the options.

Higher cover with high returns

Some people want more than risk cover from their policy. They look upon it as another source of investment. A lot of Insurance products yield more compared to regular investment options, with the added advantages of providing incentives and risk cover. Insurance companies provide a wide range of options and the individual has to select a policy based on his risk appetite. Some of them are

BAJAJ ALLIANZ

  • The Invest Gain Plan
  • The Unit Gain Plan

ICICI Prudential

  • InvestShield Life
  • InvestShield Cash
  • InvestShield Gold
  • Premier Life
  • Cash Bak
  • Secure Plus etc.

LIC

  • Jeevan Shree

What is you motive for taking insurance?

  • protection
  • investment
  • future expenses
  • retirement planning

Protection

In case you are worried about the well being of your loved ones and wish that they are adequately provided for and that their lives are not affected, even when you are not around, choose a plan which gives maximum returns in case of death. Whole Life policies, term plans should be your choice.

Investment

You can have plans which combine the security of a life insurance policy with the opportunity of enjoying high returns on your investments. You can even market-linked returns without market risks compromising the protection of your family. Choose from the Savings and Investment plans offered by companies. Companies offer a host of policies which you can choose depending on your risk appetite. You can choose from higher risk plans which invest in equities or moderate risk plans which invest in fixed income securities or very low risk investments in cash and call money markets.

One example is ICICI Prudential’s LifeLink II.

Another is Tata AIG’s InvestAssure which gives the flexibility to choose your fund based on your risk comfort and enables you to enjoy market-linked returns with a potential for higher growth

Future expenses

Depending on what your future foreseeable expenses are- marriage, house, children’s education ,vacation you can select from the policies .

For future expenses related to children there are host of Children related policies. LIC has Jeevan Balya, Jeevan Sukanya, Komal Jeevan etc.while ICICI Prudential has various SmartKid plans .

For other expenses, Savings, Investment, Money Back Plans would be appropriate.

Retirement planning

Retirement plans provide solutions to combine investment and insurance. They are designed to maintain your lifestyle needs for as long as you live and ensure peace of mind.

Max New York Life has Easy Life Retirement Plan which is a comprehensive plan to meet your post retirement financial needs. It provides an income (i.e., pension/annuity) for your entire life from your chosen date of retirement. This annuity is a guaranteed amount, guaranteed at the time of vesting (i.e., commencement of annuity).

ICICI Prudential has plans like LifeTime Pension II, LifeLink PensionII which invest in market-linked funds, to generate potentially higher returns and ForeverLife which is a regular premium pension plan.

Tata AIG has Nirvana Plus Pension policy which has guaranteed addition of 10 percent of sum assured every 5 years, reversionary and terminal bonuses credited to your policy. In addition to that it has Accident cover, Guaranteed Life cover where beneficiary will get the full Sum Assured + Guaranteed Additions + Bonuses (if any) immediately.

How much insurance you need?

This will depend on:

  • your life stage and your needs
  • the wealth, income and expense levels of your dependents
  • their significant foreseeable expenses
  • the inheritance you would leave them, and
  • the lifestyle you want to provide for them.

Comparison between some policies

Riders available are different for each company &have not been considered for calculation.

The rate is for a 30 year old, healthy male

The Sum assured is Rs. 10 lakhs.

Whole Life policies

Annual Half yearly Quarterly
LIC

Whole Life with Profits

Rs. 23,705 Rs. 12,051 Rs. 6,125
Max New York Life

Whole Life Participating Policy

 

Rs. 21,590 Rs. 11,226.80 Rs. 5,721.35

 Term assurance plans

LIC Anmol Jeevan Max New York LifeLevel Term

 

ICICI Prudential LifeGuard –without return of premium
5 years Rs. 2,564 Rs 2,170 Rs. 2,751
10 years Rs. 2,564 Rs 2,280 Rs. 2,751
15 years Rs. 2,812 Rs 2,430 Rs. 2,751
20 years Rs 3,227 Rs 2,710 Rs. 2,751

 Note:

The premium rates have been calculated on the premium calculator in the websites of the respective companies, which is a tabulated premium.

Actual premium will be based on the risk assessment by the company.

Understanding the calculation of returns

Every insurer tries to make it appear that their plans are more attractive. One has to know the terms used to find out which plan is providing the best deal and what will have significant impact on the returns they are expecting from the policy

1) Bonus Calculation

The basis of bonus calculation is very important. Different insurance companies have their own ways of calculating returns – some declare it as a percentage of the premium, while some as percentage of the sum assured.

Company A (Rs.)

Company B (Rs.)

Sum Assured

5,00,000

5,00,000

Annual Premium

20,000

20,000

Bonus

1,000

25,000

Though both the companies have declared a 5 % bonus the returns are totally different as A has declared it as percentage of annual premium while B has declared it as percentage of the sum assured.

2) Amount invested

The insurer invests the premiums paid by an individual. The amount `invested’ by the company will differ if there are additional benefits added on to the policy such as disability rider, accident cover etc.

Company A (Rs.)

Company B (Rs.)

Annual Premium

20,000

20,000

Company expenses

2,500

2,500

Accident cover

1,000

0

Disability cover

500

0

Amount avb for investment

16,000

17,500

If the same returns are declared by both the companies, rate of return of Company B will be higher. When choosing a policy, it is always advisable ask whether the additional benefits come at a cost or form a part of the policy.

3) Sum Assured of the Policy

A policy which provides a higher amount of sum assured for a given premium when compared to policies with similar features and benefits is preferable to a policy with lower sum assured. This is because if they declare returns on basis of sum assured the policy with higher sum will give better returns

Illustration: The annual premium on both the policies is Rs.20,000 and the return is 5% of sum assured .

Company A (Rs.)

Company B (Rs.)

Sum Assured

2,00,000

1,80,000

Bonus

10,000

9,000

4) Bonus on maturity

Some policies have a lumpsum bonus payable on maturity. This amount depends upon the performance of the insurance company. If the bonus amount includes a large amount of this bonus which cannot be quantified initially, the annuity amount received could be much lesser than initially calculated. Make sure that if the policy contains this feature, a conservative amount is taken.

5) Compounding returns

Customers are sometimes lured away by the promise of compounded returns. Most policies offer simple interest and people assume that the one paying compound returns would pay higher .However, before making a decision it is better to read the other clauses. If the company does not offer bonus for first few years, no additional benefits would accrue even if the returns are compounded.

Authored by : CA Rajkumar S Adukia , Email: rajkumarfca@gmail.com

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