Now all of us know that Smoking is injurious to health (thanks to the government regulations that require a prominent skull and bones and a written warning to be printed on all cigarette packets). A somewhat less prominent written warning is also printed on all gutka pouches and packets. Apart from the direct money spent on purchasing these tobacco products (which anyway ranges from Rs. 1000 to Rs. 2500 per month for most tobacco slaves) the indirect costs in terms of health care and loss of productivity costs due to the various illnesses caused by tobacco usage is quite substantial. To that long list of expenses caused by use of tobacco please add the extra costs of Insurance. In fact the extent of such extra costs on Insurance came home to me when we received a query from a reader.

Here is that query: “I am 38 years old and am thinking of buying a 30 year Unit Linked Insurance Plan where I will pay a premium of Rs. 39,000 per annum for a sum assured of Rs. 75 lacs. After deducting all the charges including mortality, the indicative fund value at the end of 30 years comes to be around Rs. 4.50 lakhs at a gross return of 6% p.a. and Rs. 9 lakhs at a gross return of 10% p.a. If I invest the premium amount in a PPF for the same tenure the fund value would total to around Rs. 44 lakhs @ 8% p.a. Since I am getting such a poor return should I investing in PPF rather than buy this policy.”

For advising him we needed to work out the cost of a 30-year term policy for Rs. 75,00,000.

The below mentioned table is as per the above illustration for a male aged 38 years with a 30 year tenure for a sum assured of Rs. 75,00,000

On that basis at that time the cheapest premium worked out to Rs. 22,000. Assuming he invested the difference of Rs. 17,000 (Rs. 39,000 less Rs. 22,000) in PPF @ 8% p.a. it would accumulate to around Rs. 19 lakhs. So we advised him to take a term policy and invest the remaining amount in to various investment instruments depending upon his risk appetite to get better returns. Also his tenure for investment was quite long so we suggested him to go for a more aggressive portfolio that includes equity. But there was a sting in the tale. The customer came back and told us that in spite of excellent medical reports he was getting the term policy at a premium of Rs. 36,000 p.a. and not Rs. 22, 000 as we had told him. On further enquiry we realized that the additional premium was not because of any health issues but because he was a smoker and the premiums indicated were for non-tobacco users only. Now of course the equations changed completely. The money left from the premium payable on the ULIP plan was only Rs. 3,000 and the gross amount accumulated on that would be much lower than the fund value even at the lower return of 6%. This was happening because the ULIP plan did not differentiate between a healthy non-smoker and a healthy smoker. We asked him to take the ULIP policy immediately if it was still available.

But this episode bought home to me the financial costs of using tobacco. Here is an example to put the figures in perspective. Assume that the direct and indirect cost of smoking/gutka is around Rs. 3,000 p.m. on a very conservative basis. If the same money were put in a diversified equity plan for 20 years (and return is 15% p.a.) the funds would be enough to pay for a course that costs Rs. 14,00,000 in today’s money (assuming inflation at 6% p.a.). So the next time you light up that cigarette or reach for the gutka pouch please remember that the money for that is directly coming at the cost of your’s child’s higher education.

Our readers who are in their 30s and 40s and looking for sum assured of Rs. 75,00, 000 for a tenure of 30 years can refer the table below which compares the premiums for tobacco and non tobacco users.

But wait the story does not end here. I was using the same illustration with a young cousin of mine to convince him to give up smoking. Instead he sought my advise on an ingenious plan. What if he does not tell the insurance company that he is a smoker and uses the resultant savings in premium to build up the nest egg? I told him that plan would not work because firstly the insurance company would not pay on the policy in case he died but also they would anyway discover the fact that he smoked in the medical tests. But he refused to give up. He said he would give up smoking for a while before he applied for the insurance so that the medical tests will not reveal that he smoked. I pointed out that it will still not work as the premium he was paying would be completely wasted as the insurance company was not going to pay the claim on the policy if anything happened to him. It would be extremely irresponsible of him to take such a risk with his family’s future. Not one to give up easily he asked what would the insurance company do if a policy holder who was a non smoker at the time he took the policy started smoking later. Well I was stumped at that one. The Insurance Company would probably have to pay if a non-smoker (at the time the policy was taken) turns into a smoker later on. But I pointed out that this did not apply to him in any case since he was already a smoker. “Stop postponing the inevitable, Vaibhav and quit smoking now “ I advised him.

Hopefully he has taken the advice. What about you?

(Smoking and tobacco usage have been used interchangeably in this article – lower premiums are available only where the policyholder does not use tobacco in any form – smoking, chewing, snuff, etc.)

It is often said that the true character of a society is judged by how it treats its elders. The senior citizens of a country need to be taken care of by the society in general and by their children in particular.

Now a days lot of benefits have been granted to senior citizens in India so that they can live a fulfilled life. These are available in the form of special saving schemes, pension schemes, postal schemes, mediclaim policies and the likes which I have already written about in my earlier columns.

In this piece I would like to dwell on the income tax benefits available to senior citizens.

As described under Income tax Act, a senior citizen is a person who was of 65 or above of age during the year. It is worth mentioning that Income tax act contains many beneficial provisions for senior citizens. So what are these? Let’s understand.

Firstly senior citizens do not have to pay any income tax upto the income limit of Rs. 2,40,000 as against limit of Rs. 1,60,000 applicable for ordinary individual.

As a senior citizen you can claim deduction of upto Rs. 100,000 each year under Section 80C, in respect of money deposits made under Senior Citizens saving scheme rules, 2004. This provision is significant when other avenues for claiming tax deductions under Section 80 C like life insurance premium, payment towards pension plan, contribution to PPF account, ULIP etc. are no longer remain attractive to senior citizens. Though for income tax purpose you are a senior citizen if you have completed 65 years of age, however for the purpose of depositing money under the senior citizen scheme, the age limit is only 60 years and not 65. This age limit is relaxed to 55 years in case you have taken VRS and the retirement money is invested within a period of three months in the scheme. The rate of interest under this scheme is 9% currently which is higher than on any other risk-free investment avenue available today and that too with tax deduction.

The general deduction in respect of insurance premium for health insurance popularly known as Mediclaim is Rs. 15,000 for a family. However if premium is paid for senior citizen, the amount of deduction available goes up to Rs. 20,000. In case the premium is paid for the parent who is a senior citizen, the person paying the premium can claim a separate deduction of Rs. 20,000 in addition to claim of Rs. 15,000 in respect of premium paid for self, spouse and children. In case of the person paying the premium, as well as his parents who are senior citizens, the deduction available for each category will be up to Rs. 20,000 each.

The income tax also allows deduction for expenditures actually incurred for treatment of family members in respect of some specified diseases. Section 80DDB allows a deduction of Rs. 40,000 for treatment of self, spouse, siblings, parents, and children upto Rs. 40,000 for expenditure incurred for treatment of specified disease. However this deduction goes up to Rs. 60,000 in case the person to be treated is a senior citizen.

Senior citizens can submit Form no. 15H for no deduction of tax at source to the payer of money like interest, withdrawals from NSS account, and income from units of mutual funds and total tax liability is nil for the year in question.

As a senior citizen if you are not engaged in any business or profession, you will not be required to file a return of Income even if you fall into the criteria on ownership/occupation of immovable property or subscription of a telephone under the popularly known as one by six scheme. However, you will have to file a return of income under the scheme if you fulfill any of the other four criteria.  This exemption is available only if the senior citizen does not have any taxable income.

This way we find that Income tax act has provided quite a few benefits to senior citizens to help them wade through their old age, by way of higher benefit for Mediclaim when the medical cost constitute a significant portion of their budget.

The Income tax Act also treats the senior citizens fairly when it allows them to provide benefit of investing in senior citizen saving scheme at a higher rate of interest and at the same time let them claim the same as deduction under Section 80C.

With the inter-regulatory spat over ULIPs being firmly settled in its favor, IRDA has taken very little time in announcing sweeping new regulations that will change the very essence of how ULIPs are structured and sold today.

So what are the significant changes and how will it change how ULIPs are sold. The changes are both from the regulator side as well as the proposed changes in the DTC that will become effective from the year beginning on April 1, 2011.

First let’s look at what the current draft of the DTC says.

Under the DTC all receipts from any life insurance policy is treated as revenue. However full deduction is allowed for any receipts from a life insurance policy if the amount is received at the completion of the original period of contract or death and

the capital sum assured is at least 20 times the premium payable in any year.

In simple words it means that under the DTC (effective next year onwards) tax exemption will be available for sums received under the insurance policies only if those sums are received on maturity (or earlier on death) and also if it has a certain minimum level of death protection. Since tax is a major driver for buying Insurance policies (a rather unfortunate situation) this single change itself will make sure that any potential mis-selling around the tenure of the policy will be limited.

Combine this change with the fact that a 5 year compulsory lock in period has been introduced by IRDA will make sure that this is perceived as at least a 5 year product. In the other very significant change IRDA now requires charges to be spread over the first five years (and not front loaded as is the case currently) and has additionally introduced a maximum spread of 4% between the gross yield and the net yield at the end of 5 years. These two changes when combined will ensure that the commission structures and other charges are kept reasonable.

On the pension front the revised discussion paper on the DTC, in a surprise announcement, has also promised an EEE treatment for “approved annuities”. It is not very clear which kind of “annuity plans” will be approved but in any case it will breathe new life in the moribund annuity market. “If”, as is being speculated, the approval of the annuity plan is linked to the corpus coming only from the NPS then it will sound the death knell for accumulation pensions plans (for example those being offered by Life Insurance companies) offered outside the NPS system.

If all the changes proposed above (especially those in the Direct Taxes code) which are yet to be finalized and legislated, are actually enacted then it would change the investment landscape in the country.

At the risk of sticking my neck out let me do a bit of crystal gazing for the next financial year:

1. It goes without saying that commissions on ULIPs will reduce significantly and be spread over a longer period. This will force the much-needed professionalisation of the financial services distribution industry, which will contract as the non-serious players leave the industry. However the serious challenge of consumers paying for advise separately from execution will continue to remain (this is a subject matter of another article) and hence mis-selling though reduced will continue to be driven by the products that offer relatively higher fee to the distributors.

2. At some point (and I am really sticking my neck out here) SEBI will have to relent and allow for fees to be paid to intermediaries upfront as well. Maybe this may take time but I think there may not be an alternative if the retail MF industry is not to become extinct.

3. We will see an increase in the mortality charges in ULIPs as these are not taken into account while calculating net yield and thus can be used to pay some additional commissions to the distributors.

4. 5 year or more single premium plans will become popular – as they are currently- but collections will not be as high as they are today simply because of the high life protection required to make the plans tax exempt. This requirement will prevent too many applications coming in from the high net worth band. They will do some circumvention by putting in applications in the name of their younger children etc. but the high cost of the protection plus the difficulties in doing financial underwriting for large insurance polices will ensure that the maximum investments are kept in check.

5. There will be an increased focus on risk products (term insurance as well as Income protection plans)

6. There will be a big focus on online distribution of products (or telephone assisted online distribution) with simple products specifically tailor made for online consumers as the insurance companies look for cost effective channels for distribution.

Of course there will be lots of other ramifications as well.

We are in for some very interesting times from the next financial year. I would welcome readers views on what they expect will happen next.

Recently I came across a newspaper report mentioning the number of insurance policies being lapsed. According to the said report, during the year 2009, insurance policies worth Rs. One trillion had lapsed and their number was over 9 lacs. And this number did not account Unit Linked Insurance Plans (ULIPS). In the same year, 1.73 million policies of Private Insurers worth Rs. 47,000 crore lapsed as against 1.28 million policies worth Rs. 25,000 crore lapsed during 2008.

The lapse ratio (a proportion of policies lapsed during a year vis-à-vis

policies in force at that time) in respect of one of the leading Private Insurance company stood at 53% in 2009, implying that 53% of the insurance policies were not renewed when they fell due for renewal. The reasons could be many but most important one which I could figure out is the selection of misfit Insurance Advisor, which is the first step we make towards insuring our lives.

This way we see that the number of Insurance policies as well as the amount of lapsed policies is on the rise and the major reason for this as mentioned above is wrong selection of insurance advisor who indulge in misselling. This mis selling happens when an insurance advisor sells an Insurance product without evaluating and matcing the insurance needs and financial strength of the customer.

The above statistics of lapse ratio made me appreciate how important it is to select a right insurance advisor which is equivalent to selecting your family physician.

So what qualities/ merits one should look into while selecting the Insurance Advisor?

• He/ She should possess financial integrity. A person with intergiety will only put a customer’s interest before his own interest. Integrity of an insurance agent should be verified by checking with mimimum two strong refernces provided by the Insurance advisor who are known to you also.

• He/ She should possess good level of enthusisam and dynamism.

• He/ She should have excellent analystical skills which makes him competent enough to evaluate various insurance products available in the market.

• He/ She should be abreast with latest developments in the insurance industry as well at his company level as insurance is a dynamic sector and keeps on changing constantly.

• He/ She should be into full time insurance business. This is important as only a full time person can spend time to keep himself abreast on the various products available in the market as well as to give you after sales service. Inadequate after sales services is another major factor leading to lapse of policies .

To quote my own experience here, I had taken an insurance policy from a new entrant in the business through an insruance advisor. After debiting my first premium amount, I have not heard from him since then. I myself serviced my own policy by finding ways and means of keeping it alive. A lay person may not be able to ensure that his life insurance policy remains in force in case there is no one to provide after sales service.

Thus it is very important that you select the person who can understand your financial position and insurance needs. Do not retain a person who does big ticket insurance only because later on he may not be able to provide you after sales service. Moreover the big ticket insurance advisor may even persuade you to buy insurance beyond your insurance needs.

It is always good to verify that the insurance advisor has been in this field for a reasonable period of time. Many insurance policies are taken by first year insurance agents and when they are not able to fulfil the criteria for continuance as an insurance advisor, you are left with no one to take care of after sales service of policies taken through them.

It is not advisable to select the advisor only because he/she has been referred to you by one of your relatives or friends, overlooking all the above mentioned merits.

Also do not buy insurance products from an insurance advisor, who is operating from place other than the place where you reside say in a different city. I know number of insurance agents coming to Mumbai on annual pilgrimage to solicit and get insurance business from their friends and relatives staying in Mumbai. Buying an insurance policy from an insurance advisor from a place other than place of your residence creates administrative problems of payment of premiums year after year. Getting after sales service becomes another big limitation in such long distnace relationships.

This is also important when a claim in resepct of such insurance product arises. A local insurance advisor will be able to give you better services than an insurance advisor loacted in a different city.

Thus above pointers will enable you to appreciate the importance of having a right person as an Insurance advisor, who can help you in identifying the proper insurance product for you at the selection stage.

A good insurance advisor plays an equally important role in servicing the insurance policy during continuance of the policy. His role is most important at final stage of an insurance product, when a claim in respect of an insurance policy is to be made. Unless you have someone to run around for you in the eventuality of you not being around.

Ensure that you have an insurance advisor who will walk an extra mile to help you dependents.

To Summarise here, I will say that it is very important to have a good insurance advisor not only at the stage of buying an insurance product but also, during the currency of the insurance policy till the final stage of of claim.

All in all your insurance advisor should be able to work right for concept to commissioning…till After Sales Service!

“I have a mediclaim policy for the last 5 years for myself and my wife. We were recently blessed with a child. The only thing that marred the joyful experience was the refusal of the TPA to reimburse the expenditure of Rs. 23,000 incurred during the hospitalization of my wife while giving birth. Is the TPA correct in refusing to reimburse this claim. How do I get this money? My agent had never told me that pregnancy expenditure is not covered. What is the use of a mediclaim policy that does not pay when you are hospitalized.”

This is one of many such emails that we receive at Apnapaisa daily from anguished mediclaim policy holders. Now pregnancy and childbirth related expenditure is permanently excluded from most individual mediclaim policies issued by the Insurance companies. Even in a few cases where it is allowed it is only for a limited sum of money (irrespective of the total sum assured) and that too after you have renewed the policy with the same company for quite a few years.

Similarly there are a host of other permanent (or temporary) exclusions that are not covered by most of the mediclaim policies such as :

• Wars, Invasion, Act of foreign enemy

• Nuclear weapons or radiations due to nuclear waste or fuel

• Circumcision unless necessary for treatment of a diseases or necessitated due to an accident

• Non-allopathic treatment

• Pregnancy and childbirth related complications

• Cosmetic, aesthetic and obesity related treatment

• Expenses arising from HIV or AIDS and related diseases

• Expenses arising due to misuse of liquor, intoxicating substances or drugs as well as intentional self injury

• Vaccination or Inoculation

• Vitamins, tonics, nutritional supplements covered only if needed as part of treatment.

• Any fertility, sub fertility or assisted conception operation or sterilization procedure.

• Cost of specs, lenses, hearing aids, crutches, limbs, artificial teeth

From the queries that we receive on our site it is clear that very few consumers are aware of these exclusions.

Clearly a lot of reasons exist for this ignorance :

First the consumers themselves :

For most people if you contrast the amount of time they spend on buying a pair of shoes versus buying a health insurance policy, the pair of shoes will show higher amount of time spent . Clearly unlike a pair of shoes that will be worn for maybe a year or at most a few years, a health insurance policy will be there with him for a substantial part of his lifetime. For that he will blindly depend on the suggestion of the agent without looking into the details himself. I think it is important enough purchase that he should spend some time to read the policy wording (or at least a detailed look at the brochure )

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There are two types of exclusions – permanent and temporary besides diseases covered with a limit.

Permanent Exclusions

• These are the main exclusions of the policy, which are never covered, in an insurance plan. These are the famous list of causes or condition because of which the claims are rejected and the company says that we don’t cover these diseases or we don’t cover these plans.

Temporary exclusions

• These are exclusions, which are there for some period of time say one year or two year. Diseases like cataract, hernia and many more come under this category. Other than that pre existing diseases if any are covered after certain number of years. This keeps on varying from policy to policy. It may start from completion of one policy year till five policy years.

Diseases covered with a limit:

• There are certain diseases which are covered within the policy but with a certain limit. Say for example a policy may say that it will cover Cataract but with a limit of only Rs. 15,000. This means that whatever cost you incur due to hospitalization for cataract, the maximum you can claim is Rs. 15,000.

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Second the Health Insurance Industry itself

A recent trend that has many disturbing implications for the future is the practice of having permanent exclusions that are worded very widely or sometimes specific exclusions that are particular to that company only. We tried to do the research on quite a few products available in the market. Some of the exclusions mentioned in the policy wordings took even us by surprise when we examined them a little deeply. This simply means how important it is to read these exclusions before buying the policy and how misleading it can be to buy a policy before understanding the exclusions of the policy.

Here is a partial list of such “surprising” and “individualistic” exclusions:

1. Injury caused due to the performance of hazardous sports of any kind

2. Act of terrorism

3. Puberty & ageing

4. Artificial life maintenance

5. Hereditary conditions

6. Treatment for any mental illness or psychiatric illness.

7. Treatment relating to birth defects and external congenital illnesses

8. Treatment by a Doctor which is outside his discipline; referral-fees or out-station consultations; treatments rendered by a Medical Practitioner who shares the same residence as an Insured Person or who is a member of an Insured Person’s family, however proven material costs are eligible for reimbursement in accordance with the applicable cover.

Lets take an example of hereditary conditions. So if any of my father or my grand father was suffering from heart disease and I happen to get the same long after I have taken the policy , it may not be covered even though it was not pre-existing at the time when I took the policy. Similarly, artificial life maintenance system forms a part of permanent exclusion of a particular policy where this is the most costliest part of the hospitalization expenses in today’s time.

There is a huge necessity for the regulator to look in to the same, as most of the conditions mentioned in the exclusions part of the wordings are too complicated to be understood by the common person (in fact it took our team of seasoned experts here about 2-3 days to make some sense of all the exclusions ). Secondly, if we pick up brochures of any of the company, then they mention a synopsis of the exclusions and not all of them. Lastly, any particular exclusion mentioned in two policies is different in wordings in both the policies. And it is very difficult for anyone to understand that both the exclusions effectively mean the same.

There is a huge need to standardize these exclusions. Any of the insurance company, which wants to keep exclusions over and above this list (or in a different wordings), should highlight the exclusions, which are not a part of those standardized exclusions. This will need to be enforced by IRDA – which is the regulator.

Contrary to popular opinion exclusions are not necessarily bad for consumers as most of them prevent the abuse of the system. If the abuse is allowed it will add to the cost of the cover and all consumers will suffer for the acts of a few. There is then a big need to carry out an extensive public awareness program about the standardized exclusions (and the need for them) as well as how to look at any exclusions that are different from the standard set of exclusions.

Let’s all hope that urgent steps are taken to make the health insurance policies more transparent and effective so that this essential pillar of social need can be spread far more widely.

I would welcome the views of the readers on this most vital issue.

A policeman stopped a person who was about to jump from the bridge. Obviously policeman stopped him and wanted to know the reason for this drastic step. The person trying to commit suicide informed that he was an insurance advisor and took nearly fifteen minutes to explain that why life is not worth living. Suddenly crowd gathered to see both the policeman and the Insurance Advisor jumping from the bridge together. This is the power of persuasion of an insurance advisor.

A lot of people are persuaded to buy an insurance policy without fully understanding the suitability of the policy for them. Thus it is important that you should ensure, before buying an insurance policy, so that it works best for you always and particularly when you are looking at tax benefits. However there are certain measures you need to ensure once you have taken the policy.

There are two pronged benefits on insurance policies. Firstly by way of a deduction under Section 80 C upto Rs. One lac in respect of premium paid on life insurance policy, secondly, on the money received from insurance company with accumulated bonus which is tax free under Section 10 (10D).

There are certain fine points you need to take note of while claiming tax benefits.

You are entitled for tax benefits for premium paid only if the insurance policy covers your life, your spouse’s and child’s life. As a parent you can claim the income tax benefit on the premium paid on the life of your child even though the child is not dependent on you. But if you pay insurance premium on the life of your dependent parent, then you cannot claim the benefit of Section 80 C.

What is the maximum limit for claiming tax benefit in relation to premium paid?

In case you pay more than 20% as premium of your sum assured, for any of the years during the term of the policy then tax benefit under 80C is not available. I will illustrate here with an example: Say you have taken an insurance policy for a sum assured of Rs. One lac and yearly premium in respect of this policy is Rs. 21,000, then the deduction in respect of the entire premium paid will not be available for deduction under Section 80C.

Now let us look at the tax aspects of the monies received. Any money received in respect of Life Insurance policy together with the accumulated bonus is exempt fully from income tax under Section 10(10D) presently.

However, money received on your insurance policy together with accumulated bonus in respect of life insurance policy issued after 1^st April, 2003, will be fully taxable if the amount of premium payable on the policy is more than twenty percent of sum assured for any of the years during the term of the policy as explained above.

But any money received on death of the person insured will be tax free though the premium for any of the year might have been more than 20% of the sum assured of the insurance policy.

But you are entitled for all these benefits only if your policy is not terminated before premium in respect of two years has been paid. Moreover as a policy holder you should not allow the policy to lapse by reason of failure to pay the insurance premium before premiums in respect of two years has been paid. Whereas for ULIPs, the policy should remain in force for at least five years and should not either be terminated or allowed to be lapsed for failure to pay premium.

It is important to know that either in case of Life Insurance policies or ULIPs, if the policy is terminated or allowed to be lapsed, then aggregate of all the deductions allowed in earlier years, will be added to the income of the year in which such policy is terminated or allowed to get lapsed for non-payment.

This way you see that by properly studying your policy will not only benefit your heirs but also benefit you big time while claiming tax benefits. But the essence of this is that you ensure proper and timely payment of your premiums to reap the real fruits of your harvest.

Life insurance is to save your dependants from paying for your liabilities in your absense. So if you have no liabilities so u need insurance?

The answer to these questions is a ‘No’. you only need life insurance if u have dependants or if u have any liabilities. your dependants can be your parents, grand parents, children, grand children or anyone else if they are dependant on your income for their expenses.

Your life insurance cover should be an amount if invested in the safest way and yielding a return that can help your family to bear all of its expenses which you wuold have provided. So your insurnace should firstly cover the amount that gives your dependants their monthly income

Life insurance should also cover any liabilities on you. This will ensure that incase of any sudden incident happening to you, your liabilities can be paid off and your family will not have to face this burden in your bsense .

So in short your insurance cover should have cover the follows:-

1) A sum that provides for the household monthly expenses for life in present value terms, adjusted for inflation

2)It should cover all your liabilities

3)It should make up for the expenses needed to fullfill your future goals in it spresent value terms

So if you are a bachelor/spinster and your parents are not dependant on you financially. and you dont have any other dependants, nor do you have any liability, so then you need no Life Insurance. In the same way if you are retired and have no liabilites, and no more goals ot be achieved for your dependants and your dependants are completely financial independatn then you too need no insurance at all.

Term Insurance is a pure form of insurance wherein you are not linking insurance(risk cover) and investments together. people over the past with their so called adviser cum insurance agents have put alot of money in the insurnace plans expecting a good return at the end. The way its portrayed by the agent is the numerical value of returns and not the persentage terms which should actually be the case, as Rs.100 today is only equal to Rs. 466 after 20 years @ 8% Per annum, so if your insurnace gives you even 4 tiems your monsy that is Rs. 400 then too you are at a loss.

Insurance linked investmetns are bascically of two types.
1) Debt invesstments:- Endownment, Whole life, most Moneyback policies,
2) Equity market Linked:- ULIP’s and unit linkes pension plans

Historically debt linked insurnace products dont give more than 6.5% return over the term of the insuance contract and the problem with ULIP;s are that they are very costly as the agent gets upto 40% of your premiums as commissions and the management expense is also very high

So if you want to seperate investmetns from your risk cover then you should only protect yourself by a term insurance policy

Example:- To compare the two types of insurances

A Term policy for a 30 year old male for a cover of Rs. 30,00,000/- for a period of 25 years will cost around Rs. 5160:/ pa where as an Endownment worth this will cost him around Rs. 190000/-pa

There is a cost Saving of Rs. 184840/- Pa which can be saved and invested as per your investmetn risk profile and asset allocation rather puttin it for 25 years at around the average growth rate of 6.5%

This is why only Term Insurance should be bought and make investment into better yielding products as per your risk profile and time horizon..

No agent will ever tell you this as his commission income will be reduced drastically.

Highest NAV guaranteed? ………………. ?

We have been bombarded with these advertisements in the media recently. It has come to the light that almost all the top insurance companies like LIC, ICICI PruLife, Bajaj Allianz, SBI, Tata AIG, Reliance and Birla Sunlife are having these guaranteed products.

This probably sounds like magic and to a limited extent it actually is. To provide this kind of a guarantee a dynamic trading strategy known as constant proportion portfolio insurance is used by these Insurance companies. The model is fairly intricate and is probably understood by a limited number of very statistically oriented people who earn a living by pricing options, interest rates and risks (I cannot claim to be among them).

However the broad contours of how this strategy works can definitely be understood. Let me try and explain in simple English what I have understood based on my own research and talking to various players in the market.

Simply put the strategy would start with a base allocation of the funds between risky assets (read equity and related products) and relatively safer assets (debt market and derivative products) depending on their assumption of returns expected from a risk less instrument as well as the amount of market price drop/interest rate changes that they seek cover from and a host of other similar assumptions. Depending on how the actual market prices/interest rates perform the portfolio is rebalanced periodically to maintain a guaranteed capital. So various players may have different initial portfolios depending on their initial assumptions and the extent of risk of change in prices/rates that they are willing to underwrite. I ,for one, would not hazard a guess on what gross returns these funds would generate.

So should one invest in such products? Here are some things to consider:

1. Like any other ULIPs the amount invested in the fund is lower than the premium paid by you due to various charges like policy allocation charges, policy admin charges, etc.. These are generally stiffer in the case of such ULIPs as compared to regular ULIPs from the same insurance companies for similar amount of premium paid. There are also the guarantee charges that the insurance companies charge over and above the other charges.

1. Highest NAV Guarantee does not mean return is guaranteed. It is only a capital guarantee at a point of time. Let me explain with a simple example

Year Premium amount Invested NAV on that date No. Of Units

Net of charges

1. Rs. 1,00,000/- Rs. 10/- 10,000

2. Rs. 1,00,000/- Rs. 10.70 9,346

3. Rs. 1,00,000/- Rs. 11.45 8,733

Rs. 3,00,000 Rs. 10.68 28,079

You now have 28,079 units at an average price of 10.68 on which it is guaranteed that at the end of the policy term (say 10 years) you will get Rs. 3,21,505 (i.e. 28,079 units * highest NAV 11.45). All that this ensures is that as long as you hold these to maturity and continue paying any other premiums/charges that may be due you will get at least Rs. 3,21, 505 at maturity (which normally will be 4-7 years later). Your return of course will vary depending on when this amount is due, even higher NAVs reached during the further Guarantee period (which is normally higher than the premium paying term which is assumed to be 3 years in this example) and when such highest NAV was reached.

This is just an example to show how this is a capital guarantee product rather than a return guaranteed product.

1. The strategy is designed to guarantee capital and not guarantee returns and hence protection is inherent in the model itself. This precludes the chances of this return being comparable to a long-term investment in equity.

2. There are a host of surrounding terms and conditions, which may make this product less attractive. For example in one product the guarantee is available for the investment made in the first 3 years but premiums need to be paid for 10 years with the last 7 years premium effectively being a regular ULIP plan. In another such product the guaranteed NAV is not available in case of a drastic fall in NAV (defined in the product and unlikely to be ever reached but nonetheless it detracts from the overall product positioning and very unlikely that the customers would be aware of such a provision).

But to get back to the original question. Should you invest in such a product?

Firstly large investors can probably save on costs by having a Portfolio Manager run this scheme for him (without the guarantee of course) and the charges will be much lower. For the relatively smaller investors, it is definitely a decent product provided you have realistic expectations about returns (more likely to be nearer to a fixed income investment rather than a equity investment) and are committed to pay all due premiums till maturity and hold on till maturity. My suggestion – ask for an illustration for the amount of premium that you wish to invest in such a product and then calculate the IRR based on the premiums paid by you and the accumulated amount at the higher end of the spectrum (please remember this return is not guaranteed).

If that IRR is acceptable to you then you should go ahead. This is the best rule of thumb that I can suggest. . For smaller investors It may be advisable to stick to the standard Insurance plans, ELSS of mutual funds or tax based small savings plans such as PPF or NSC. (Caution: Please seek individual professional advise before you make any investments This is a general purpose article and not meant to take the place of individual professional advise)

Last Friday my friend Hemant Mishra approached me with a problem, which may sound mundane, but it caused lot of trauma to my friend, courtesy insurance company.

Acting on my advice, he bought a term insurance policy as I always thought it was important even though he had an impressive profile – age 42, decent income, good savings, low debt, high placed professional in an MNC bank and to top it all a fitness buff. Based on this I had recommended him an amount which ran into crores as sum assured.

So I was surprised on receiving a call when an anxious Hemant who told me that there was a problem with respect to his term insurance policy.

Let me share Hemant’s account with you.

His Insurance agent had started the process under which made Hemant filled up the form, paid the premium followed by a battery of medical tests. Given the size of the policy, he had to answer quite a few questions from the Insurance company, besides visit to his office by insurance company’s personnel. The process was smoothly completed and it was time for him to receive the policy. Here comes the real shocker, when the insurance company informed Hemant that they would be charging an extra premium. Reason? quipped Hemant. He was informed that there were some issues with his medical reports, hence he would be required to pay extra charge to get the policy and insurance company wanted his approval in the matter.

At this point Hemant was more anxious to know what were these exact health related issues. Now comes the real twist. When he asked for his medical reports from the insurance company, he was informed that his medical reports were their property and cannot be divulged. He was aghast at this response

Now he was far more anxious to know about the health related issue in his medical report rather than the insurance policy itself.

When he mentioned this to me, I made the research team at ApnaPaisa to do a quick check on the practices followed by the various Insurance companies in disclosing the medical reports to the insured person. They informed that most companies will provide a photocopy of the medical reports on request to the consumer, whereas one . insurance company was willing to provide the copies only to the family doctor named in the Insurance proposal form. But the company chosen by my friend was an exception which did not provide the reports to the insured at all.

A quick check on the Insurance Act showed that Section 51 of the Insurance Act, 1938 requires that Insurance company should supply the “Policy Holder” the medical reports.

So legally speaking Hemant was entitled to a copy of all his medical report after paying a princely sum of Re. One, Once he became a policy holder which means he paid the extra premium and took the policy. After he got his policy he would be in a position to get the medical reports.

In case the Company still refused to give him the medical report, he could file an official complaint on the Insurance company’s website. In case that did not elicit any response he would have no choice but to file a complaint with the Insurance ombudsman or the alternative grievance redressal mechanism of IRDA (details on www.irdaindia.org).

By this time Hemant ( and his wife) were frantic with worry and so decided to repeat all the tests at his cost as he did not want to wait for the Insurance company to react to his request. I asked them not to worry too much as it was very unlikely that there would be anything seriously wrong in his report. Otherwise the Insurance company (or its re-insurers) would have clearly declined to issue the policy rather than just charged an extra premium. I asked him to follow up with the Insurance company after he took the policy since those reports would also serve as a very useful checking point against any reports that he would obtain on his own.

It is indeed sad that Hemant had to go through this distressing experience due to the policies of that specific insurance company.

Let’s hope other consumers are spared such an experience in the future.