Tag: Insurance

31 Jul 2020
A wake-up call to analyse your insurance needs

A wake-up call to analyse your insurance needs

Socio-economic and administrative challenges aside, this pandemic has also opened a pandora’s box in terms of financial preparedness of a vast majority of population across the globe. The problem becomes acute in society like ours, where social security like quality healthcare at affordable costs for all or an unemployment allowance for all, is almost negligible.

The Financial Challenges

To be sure, these challenges are not new. It is not the case that, had Covid-19 not struck us, we would have had deep penetration of financial security. 

No. In fact, these are prevalent issues. The current situation has just given us time and space to think about financial planning and its importance. Even in financial planning, this entire situation has forced us to think, talk and ask about insurance. Personally, we have had several people other than our regular clients approach to seek advice on insurance products.

The concern is two-fold. 

One, what if I contract the infection? Will I be able to afford the treatment in a hospital of my choice, which could be different from military hospitals? 

Two, what if I contract the infection, and then succumb to it? How will my family bear the treatment expenses to whatever extent needed, and what will they go through, financially, in my absence?

The Solutions…Somewhat!

With the virus being able to spread through even the most innocuous of human interactions like a hand-shake, we might not be in a position to guarantee that we will remain safe through any measures. After all, we all need to have some activity outside the confines of our homes. It could be as simple as stepping out to get your groceries. Even if you aren’t stepping out, someone is stepping out from your house, or someone gets stuff for you from outside. The point is that there is no sure shot way to guarantee that the spread of the virus will remain outside your home.

In such situations, we are all prone to medical exigencies. Accordingly, it is best to be prepared. While the government and government agencies are doing their best to provide healthcare to covid-19 positive patients, it is no secret that the capacity that the government run facilities have is quite limited. Moreover, those facilities may also not be of your liking for various reasons. This leaves you with the only option of going to private healthcare facilities. It could also be that you or your immediate family is covered through government facilities like military hospitals but there are other important people in your lives who are not – your grown up children, parents, a close relative, etc.

In that case, the challenge changes from quality of healthcare to cost of healthcare. Dealing with those costs might not be a cakewalk for many. Hence, having a health insurance policy could be immensely beneficial. Moreover, already there are instances of the hospital bills for Covid-19 patients running into seven figures quite easily. That should give you a sense of the minimum health insurance that you or the affected person must have.

Now coming to the other aspect. What if after your best efforts and best healthcare, you as a breadwinner of the family, are forced out of the equation of life? Sounds harsh, we know. But, this is something that at least 28,000 families in India are dealing with right now.

This should prompt you to think if you have an adequate safety net for your family in your absence. This should cover all your existing debts and expenses for your important life goals. For instance, if you have a home loan of Rs 50 lakhs, plan to spend Rs 50 lakh on your child’s foreign education and would need another Rs 50 lakh for retirement, then your life insurance should give your surviving nominees at least Rs 1.5 crore. A note of caution, these numbers are purely indicative for the ease of understanding. The actual amount of life insurance you need could also depend on some other factors, but you should get the drift.

While there could also be other forms of financial risks in life, it is extremely crucial that you cover yourself and your family for health risks and for life risks. 

Also, while the emotional void of a loss cannot be filled, modern financial systems give us a choice, somewhat, to have a say in the life of our loved ones even after we are gone. Make good of that opportunity to make the life of your family free from financial stress, in case you aren’t with them. The unfortunate spread of the pandemic is probably the best wake-up call we could get to analyse our own insurance and other financial needs. So, just have a close look at the safety techniques talked about above – medical insurance, life insurance, preparation of Wills, home insurance, critical illness and disability insurance, to say the least.

26 Sep 2013
WHY ARE THE INSURANCE AGENTS AFTER YOU IN THIS ‘OFF-SEASON’ ?

WHY ARE THE INSURANCE AGENTS AFTER YOU IN THIS ‘OFF-SEASON’ ?

 

A large number of people have suddenly stated receiving unsolicited calls, SMS and pamphlets with their morning newspapers about ‘good’ insurance policies being unavailable after 01 Oct 2013 and they should take such policies before it is too late. What has happened which has generated such a huge concern amongst the insurance agents about your well-being?

Actually, new guidelines issued on 16 Feb 2013 by Insurance Regulatory & Development Authority (IRDA) come into effect from 01 Oct. The notifications pertain to the structure of non-market-linked insurance products like traditional policies, market-linked insurance policies like ULIPs, variable insurance plans and health insurance policies. Here are some basic features of the linked, non-linked and health insurance products which are likely to hit the market from October.

Minimum sum assured (or the Life Insurance Cover): At present, the insurance companies provide 7-8 times of annual premium as the life cover depending on age of customers or the plan. Post 01 Oct, following changes will take place:-

  • Non-market-linked products (ie, traditional insurance policies): For individuals below 45 years of age, minimum sum assured will be minimum 10 times or 105% of all premiums paid. For age group of 45 years and above, it would be 7 times of the annual premium or 105% of the total premium paid as on date of death.
  • For market-linked products like ULIPs: For those below 45 years, it will be 10 times of annual premium or as per a  formula prescribed by IRDA. For individual of 45 years and above, it would be 7 times of annual premium or as per the IRDA formula.
  • For health insurance products: The health insurance cover would be 5 times of annual premium or Rs 1 lakh per annum, whichever is higher for both age groups.

Surrender value: Surrender value is the money which a policyholder receives after he/she decides to terminate the policy before its maturity. At present, insurance companies offer a surrender value of only 30% on all premiums paid minus the first year premium and the policyholders can claim surrender value only if they have paid premiums for at least three years.  The new guideline has proposed to hike the surrender value for traditional plans. The insurers have to offer a guaranteed surrender value (GSV) after three years with a premium paying term of 10 years or more. For policies which are for less than 10 years, the GSV would accrue after the second year. This GSV will be 30% of total premium paid if the policy is surrendered between the 2nd and 3rd year. However, it will become 50% between the 4th and the 7th year.

Commission Structure: This is the main reason for those pesky calls and SMS. Since IRDA has linked commissions with the period of premium payment, the commissions of agents and brokers on sales of insurance products will be reduced significantly. In single premium non-pension products, the agents will only receive commission up to 2% of the premium paid. In regular premium paying schemes like endowment policies of five years, the agents will get up to 15% of the first year premium followed by 7.5% in second year and 5% thereafter.

For those insurance products where premium payment tenure is longer like whole life insurance policies, the agents will get commissions up to 35% (if the company is at least 10 years old) and 40% (company with less than 10 years of track record) of the first year premium, 7.5 % in second year and 5% till the premium paid by the policyholders.

No commissions will be paid in direct sale of products like term insurance and the accrued benefits will be passed on to the policyholders.

More transparent: The new product guidelines ensure greater transparency as the insurance regulator has asked all insurers to clearly indicate whether the product is protection-oriented, savings-focused or a combination of both. In ULIP products, the life insurers will have to provide performance sheet to policyholders on monthly basis. Besides, the insurers have to disclose the charges, deducted taxes, payment details and other necessary information to their customers by issuing an annual certificate.

Our Take:

  • Insurance policies should be taken for investment only if you do not want separate products for insurance and investment, and are ready to compromise in both, insurance cover as also the investment returns.
  • If you still decide to go ahead with an insurance policy for the purpose of investment, wait for the new regime after 01 Oct since that will be more transparent, less rigid and more beneficial to you.

 

Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM, CEO,

Hum Fauji InitiativesTMYour Long-term Partner for Wealth Creation
E-511, 2nd Floor, Ramphal Chowk, Palam Extn, Sector 7, Dwarka, New Delhi-110077

|   Tele: 9999 022 033, 011 – 4054 5977, 011 – 4214 7236  |  https://humfauji.in

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20 Jan 2013
Are you wasting your money in the wrong Insurance Policy- Humfauji.in

Are you wasting your money in the wrong Insurance Policy? Can you Get Out of It?

Life insurance should be used only as a financial protection tool

for your loved ones dependent on you, NEVER to create wealth.

 

There are many investors who happily say they have 5, 7, 10 or even more life insurance policies and the maturity amount of each policy (usually 15-20 years later) is twice or thrice the total premiums that they will pay. They feel they have made a very savvy investment and it will help them meet all their financial commitments in life. They are usually concerned with only one question while buying these policies, “How much will I get back from it?” Do they know that most such policies actually give them returns in the range of 6-7.5% only!! Rarely do these policies go beyond this range. This is so because buying insurance for the sake of investments or savings for future is like trying to dig a well with a spoon – not that there is anything wrong with the spoon, but the purpose for which it is being used is absolutely wrong.

 

Insurance is a service purchased to replace any financial loss incurred by you due to any unfortunate event. For example, you can insure your car, house, health and property to replace the loss in the event of damage, theft, fire, accident, etc. You can similarly insure your life for the sake of those who are financially dependent on you so that in case something happens to you as the main bread-winner of the family, at least your family gets a decent amount of money to carry on with their basic requirements of life till they can stand on their own feet. Hence, the purpose of insurance is purely to replace a financial loss. Investment on the other hand, is what you hold, allow its value to grow at a smart pace and then sell for consumption in future. Hence, one always invests at the best possible rate of return to fulfill future goals such as children’s education, their marriage, purchasing a house, dream vacations or retirement funding – of course, all the investments have to be consistent with the amount of financial risk you are prepared to take.


It’s not at all a good idea to mix the two – insurance and investment !!

Let’s understand this by a simple example:

A and B, both aged 30, go to buy a life insurance policy for themselves. A opts for an endowment plan of 30yrs with a life cover of Rs 10 lacs at a premium of Rs 32,000 p.a. On the other hand B opts for a term plan providing the same life cover of Rs 10 lacs and the same term of 30 years but, at a premium of Rs 3,700 p.a. only.
Now, the difference between the term insurance and the endowment insurance is that term insurance offers only insurance, ie no money is paid if the insured survives the term, as it happens with your car or house insurance. However, in the endowment insurance plan, a maturity value is paid at the end of the term if the insured survives the term of the policy.  Examples of Endowment Plans are the money back policies, children plans etc. A made fun of B by saying that latter has only ‘wasted’ his money buying that insurance as he will get nothing in the end.  A felt proud that his endowment plan will provide him a maturity value of Rs 29,43,655/- (ie a return of around 7%). B explained to him that while taking a term plan, he was paying a premium of only Rs 3,700 p.a for the same cover of Rs 10 Lacs, hence saving the extra premium of Rs 28,300 that A paid (32000-3700). Now, this extra premium he plans to invest in equity Mutual Funds with an approx estimated return of 16%p.a. over the long period of 30 years. This is likely to earn him a whopping Rs 1,74,09,073/- compared to A’s endowment plan providing 7% p.a. returns and a maturity value of Rs 29, 43, 655/-!! Thus, B’s aim of getting a Rs 10 Lacs insurance cover and good investments on his money are fulfilled far better than A.
So, was it a right decision by A to choose insurance as an investment instrument? A resounding NO!
If you are still tempted to use insurance as an investment, please also consider that the monthly contribution made in investment avenues like Mutual Funds can be changed, whereas, the monthly premium for life insurance cum investment policies usually cannot be changed.

 

Another argument that goes against insurance for investment is that, due to using the wrong tool for insurance as also investments (remember, using a spoon to dig a well!), you neither get the Insurance as per your requirement nor are able to get the best out of investments properly. In the example quoted above, if actual requirement of insurance for A and B was 50 lacs each, B could’ve easily provided that much financial security to his dependents by taking a term plan for 50 lacs (for just about Rs 5000 more per year). Could A have gone in for such an insurance cover since he was trying to buy a khichdi of insurance and investment by taking an Endowment plan?

 

The question then arises is – are these endowment kind of plans good for anybody? Yes they are if you think you need to be forced to save – in insurance policies, you have to pay to pay your premiums, no way out since otherwise they will lapse. They are also good for you if you want to put in almost no effort into your investments and are ready for their low returns – because you would, otherwise, not do anything at all! However, if you are not prepared for low returns and are prepared to put in some effort towards your investments, then the combination of Term Plans (for insurance) and Mutual Funds (for investments) will work the best for you.

 

What do you do if you have any such undesirable insurance policies

     Very often due to bad advice from a insurance broker motivated by his financial self interest you may get stuck with a bad insurance policy, which takes up too much of your savings leaving you with very little for meeting other bigger commitments. Here are three options available to the policy holders who intend to break free from a wrong insurance policy depending upon specific needs:

 

  1. Surrender the policy after paying premium for the minimum cut-off period required to fetch the surrender value so as to get some money back. However, such amount will be a fraction of the total premium paid by you because of imposition of steep surrender charges by the insurer in the initial years, which progressively goes down as the policy progresses.
  2. Convert your policy into a paid-up one by stopping payment of premium but without discontinuing it. It is considered a better option to turn a policy into a paid-up one than to surrender it and lose its life cover.
  3. Allow your insurance policy, no matter how bad it is, to continue for its full term. If your policy is close to maturity, you should continue to pay the premium for the full period. When you have already passed through the difficult period of paying high charges in the initial years of the policy, it absolutely makes no sense to let go the built up benefits at the very end of the term.

 

Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM

CEO, Hum Fauji Initiatives,
Your Long-term Partner for Wealth Creation
E-511, 2nd Floor, Ramphal Chowk, Palam Extn, Sector 7, Dwarka, New Delhi-110077

Tele: 9999 022 033, 011 – 4054 5977, 011 – 4214 7236 | humfauji