Tag: Insurance

26 Aug 2020
A Chit-chat on safety shield for your loved ones

A Chit-chat on safety shield for your loved ones

Being part of the armed forces often means having to bear a higher degree of life-risk than others. This is also something that comes up in our financial planning discussions quite often with serving officers. While there are insurance provisions under the Army/Navy/Air Force Group Insurance Funds (AGIF/NGIS/AFGIS), it is but natural for all to think about having their own safety net too. Also, is the cover provided by these Govt agencies adequate in this hyper-inflation era? May not be so.

Typically, one will buy an ‘insurance’ from someone in their own hometown or community circles and then the word spreads fast in the peer group. Now everyone is thinking of getting the same ‘policy’!
Someone from that peer group gets in touch with us to discuss the pros and cons. Here is how the conversation goes.

I’m getting Guaranteed returns!

This is something that all of them are hooked on to. A junior Officer with limited personal responsibilities at his age, was considering paying Rs 30,000 per month (☹!) for this ‘insurance policy’ for a period of 10 years. That is quite some money given out every month!

The ‘hook’ was that the insurance company is guaranteeing that he will start getting a regular income from the policy from 15th year onwards till the end of 20th year and the total amount paid to him will be around Rs 67 lakhs these years.

But what about insurance, we ask? Weren’t we talking about insurance in the first place?

Yes, there is ‘also’ a life insurance of around Rs 37 lakh which is assured in case of mortality of the policyholder.

What do we say to it?

We listen to these promises of the agents often. And then tell them that they are not gaining much or what they actually deserve, in this entire scheme.

Prompt comes the reply that the invested money is getting doubled. Then we need to explain that even if it is getting doubled, it is happening over a period of 20 years, which turns out to be a return of about 4.32% per annum, and this doesn’t even come close to several other safe investments done for such a long period of time.

The interesting part is yet to come though.

Despite keeping that much money with the insurance company for such a long period of time, the actual life insurance amount is almost equal to your originally invested amount. And after the policy period is over? You are again left without this insurance at the age of 50 years.

Let’s do some useful calculations

As the primary discussion was regarding insurance, we then do some reverse calculation of how much should that officer be paying for that actual insurance of Rs 37 Lakhs in question.

Many of them are surprised when inform them that they can get the same insurance cover, that too till 60 years of age, for as little as Rs 4000-5000 a year. Yes, just above 1% of what they actually planned to invest in a year.
How? We will get to that in a bit.

Just one important point we need to highlight. That Rs 30,000 a month investment is a good commitment – just that it needs proper planning and appropriate execution. The one that was being explored was not the right one.

Coming back to insurance. How to get that cheap an insurance?

The simplest insurance product will do the trick!

This is the simplest and in fact, the purest form of life insurance. You pay some money as a premium and the insurance company, in return, assures that a fixed amount will be paid to your nominees in case of your untimely demise. Just that you pay the premium and forget about it, in other words you do not get the money back. There are some policies that offer a return of premium even in term insurance, but then the premium is not as low and again defeats the purpose of ‘insurance’.

Taking more realistic aspirations and family goals, a Term Insurance policy assuring your nominees of Rs 2 crores in case of an eventuality, costs only around Rs 15,000 a year at the age of 30 years. The caveat here is that this is for a person buying this policy at a young age. But even at an increased age, premium of such policies remains very reasonable. Why? Because the agent commissions are very low and this is no fancy product.

The premium then remains constant throughout the policy term. If the same policy is bought by someone at, say, age 35, the premium could go up to just around Rs 25,000 a year. So, the key is getting this early on in your career.
In case of any eventuality, this money can be used by your nominees and loved ones for any purpose. Be it for repaying existing loans like a home loan or retirement of the spouse or higher education of children. It can be anything.

A challenge

Being part of the defence fraternity comes with its own set of challenges. One such challenge is that if you buy a Term Plan when you are posted to a field area, it is likely that the insurance company could deny you the policy or load some extra premium on it. This is due to the higher risk your life could face in those situations. So, the trick is to take it when you are in a peace area – this is all within rules.

Discuss with your financial planner about all the factors you should take into account to arrive at an ideal term insurance amount and tenure for you.

We hope this post acts as food for thought to make you think in the right direction, and prevent you from going for ‘too good to be true’ promises.

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
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