1. LIC will bring out an online policy purchase option.
2. IRDA will allow agents to sell/promote policies from more than one Insurer.

My understanding is this: Some journalist would have asked this question from a Top Management guy in the IRDA/LIC on the sides of a seminar/conference/press conference and the top management would have used such words as “likely to do this” or “not ruling out this”

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Like any other endowment policy, this scheme is also bundled with the dual benefits of investment and life insurance. But unlike most schemes, it promises guaranteed returns on maturity. This is probably what is driving investors to this scheme, which is scheduled to close this week. However, those who have still not invested would do well take a sneak preview before following the herd, for if the scheme has pros, it has cons too.

Notwithstanding the imbedded insurance benefit, prima facie, this scheme appears a more lucrative investment option. If one were to read its fine print, it reads as – upon survival, the insurer is liable to get the maturity sum assured (MSA) and guaranteed additions. MSA is the one-sixth of the basic sum assured, i.e. one-sixth the amount of life cover. Thus, for a life cover of Rs 1,50,000, MSA would be Rs 25,000. Guaranteed additions have been bifurcated for the 10-year and five year plans. Thus, guaranteed addition is Rs 100 per thousand of the MSA (and not the life cover) per year for a 10-year term and Rs 90 per thousand of MSA per year for a five-year term. Sounds not only confusing but also exorbitant!

To summarise the above thesis – an investor would get 1/3rd the life cover as maturity benefit for the 10-year policy and approximately 1/4th the life cover if the policy tenure is five years. Thus, for a life cover of Rs 1,50,000 for 10 years (which is also the minimum required by the scheme) the amount bound to be received on maturity is Rs 50,000. This is almost double the premium paid – subject to the age of the investor at the time of taking the policy (See Table). The entire premium, however, is required to be paid through a single payment at the time of taking the policy. Thus, an investment at the age of 25 years for 10 years in this scheme would earn risk-free compounded returns of 7.28% per annum.

However, the policy doesn’t score well on the insurance front. It makes sense only if the insurer can foresee death within the first year of taking the policy. Death of the policy owner within the first year of the policy period will ensure the beneficiaries with the entire amount of life cover and the guaranteed additions, too. However, in case the unfortunate event occurs after the first year of the policy the beneficiaries will get only one-third of the life cover with guaranteed additions from the insurance company.
While this scheme does offer decent returns, it is more beneficial to those in the lower age group. Investors in higher age bracket may consider other investment options.

NABARD’s Bhavishya Nirman Bonds (NBNB), those re-opened last week, call for an initial investment of Rs 8,750 per bond (earlier it was Rs 8,500 per bond) and return Rs 20,000 per bond after an investment period of 10 years. These bonds thus offer a post tax CAGR return of 7.97%, a tad higher than Jeevan Aastha. However, they do not qualify for the tax deduction under section 80C of the income tax act. Another product from NABARD, the rural bonds, currently offer 8.5% interest and are eligible for tax benefits under section 80C. The downside is that the interest amount is taxable on maturity, and the interest received on these bonds is not compounded over the years. Thus the benefit of compounding is lost which one can otherwise earn in bank deposits or other savings instruments.

Other investment options that can be given a thought are the National Savings Certificate (NSC) and the Public Provident Fund (PPF). The former is a six-year scheme with interest compounding every half-year, but the entire interest received on maturity is subject to tax, which drastically reduces its returns.

PPF, on the other hand has longer investment tenure — 15 years and the interest gets compounded only annually. However, since the maturity proceeds are absolutely tax-free, PPF gains an edge above most other products of its kind. Both NSC and PPF are eligible for tax deduction under section 80C.

As interest rates have begun to slide, returns on bank deposits have taken a backseat. While SBI currently offers 8.5% on its 5-year tax-saving fixed deposit, HDFC and ICICI currently offer 8% and 9% respectively on similar deposits and the interest is compounded quarterly. However, post-tax, the returns range from 5.96% to 6.77%, which makes them less attractive compared to PPF, NBNB and Jeevan Aastha.

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The survey by marketing information company Nielsen shows that 54% of people in the country prefer to invest in the different insurance schemes, while only 34% opt for fixed deposits.

The exercise polled around 1,000 people across the cities like Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad.

However, the most popular choice of all is gold with 58% of respondents naming it as their best investment option.

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Behind these announcements is the ongoing struggle between life insurance companies and mutual funds. Mutual funds and life insurance are two distinct products, one intended as a savings vehicle and the other a safety net. However, this distinction has blurred over the last few years. Indeed, one gets a feeling the life insurance companies are also in the business of running mutual funds, categorised somewhat differently as unit-linked insurance plans (Ulips).

Ulips have a mix of characteristics of both insurance and mutual fund schemes.
Crucially, however, the mutual fund aspect of Ulips is regulated by the government under a very different set of rules compared with the real mutual funds.

From the investors’ point of view, the biggest difference between the two categories pertains to how much of his money is actually used for his insurance and his savings and how much is taken away to pay commissions to agents and towards the insurance company’s expenses. The second big difference is in the quality of the information he is given about his investments.
Mutual funds deduct less than 2.5% as the agent’s commission. And as per current norms, there is no deduction if investors don’t use an agent and go directly to a fund company.
In Ulips, on the other hand, the agent’s commission varies, but in the first year, it could be as high as 25% and more.

Next is the issue of transparency.

There is a vast difference between the meaning of net asset value (NAV) of Ulips and mutual funds.

In a mutual fund, the NAV announced is net of all expenses and charges the fund company deducts. If your investments were worth Rs 1 lakh when a fund’s NAV was Rs 22, then it will be worth Rs 2 lakh when the fund’s NAV is Rs 44. That’s it.
The arithmetic of insurance companies is different. NAVs of Ulips are effectively pre-deductions. The NAV may double, but your investments won’t double because the insurance company will reduce the number of units you hold to pay for expenses and commissions etc. This means the announced NAV has no clear and transparent relation to what the unit holders are actually earning.

However, Ulips have been the more successful of the two. News reports say that last year, a total of Rs 55,000 crore was invested (if invested is the right word) in Ulips. In the same period, around Rs 16,000 crore was invested in mutual funds.
We are often told by the insurance industry that this is because Ulips are a superior product. That’s complete rubbish. Ulips are successful because the ultra-high commissions and charges make insurance agents far more aggressive salesmen than those of any other financial products. These charges also enable insurance companies to spend far more on advertising, all from the unit holders’ money. The net result of high-pressure sales is that savings that would otherwise have ended up in mutual funds, bank FDs, PPF, post office deposits and many other asset types is ending up in Ulips, where a good proportion is diverted to pay commissions.

The direction India’s insurance industry has taken in the last few years amounts to regulatory failure. This industry was opened up to foreign capital and provided with a relatively lenient regulatory framework so that it could bring insurance to India’s under-insured masses. Instead, it has ended up focusing its energies (and capital) on selling expensive and opaque mutual funds dressed up as insurance.

It’s tragic that there is no move to even recognise that this problem exists. Indeed, even higher foreign ownership is on its way, supposedly because more capital is needed to Ulip the under-Uliped masses.

But, even the mutual funds don’t seem to be very interested in highlighting these issues, perhaps because many of them are part of financial conglomerates with flourishing insurance businesses.

It is therefore left to the investor to understand the issues and do what he thinks is in his best interest.

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Since Insurance is always sold and not bought, it requires considerable individual efforts to sell the product. The individual needs to be remunerated upfront which results in a seemingly higher cost. However as the product is sold for a longer term it gets amortised over longer period….

That is your Insurance Agent’s argument. Do you agree?

I find it absurd!

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After a recent dispute with mutual fund companies, which wanted to collect insurance premium by hawking policies along with their schemes, life insurers on Thursday decided to end the system of bundling on a host of financial products.

The decision taken by the Life Insurance Council, a self-regulatory body, is significant since some of its members have a common parentage with asset management companies.

At present, Reliance Mutual Fund and Birla Sun Life Mutual Fund, which were offering systematic investment plan (SIP) products with insurance policies, will stop offering the cover.

Insurance Regulatory & Development Authority (Irda) had also said fund houses desiring to sell insurance products should get a licence from Irda.

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(Source: The Times of India, August 31)

It’s the most common mistake, and they get hit on both sides, says financial planner Gaurav Mashruwala

Ashfak Shaikh never asked his parents for pocket money. Since his childhood, he knew his father was working double shifts to support the family–with the Pune municipality during the day and giving tuitions in the evening. He managed to educate three sons. Ashfak rose to the occasion and became a broker for second-hand two-wheelers. “I must have traded in 50-60 two-wheelers,” says Ashfak. He believes in the joint family system where bonding counts for more than materialism.
Ashfak, now 38, holds a BE and works with a multinational company. His wife Jasmine is a doctor. They have an eightyear-old daughter, Aliya.

WHAT IS THE COUPLE SAVING FOR?

(1) Ashfak wants to ensure that even in the worst of times he can support his parents (about Rs 60,000 per year) (2) A larger house (Rs 40 lakhs) (3) Rs 5 lakhs for Aliya’s higher education after a decade and another Rs 5 lakhs for her marriage after 16 years (4) When they retire, after 23 years, they need a corpus which will generate Rs 9 lakhs per annum. They also dream of a luxury car (Rs 10 lakhs) and foreign travel.

WHERE ARE THEY TODAY?

Cash flow: Total yearly inflow from all sources is Rs 17 lakhs. Against this, they spend Rs 13 lakhs on EMI for car and holiday home, taxes, insurance premium, support to parents, regular savings and expenses incurred on travel and entertainment. The last car EMI is due in October. Total EMI payout is about 10% of inflow. Mandatory monthly outflow is about Rs 95,000.
Statement of net worth: Value of total assets is Rs 48.70 lakhs. Of this, assets worth Rs 30 lakhs are for self consumption and non-earning (house, car and jewelry). Outstanding loan on car
and holiday time-share is Rs 1.07 lakhs, about 2.21% of the assets.
Contingency fund: Total in savings bank, FD and in cash at home is Rs 3.95 lakhs—about four months’ mandatory household expenses.
Health & life insurance: Ashfak’s employer provides health cover of Rs 3 lakhs for the family. His life cover is Rs 17 lakhs through a ULIP and endowment policies.
Savings & investments: Value of assets other than those for self consumption is Rs 18.70 lakhs. Out of this Rs 3.95 lakhs is in cash/near cash. Apart from this, the value of direct equity is Rs 1 lakhs, equity-based mutual fund Rs 75,000, bonds/FD Rs 2 lakhs, EPF/PPF Rs 3 lakhs and stocks of Cosmos Bank valued at Rs 2 lakhs.
Total premiums paid till date on ULIP and other investment-oriented policies is Rs 6 lakhs. However, its market value is currently lower.

FISCAL ANALYSIS:

Very good income level. Savings rate is also good. Health and life cover are insufficient. Amount spent on insurance premium is too large. Borrowing is within permissible limit. Equity component is low and is also skewed in favour of single Cosmos Bank stock.

WAY AHEAD:

Contingency fund: Keep only Rs 2.85 lakhs for contingencies. Deploy surplus as follows.
Health insurance: Increase health cover of Ashfak and Jasmine to Rs 5.00 lakhs each and that of Aliya to Rs 3.00 lakhs.
Life Insurance: He must discontinue certain expensive insurance plans after completion of five years. Further opt for term plan worth Rs 75.00 lakhs.
Financial Goals:
Parental responsibility: Surplus in cash/near cash asset should be transferred into a monthly income plan of a mutual fund. However, continue supporting parents from regular income. Only in turbulent times use this fund to support parents.
Home buying: Preferably wait for twothree years, and then save about Rs 5 lakh per year in a debt fund. At the time of buying a new house, sell old one. Use sale proceeds plus investment in debt fund. If there is a shortfall, liquidate a part of the equity portfolio.
Aliya’s education and marriage:
Firstly, reduce investments in Cosmos Bank stocks to half. Park proceeds in a debt fund and systematically transfer into an index fund. After purchase of new home, systematically invest in index fund and gold fund for her education and marriage.
Retirement: Next two years’ savings would be needed for home buying. For another three-four years, deploy surplus for Aliya. Later, invest entire surplus in large cap fund and international equity fund for retirement.

PLANNER’S EYE:

The family’s weakest link in their finances are their life insurance policies. Out of total life cover of Rs 17, lakhs, Rs 5 lakh cover is provided by the employer. For the rest, the premium being paid annually is Rs 2 lakhs.
Instead, if he had opted for term cover, then annual premium for Rs 12 lakh cover would have been Rs 5,000. Balance Rs 1.95 lakhs invested in a pure investment product would yield higher returns. It is the most common mistake people make-confusing insurance and investment.

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Now with the markets falling, investors are seeing the value of their ULIP investments decline with each passing day. The higher expenses charged in the initial years are only adding to the agony. Both investors and insurance advisors are responsible for this scenario. Investors, for having made ill-informed investment decisions and advisors for having mis-sold ULIPs and/or failing to adequately educate investors.

The trouble is that there is no universal answer to this question. Investors who are invested for the long haul (10-15 years or thereabouts) in a well-managed ULIP with the intention of achieving a predetermined investment objective should continue to stay invested.

However, investors who got invested for the wrong reasons or in the wrong ULIP may have to consider making an exit after consulting with their advisors. Such investors would do well to explore all available options and also study the implications of making a premature exit, before making a decision.

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At the time of taking a policy, policyholder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void. Protection:
Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.

Aid To Thrift:
Life insurance encourages ‘thrift’. It allows long-term savings since payments can be made effortlessly because of the ‘easy instalment’ facility built into the scheme. (Premium payment for insurance is either monthly, quarterly, half yearly or yearly).
For example: The Salary Saving Scheme popularly known as SSS, provides a convenient method of paying premium each month by deduction from one’s salary.
In this case the employer directly pays the deducted premium to LIC. The Salary Saving Scheme is ideal for any institution or establishment subject to specified terms and conditions.

Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.

Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force.
Assessees can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.

Money When You Need It:
A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time.
Children’s education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies.
Alternatively, policy money can be made available at the time of one’s retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).

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