Mis-selling of insurance policies is a serious issue in the insurance industry, according to Mr J. Hari Narayan, Chairman, Insurance Regulatory and Development Authority (IRDA).

The instances of mis-selling is significantly larger in the unit linked insurance plans (ULIPs), Mr Hari Narayan said.

“The incidence of mis-selling, however, has come down a little from 14 per cent in 2006-07 to 12 per cent in 2007-08. But still about 10 per cent of total complaints received by the authority are on mis-selling,” he said. But we cannot draw any conclusion based on this 3% drop. Misselling continues to be an issue.

Ulips are popular savings instruments as they offer protection in terms of life cover and flexibility in investments to the policyholder. A part of the premium is invested in equities or government bonds, depending on the choice made by the policyholder.

In most cases, the cost structure is front-loaded, with the bulk of the agents commission being paid in the first year. Hence, if a Ulip were to be sold to an individual with an investment horizon of only three years, most schemes are likely to result in generating returns lower than expected due to the front-end charges.

The regulator has now made it mandatory for companies to give a break up of all charges they have to pay and the exact amount that will be available for investment during the premium payment period.

Almost two years after the UPA government referred the Insurance Amendment Bill aimed at raising the foreign direct investment cap in the sector from 26% to 49%to a Group of Ministers (GoM), the panel finally paved the way for the Bill to be introduced in Parliament.

Indicating that all major issues have been resolved, finance minister P Chidambaram said, “We will take it upto the Cabinet now.”

With the government having decided to convene the Lok Sabha on October 17, and Chidambaram reiterating the UPA’s intent to take forward the pending financial sector reforms agenda on several occasions in recent weeks, the Bill should get the Cabinet’s nod in the interim.

With the Left parties, which had been putting a spanner in the UPA’s reform works, pulling out of the ruling alliance in July, the government is keen to carry out key changes in the insurance, pension and banking sectors in its remaining shelf life.

Official sources said that while the overall structure of the Bill has been agreed upon in Monday’s meeting, there may be another round of meetings between officials to iron out minor differences.

Contract Of Insurance:
A contract of insurance is a contract of utmost good faith technically known as uberrima fides. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance.

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).

The insurance sector is likely to become more crowded, with four companies, which are awaiting approval from the Insurance Regulatory and Development Authority (IRDA), starting operations.

“We cannot share further details on the pending approvals. We have asked for some particulars and the moment they submit them, we will issue R1 licence (the first of three licences required to start operations),” Mr J. Hari Narayana, Chairman, IRDA, told newspersons on the sidelines of a product launch function of Max New York Life Insurance here on Tuesday.

Micro insurance

On the trends in micro insurance, the Chairman said the interest of private players in the segment has been growing. “However, there is still a long way to go as the micro insurance business represents a miniscule in the insurance industry though India can be called a leader in micro insurance,” he said.

In 2007-08, out of total premium of Rs 1,00,000 crore, only Rs 125 crore came from micro insurance, he added,

“Till recently, micro insurance was driven by the Government-led social security schemes. But now the time has come for an independent growth,” he observed.

The insurers should design different, unbundled micro insurance products to cater to the needs of the rural areas, he suggested.

To expand the reach of distribution, the non-governmental organisations (NGOs) should also consider a broking model as against agent model widely adopted currently. “I understand that the costs in broking model are high and we can workout a mechanism to bring them down for NGOs,” Mr Narayana said.

On a related development,

Max New York Life Insurance, a joint venture between Max India and New York Life Insurance, on Tuesday announced a referral tie-up for its micro insurance product Max Vijay with Confederation of NGOs of Rural India (CNRI).

The latter will refer corporate agents to the insurance company. About 6,000 NGOs will be engaged as agents, chairman Analjit Singh said.

In Mahabharata, the great Indian epic, there’s a story of a Yaksha asking some intriguing questions to Yudhisthira. The story goes like this….

One day while living in exile in the forest, Yudhisthira finds that while attempting to drink water from a lake, all his brothers have been killed by a mysterious Yaksha (a celestial entity). When Yudhisthira arrives the Yaksha challenges him to answer all his questions or else face the same consequences as his brothers.

One of the questions was what is the most wonderful/surprising thing in the world and Yudishthira answers that the most amazing thing is that even though every day one sees countless living entities dying but no one can imagine him/herself taking that last journey!

http://www.prabhupada.com/king.html

That’s why even though Insurance is an important financial product, people have a natural tendency to avoid it.

First of all, you should never buy anything but term life insurance. Insurance as an investment is a great investment for the insurance company but a terrible one for you. If you want insurance, get insurance; if you want to invest, buy an investment. Don’t mix the two!

Second, if you have no dependents and no spouse, don’t buy life insurance. Ever. Don’t let a salesman talk you into it.

Next, the more net worth you have, the less insurance you need. This means that before you start thinking about life insurance, know what your net worth is. This is an important number for figuring out how much net worth you’re going to need.

Welcome to the world of Insurance in India.