Insurance » Insurance

Mis selling of Insurance Policies

admin — Mon, 08 Sep 2008 07:22:07 +0000

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.

Insurance Amendment Bill on its way to Approval

admin — Sat, 06 Sep 2008 07:02:28 +0000

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.

Don’t confuse insurance with investment

admin — Thu, 04 Sep 2008 08:39:24 +0000

(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.

Why of Insurance v/s Other Savings

admin — Sun, 17 Aug 2008 10:20:11 +0000

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).

Insurance & Microinsurance Sector Action Hotting Up

admin — Thu, 14 Aug 2008 06:03:24 +0000

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.

Glossary of Insurance Terms: Part I

admin — Wed, 13 Aug 2008 06:13:45 +0000

Accident

An event or occurrence causing damage/injury to an entity, and is unforeseen and unintended.

Accident Benefit

Provides for payment of an additional benefit equal to the sum sum assured in instalments on permanent total disability and waiver of subsequent premiums payable under the policy.

Age Limits

Stipulated minimum and maximum ages below and above which the company will not accept applications or may not renew policies.

Agent

An insurance company representative licensed by the state who solicits, negotiates or effects contracts of insurance, and provides service to the policyholder for the insurer.

Annuity Plans

These plans provide for a “pension” ( or a mix of a lumpsum amount and a pension ) to be paid to the policy holder or his spouse. In the event of death of both of them during the policy period, a lumpsum amount is provided for the next of kin.

Application Form

Supplied by the insurance company, usually filled in by the agent and medical examiner (if applicable) on the basis of information received from the applicant. It is signed by the applicant and is part of the insurance policy if it is issued.

Assignment

Assignment means legal transference. A method by which the policy holder can person on his interest to another person. An assignment can be made by an endorsement on the policy document or as a seperate deed. Assignment can be of two types
Conditional
absolute

Beneficiary

The person(s) or entity(ies) (e.g. corporation, trust, etc.) named in the policy as the recipient of insurance proceeds upon the death of the insured.

Business Insurance

A policy which primarily provides coverage of benefits to a business as contrasted to an individual. It is issued to indemnify a business for the loss of services of a key employee or a partner who becomes disabled.

Cancelable

A contract of health insurance that may be cancelled during the policy term by the insurer or insured.

Coinsurance

1) A provision under which an insured who carries less than the stipulated percentage of insurance to value, will receive a loss payment that is limited to the same ratio which the amount of insurance bears to the amount required;
2) a policy provision frequently found in medical insurance, by which the insured person and the insurer share the covered losses under a policy in a specified ratio, i.e., 80 per cent by the insurer and 20 per cent by the insured.

Convertible Whole Life Policy

A mix of “whole life policy” and “endowment policy”, it provides for very low insurance premiums with maximum risk cover while the life assured is just beginning his working career, and the possibiliy of converting the policy to an “endowment” policy after five years of commencement.

Coverage

The scope of protection provided under a contract of insurance; any of several risks covered by a policy.

Days Of Grace

Policy holders are expected to apy premium on due dates. a period is 15-30 days is allowed as grace to make payment of premium; such period is days of grace.

Deferment Period

Period between the date of subscription to an insurance-cum-pension policy and the time at which the first instalment of pension is received. Such policies generally prescribe a minimum and maximum limit on the deferment period.

Depreciation

A decrease in the value of property over a period of time due to wear and tear or obsolescence. Depreciation is used to determine the actual cash value of property at time of loss.

Double/Triple Cover Plans

These offer to the beneficiaries double/triple the sum assured on death of life assured during the term of the policy. On survival to the date of maturity, the basic sum assured is paid to the assured. These are low-premium plans, most useful for situations such as housing.

The Yaksha Question

Ranjan — Tue, 29 Jan 2008 06:12:27 +0000

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.

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