Fundamentals of Life Insurance for You

For millions of people in India, the concept of life insurance still remains a mystery. Thanks to the new media channels, more and more people are becoming aware of the significance of life insurance. For those, who wish to develop fundamental understanding of the concept of life insurance, here is a quick snapshot.

What is meant by life insurance?

As the term suggests, life insurance covers the risk of life. Life insurance policy is a contract between the insured person and the life insurance company to provide a pre-determined sum of insurance to the nominee/s in case of death of the policy holder.

Life insurance is expected to provide financial security to the dependents of a policy holder. The insured amount should be sufficient to replace the income of policy holder. However, there is no compulsion to equate one’s income to the sum insured under the policy.

How much amount should be insured?

Most of the times, life insurance policy holders are not able to determine the amount of insurance coverage. As a thumb rule, the amount of insurance should be 8-10 times of the annual income of the policy holder.

For instance, if one’s income is Rs 5 lakh a year, then the amount of insurance coverage should be in the range of Rs 40-50 lakh, or more. This way, in case of the death of the policy holder, his dependents can invest the insurance amount in government securities or bank fixed deposits, and earn an interest at the rate of 9-12 per cent. The income derived from interest can thus replace the income of the policy holder in case of his demise.

However, keeping in mind the average rate of inflation at 5-6 per cent, the amount of insurance should be higher than 10 times of one’s annual income. The income from investment of insurance amount should support policy holder’s nominees, and may be utilised for education, marriage and other necessary expenditure. The purpose is to ensure financial security for the people who depend on the income of policy holder.

Types of life insurance

In India, life insurance policies are broadly available in five types. Here is an overview of all of them.

Term insurance policy:

Under this type of insurance policy, one is expected to pay premium amount against consideration of a certain sum of insurance coverage. The amount of premium is treated as expenditure as a term insurance plan does not give any returns or money back. Term insurance plans can be taken for a period

ranging from 5 to 30 years. After the reforms in the insurance sector in India, the premium rates for term insurance plans have gone too low.

Endowment policy:

Under an endowment policy, the policy holder receives whole of his money paid as premium amount back after expiry of a pre-determined policy period. In case of death of policy holder, his or her nominee receives the full sum insured under the plan. These kinds of policies are typical and generate returns in the range of 4-7 per cent. They are suitable for people who do not want to take much of risks and look for secured investments in government securities and debt instruments.

Unit Linked Insurance Plan (ULIPs):

As the term suggests, Unit Linked Insurance Plans (ULIPs) are purchased in units. The price per unit is announced by an insurance company as per the Net Asset Value (NAV), which is declared every day. ULIPs provide the dual benefit of life insurance and investment. The amount of premium paid towards a life insurance plan is investment in equity markets, which work on the principle of risk and rewards. These types of policies generate better returns as compared to other types of plans, in the long term.

Group insurance policy:

Such policies are taken for a group of people. Generally, organisations provide group insurance policy benefits to their employees. It depends on a company whether or not it charges employees to contribute towards group insurance scheme. Governments also provide group insurance schemes to citizens. The recently launched ‘Pradhan Mantri Jan DhanYojana’ is an example of massive group insurance scheme.

Types of Life Insurance policies

Are there any additional benefits also?

In India, there are hardly any public social security schemes for masses. Thus, one has to organise financial security from his or her own resources. Recently, the government launched a couple of mass insurance schemes but the amount is limited to a couple of lakh. This amount may be good but not sufficient to secure financial future of one’s family.

Perhaps, the government also knows that it is not doing enough for its citizens. Thus, there are some great incentives at one’s disposal when it comes to buying life insurance.

Income tax benefits are offered to those who buy insurance. An investment of up to Rs 1.50 lakh in life insurance is eligible for claiming tax exemption under section 80C of the Income Tax Act 2000. Until the end of fiscal year 2013-14, this limit of income tax exemption was Rs 1 lakh. This limit was raised by Rs 50,000 during the Union Budget provisions for fiscal year 2014-15.

That means, if your taxable income is Rs 10 lakh, and supposing that you buy life insurance of Rs 1.50 lakh, then your total taxable incomes goes down to Rs 8.50 lakh. This way, you are able to directly save

income tax in the range of 10-30 per cent, depending on your gross taxable income. One can factor in this tax saving as return generated over the premium.

If you are willing to invest a large amount, you can also consider buying more than one plan for yourself. For instance, if you wish to invest Rs 1 lakh in life insurance, then you can buy two plans of Rs 50,000 each from two different companies. This can provide you benefits of diversification. If one plan does not generate much return, then there are chances that the other one performs better.

Overall, one can ensure peace of mind by buying suitable coverage for himself and get the satisfaction of discharging his duties towards his dependent family members. 

Source: (https://bloglifeinsurance.wordpress.com/2016/01/05/fundamentals-of-life-insurance-for-you/)

Life insurance industry is ready to shift gears in 2015

The life insurance industry has seen several phases since the entry of private players into the sector at the turn of the millennium. Hence, before we talk about 2015, it is worthwhile spending sometime on the years that have preceded it.

Broadly, these can be classified under three phases. The first phase was one where private players started to establish themselves in the marketplace. The second phase coincided with the growth in the equity market where new business premiums grew on the back of investment-linked product selling. This was a phase when insurers, regulators and customers believed nothing could go wrong. More insurers and distributors entered the industry, increasing the reach of insurance products multi-fold.

In hindsight, a major proportion of the growth trajectory was based on ‘riding the wave’ and left several customers dissatisfied once the global financial crisis hit home. So it was not surprising that just as the party had got going, the regulator stepped in to take away the punch bowl. This in effect laid the stage for phase three, which has lasted longer than most industry watchers would have expected.

Regulatory intervention is now taken as a fait accompli post the tectonic shift in regulations since 2010. Margins of Indian life insurers companies are amongst the lowest in the world. Several agents exited the industry in its aftermath as their earnings ability declined. An industry that prided itself on bringing protection to individuals and households saw a long phase of stagnation in new business premium collections. But as they say, one tends to learn more from one crisis than from multiple successes.

Phase three also helped segregate the men from the boys. You could clearly see the large private players breaking out of the pack as market share started to polarise in their favour. These are players who today are in a position to innovate and offer a balanced product mix to consumers. New segments such as term plans, annuities, health plans, low-cost Ulips have started to reignite growth for them. These players have the ability and financial muscle to invest in improving processes, next generation technology and digitisation. They players have the wherewithal to reach out to customers and manage high persistency levels and drive growth through renewal premiums.

Large private players now have well known brands which can compete in most markets with the market leader as a new set of consumers enter the insurable population. These players are also well integrated with bancassurance partners besides having a diversified channel mix. We have already seen the market share of this segment grow in the current financial year and this should pick up more steam in 2015.

As the cost of regulation becomes even more onerous through further caps on expense management, insurers will need to fine-tune their business models further. As we exited 2014, an ordinance of insurance laws (amendment) was issued by the government. Beyond the headline on increasing foreign investments to 49%, the ordinance offers more teeth and flexibility to the regulator to frame guidelines around commissions and expenses, customer experience management and citizen charters, claims settlement, and so on. This would require insurers to be nimble enough to adjust their business processes.

As the industry starts to attract more foreign capital and if a few insurers decide to go in for a public listing, there will be a need for the players to disclose more financial and non-financial data than what is required currently. This will increase the levels of transparency and the understanding of how an insurance industry operates amongst analysts and the media.

I believe the industry should be able to sustain a smooth upward growth curve growing at 12-15% CAGR over the next five to six years on the back of relatively stable economic policy and industry regulations. 2015 could potentially be that year when we see a distinct shift to the next phase of the life insurance in India industry.

Source: (http://blogs.economictimes.indiatimes.com/et-commentary/life-insurance-industry-is-ready-to-shift-gears-in-2015/)

3 Things You Should Know About Life Insurance

Life Insurance is a subject that has all of the elements of a perfect storm for poor decision-making.

It’s complicated.

It’s boring.

It can be expensive.

It’s wrought with potential conflicts of interest.

It deals with a subject we don’t want to confront.

Many people don’t purchase enough life insurance to cover their needs. Of those that do, many end up making critical mistakes and buying insurance that is not optimal.

According to the Life Insurance and Market Research Association, more than 30 million Generation X and Y households surveyed reported that they needed more life insurance in 2012. One-third of wives own no life insurance at all.

These basics might help you find your way through the insurance thicket:

1. Determine whether or not you need life insurance. Not everyone needs life insurance. If you are young and without dependents, you may not need life insurance. If you plan on having

Dependents, it can be a good idea to buy insurance when you are young. By doing so, you guarantee your insurability (as long as you continue to pay the premiums).

2. Determine how much life insurance you need. There are two ways you can calculate how much insurance you need:

Income replacement: This approach considers your age and earnings. It generally produces a higher number than a needs-based approach. You start with your age and determine how many years of income you would need to replace in the event of your death. For example, if you are 40 years old, you might decide to buy insurance that would pay 15 or 20 times your yearly income. Some calculations using this approach take into consideration your projected after-tax earnings over your working years, factor in inflation and discount the results to present value. The basic problem with this approach is that it’s not very individualized.

My preference is for the needs-based approach, but it will take more time and reflection to get it right.

Mint.com has a useful “life insurance plan wizard" that will help you calculate the amount of insurance you need.

3. Determine the type of insurance you need. The two basic types of insurance are term and cash-value insurance (which is also referred to as permanent insurance).

Term insurance has no investment component. You just decide how much coverage you need and the period of time you want that coverage to remain in effect. You can obtain term insurance that has a level premium over the term of the policy. Term insurance has lower premiums than cash-value insurance. Many financial planners recommend buying term insurance and investing the difference between a term-insurance premium and a cash-value premium.

If your annual premium for insurance will be $10,000 a year or more, consider retaining a fee-only insurance advisor, one who doesn't have any financial stake in your decision. These advisors can save you far more than their fee, and you can feel more assured their advice is objective and in your best interest.

Source: (https://bloglifeinsurance.wordpress.com/2015/12/29/3-things-you-should-know-about-life-insurance/)

Life Insurance: an apt tax saving tool for women too

In 2015, women are much ahead of just being homemakers! Be it any profession, they often become the frontrunners and win the race much like their male counterparts. Contrary to the popular notion, they earn hefty salaries; they run their families hand in hand with the men.

Therefore, it is equally important for women to save tax too alongside having a well-planned financial goal. Tax planning involves taking into consideration various factors such as the age of the assesse, total income earned and the financial goals of the assesse as an individual and from the perspective of her family. Most women start looking at tax saving avenues only in the January-March quarter of the financial year so as to submit the proof of investments to their employer by the end of that financial year. This is the time of the year when all financial advisors, banks or other financial intermediaries will also start approaching individuals with their tax saving ideas. However, it is prudent to consider and start investing early for tax-planning purposes. Today, there are numerous investment options available to woman investors which help save taxes.

Among other financial products, insurance should definitely be a crucial tax saving option for a woman investor to include in her financial portfolio. Women often do not consider insurance, both life and health, as priority. However, with rising medical costs and growing incidents of lifestyle related illnesses, it makes sense to invest in an insurance plan that covers such exigencies. Investing in insurance is not only quite hassle-free, but it also provides for projected living costs, education expenses and retirement benefits.

Under Section 80C of the Income Tax Act, individuals have been provided many tax reliefs such as tax free investments of up to Rs. 150,000. One of the tax saving options under this category is life insurance. It is a known fact that a life insurance policy is the most cost effective tool to provide financial protection to a woman’s family in case of unforeseen eventualities. However, the quantum of life insurance depends upon many factors such as income, expenses, liabilities, goals etc. Term insurance may be a right instrument for lump sum life insurance cover, whereas ULIPs are the best option for steady and sustained investment with an investment goal of 10-15 years. Since, tax benefit is the inherent advantage which comes with this product; she should consider this option only after analyzing her needs. It is also important to know that for policies starting April 1, 2012 and later, Section 80C of the Act currently allows a deduction on premium paid on life insurance policy only if the annual premium paid is less than 10% of the sum assured.

Source: http://lifeinsurance.bajajallianz.com/tax-insights/life-insurance-an-apt-tax-saving-tool-for-women-too-2/

Life Insurance Policies: Their history in world and India

On December 15, 1794, America's first life insurance policy was issued by a general insurance company in Philadelphia.

Here is all you need to know about life insurance policies and their history:

• Life insurance policy or life assurance policy is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money in exchange of a premium, to be received upon the death of the insured person

• An early form of life insurance dates to Ancient Rome. As early as 2000 BC in China and 1750 BC in Babylon, insurance began as a way of reducing the risk for traders

• Modern life insurance policies were established in the early 18th century. The Amicable Society for a Perpetual Assurance Office was the first company to offer life insurance. The company was founded in London in the year 1706 by William Talbot and Sir Thomas Allen

• The sale of life insurance in the US began in the late 1760s

• In India, insurance in its current form has its history dating back to 1818. It was the time when Anita Bhavsar started Oriental Life Insurance Company in Kolkata to cater to the needs of European community

• Bombay Mutual Life Assurance Society became the first Indian insurer in 1870

• Insurance in India covers both, public and private sector organisations. It is listed in the Seventh Schedule as a Union List subject in the Constitution of India. It can only be legislated by the Central government.

Few Guidelines for Life Insurance Buyers

Life insurance buyers should know that it does not deliver any instant gratification. Generally, it is sold on the basis of commitment made by insurance companies in India for events which may occur in the long run. The insurance document is an agreement between the policyholder and the insurer that assurances certain amount of payments in case specific circumstances are fulfilled.

Insurance service provider must assist the insured person’s family in completion of claim requirements at the time of the incident. This policy is like a contract of trust where insured should help in correct decision-making by giving all the required details. Insurance protects the chances of a person getting ill or dying.

If the risk is higher, then the premium is also higher. An individual with high risk paying low premium by hiding critical details is liable for penalty. Below are few guidelines an insured must follow:

Right Information

While filing and signing a proposal form, buyer must check all details since he or she will be accountable for providing wrong information.

Nomination

The insurer is discharged for its liability when it pays the sum assured to your beneficiary registered under a procedure established by the Insurance Act, 1938. Policyholders should know that a life insurance claim without a beneficiary cannot be settled and all insurers demand evidence that the claimant is the correct person to receive the policy benefits.

If policyholder has mentioned somebody as nominee to receive the benefits at the time of demise, claim benefits are paid to the 1st legal heir as per the policy document. Amount will be received by the policyholder in case of maturity.

Documentation

Submit all necessary documents to file a life insurance claim. These documents under any term insurance death claim come under the following categories:

Policy related documents

Documents that prove the occurrence of the event does not come under exclusions specified in the insurance agreement.

Identity proof of the claimant

Insurers cannot settle a life insurance claim until all essential documents are submitted by the policyholder. If insured person failed to submit original policy document, then there is another way to get the documents certified. Insured people must pay their premiums on time to conveniently avail maturity claims.

During the policy period, if the address or contact details change, policyholders should get it updated in the company records. Insurer will contact the insured when the plan would be due for its maturity to close the required documentation. Some issues which can result to delay are dispute between insurer and claimant, non-disclosure of facts and nomination not specified at application stage etc.

Source: http://www.policyboss.com/blog/term-insurance/few-guidelines-for-life-insurance-buyers

Status of life-insurance penetration in India

According to the economic survey, insurance penetration in the country has grown from 2.3% in 2000 to 3.9% in 2013. Life insurance penetration has grown from 1.8% in 2000 to 3.1% in 2013 and non-life insurance penetration from 0.7% in 2000 to 0.8% in 2013. It also said that life insurance penetration level compares well with the emerging market economies.

According to Swiss Re, overall insurance penetration in India (measured as percentage of premiums gross domestic product), which was surging consistently till 2009, has been seeing a gradual decline. However, while life insurance penetration saw a sharper decline, non-life insurance penetration has seen some marginal improvement, though it still stands below one percent.

But compared to emerging markets like Brazil and China, which have life insurance in India penetration of 2.2% and 1.6%, respectively, India’s life insurance penetration stands better, said Swiss Re.

According to the economic survey, Pradhan Mantri Jan Dhan Yojana and the RuPay Card are complimentary and will enable to achieve multiple objectives such as financial inclusion, insurance penetration and digitization. Jan Dhan Yojana has offered Rs 1 lakh accident insurance for all RuPay Cardholders and also Rs 30,000 life insurance for those who enrolled in the scheme before January 26, 2015.

Source: https://www.policymantra.com/blog/status-of-life-insurance-penetration-in-india/