Importance of disclosing health information

Last week I read a blog post (in Malayalam) shared in Facebook by one my friends. A heart wrenching story of a father who lost his son. The young man, in his late twenties, passed away in his sleep. If fate was in its cruel mood, the insurance company's denial to pay the insurance amount was probably even worse.

The young man had taken two policies. One was from LIC (sum assured of 1 lakh and annual premium of Rs. 5,000 or so) and another from a new generation private insurance company (ULIP: sum assured is not mentioned and monthly premium was Rs. 5,000). Like thousands of other Indians, both the covers were taken through insurance agents - who were either close friends or relatives. The young man had a previous history of epilepsy and was under treatment from a leading hospital. He was healthy otherwise. Married and working for a private IT firm. The agent in the case of private insurer, even though alerted by the young man, advised them not to disclose the information. In fact the application form was filled up by the agent himself and he assured them with typical "dont worry", "I will be there" and "no problem". At the time of claim, LIC processed the claim without much problem and the private player promptly denied (they found out the treatment history from hospital). And as one could guess, the agent who sold the private insurance policy had vanished (changed jobs and wouldn't take the phone)!

Term plans for topping up sum assured

With the arrival of a new dependent, i recently reviewed my insurance portfolio and realized that i needed to enhance my life cover. I knew that a lot of new products (especially that available online) has been introduced in last one year. I tried getting an online quote from 3 private insurance providers - ICICI Prudential, AEGON Religare and MetLife.

Are ULIPs getting better?

I was recently approached by an insurance agent with a ULIP. Even though I was not willing to take the policy, he wanted to present the plan and get my feedback. 

The plan in question is Birla Sun Life’s Classic Endowment Plan . The basic sum assured for the plan presented to me was Rs.3,75,000. But paying an extra premium I can get the life cover enhanced to whatever I prefer. In this case, we took the enhanced sum assured as Rs. 18,00,000.  Policy paying term is 10 years (I pay for only 10 years) and the policy term is for 30 years (I get cover for 30 years). For a 33 year old male, the annual policy worked out to Rs.36,538. (total pay-out of Rs.3,65,380)

Common Insurance Mistakes

Here is a short story based on a real life example.

Mr.X passed away two months back after a sudden illness. He was 52 and is survived by his wife, college going daughter and school going son.

Mr.X worked in the Merchant Navy and was always aware of the risky nature of his job. So he was more than happy to take a few insurance policies when approached by relatives/ friends who were insurance agents. He kept all the policy documents with his wife for safe keeping. Being a house wife, he knew she was good at filing papers neatly, and she was the one who would need those anyway, if something happened to him. He had 5 policies in all and his yearly premiums were close to 75,000 - more than sufficient to cover the tax exemption limits along with his PF contributions. His annual salary was around 10 lakhs.

Truth behind "NAV guaranteed" policies

There are a host of "NAV guaranteed" policies (ULIP/ ULPP) these days. It comes in different names and variations and easily one of the hottest in sales kits of insurance agents. Here is good hard look at such policies.

Jeevan Nishchay - A Review

Jeevan Nischay is the latest product from India's largest insurance company - Life Insurance Corporation (LIC) of India. It is a single premium closed ended plan falling under the special plans category and similar to the very successful Jeevan Astha. This new policy will be sold to ‘existing‘ customers of LIC and will be sold for a limited period until end of March 2010. Here is a critical review of Jeevan Nishchay.

5 Must-have Insurance Policies

I am back to my favourite topic of insurance again. I have written in the past about the importance of insurance and reviewed some of the common insurance policies. This post would be about what all insurance policies should one take?

I would categorize insurance policies under two categories - Policies that offer protection to (1) Self and (2) Valuables.

Women’s Insurance

This post was prompted by my better half. She was going through an issue of Vanitha (a leading Malayalam fortnightly for women) and it carried an article on women centric financial products – savings accounts, insurance schemes, etc. LIC’s Jeevan Bharathi caught her attention - insurance schemes with money back options looks really impressive. The following tries to decode a typical women’s scheme - Jeevan Bharathi.

Happy Life or Bad Insurance?

One more example of how lack of knowledge on part of investors is exploited by insurance companies.

As an example, let us look at Jeevan Anand, an insurance policy by LIC. Jeevan Anand, like many other endowment insurance policies, provides life cover for the term as well as returns at the end of term. It guarantees a certain sum in case of death/ maturity, plus there is a variable component, which depends on number of factors including future investment performance of LIC. For illustration purposes, and as specified by IRDA, LIC has given a table assuming 6% and 10% returns. The statutory warning in the site also says that these assumed rates of return are not guaranteed and they are not upper or lower limits of what the insured might get back.

Sufficient Life Cover

This would be my third blog on the topic - Insurance. This is in continuation to my earlier posts on the importance of term insurance and on how one needs to be careful and cautious on bundled insurance products. It is a sincere attempt to increase awareness on the importance of insurance.

Before I start, let me tell you a bit of history. I took my first life insurance policy almost 10 years back. My objective was two fold: to save tax and to get a handsome amount at the end of the term. And I had two vital questions before I opted for the policy: what was the premium (mine was around Rs.8500 per year) and how much money will I get back (I was told that I would get around 1.25 lakhs + bonus + some other profit share). With a wide grin on my face and without much further thinking, I became a proud insured person. And one had very little option at that time.

Ten years later and having gained some basic understanding of insurance, I keep asking people whether they have their life insured. Nowadays most have. And when I ask what is the sum assured, the most likely answers are either that they don't know or that they pay Rs. X as quarterly/ monthly premium. Some go on to say that they will get Rs. Y lakhs at the end of "n" years. In another instance, I was laughed upon by an insurance agent when I said that I need to know the premium amount for a “term insurance” of 20 lakhs. Why on earth would someone want to spend Rs.6500 per year for a policy that gives zero returns at the end of policy term! The agent seemed genuinely confused!!

Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss. So if I have a car worth 5 lakhs, I can prevent the monetary impact of loss (by accident/ theft) of my car (valued at 5 lakhs) by paying a relatively smaller premium (of say Rs.12,000). So an insurance policy hedges the risk of loss of a valuable asset for a small price. Mind you, motor insurance is mandated by law. Any vehicle plying on public roads needs to have at least third party coverage, where if the vehicle meets with an accident, the policy can cover damages to the third party. Even though insurance is a matter of solicitation, law mandates it to cover the risk for third parties! If one wants to cover own damages, then the premium to be paid is higher (comprehensive vehicle insurance).

Given below are some basic facts about insurance:

• Insurance is important
• Insurance has a cost and it needs to treated as an expense
• Insurance is not an investment
• More the insurance cover, the more the premium
• More the risk, more the premium

Let us get back to some basic questions: Do you have life insurance? Do you have sufficient life cover?

Take half an hour from your schedule and assess your insurance portfolio. For each policy, verify how much insurance cover you have. If in doubt, get in touch with your agent or life insurer – it may be spread across LIC policies, ULIPs and similar products. But take stock of what is the total “sum assured” for all your policies. The result can be very disturbing. “Sum assured” is that amount that your family may have for livelihood, education and expenses, in case something happens to you – Is that sufficient? Do you have that comfort feeling?

The sum assured should be sufficient and comfortable for the purpose of insurance – monetary assurance to your dependents in case, god forbid, of your loss of life. Most people fall well short of this “sufficient and comfortable” life cover because of two reasons – they are not aware of the importance of life insurance or they already have one or more high premium policies due to which they cannot afford another one. I have tried to cover the first reason till now. The second one need some real thought.

It is not sufficient that you have insurance (one or more, from different insurance companies/ agents), you must have adequate cover. People usually become “under insured” because they opted for money back policies, endowment plans and ULIPs. These are expensive forms of life insurance – one pay higher premium for lower sum assured (of course one get “returns” from that). But remember that investment is not the primary purpose of an insurance policy. It is insurance. Period. And the primary evaluation criteria while taking a policy should be the cover (sum assured) associated with it. Other criteria of importance are the premium (cost involved) and the policy term (coverage period).

If you do not have sufficient insurance, please bear in mind that life insurance is not very expensive. When I say life insurance, I mean pure term insurance. Term insurance is the most economical and effective form of life insurance. One can add a fresh term plan to the insurance portfolio by buying a new policy. Make sure that it has sufficient cover and extends to a term of your needs. Since term plans are “less profitable” for insurance companies, they offer lower commissions to agents and they in turn never promote term plans. So it is up to us to ensure that our most basic insurance needs are met in the most effective and economical way. Make sure that you have adequate life cover and then, and only then, think about end of term returns and annual premiums.

Disclaimer: The views posted in this blog are my own and are based purely on my own way of assessments. Readers are  requested to consult with their financial/ insurance advisers before making any investment/ insurance decision, do their own due diligence and validate factual information.

Simple Investment/ Insurance?!

Here is a perfect example of insurance products taking investors for a grand ride.

Go to simpleinsurance.co.in for a chart of various investment/ insurance options:

For example, consider the Retirement Plan. For a 30 year old male, with an investment of Rs.2000 per month for 30 years, the plan with an optimistic 10% per annum growth rate will give a pension of Rs.15,315 per month for life from the 31st year onwards.

But are these plans good investment options?

Now here is the catch. All of these plans are unit linked. Any unit linked plan is confusing - with a variety a charges (asset allocation charge, fund management charge, mortality charge, etc.) deducted differently (either in terms units or deducting directly from the investment) at different times (at the beginning of the investment, monthly or yearly) and unpredictable growth rates (which are limited by the IRDA to 6% and 10% for illustration purposes). So each of these plans need to be evaluated in terms of their overall attractiveness.

How can these plans be evaluated?

The best way to evaluate investment/ insurance plans is by separating the insurance (if bundled) and investment components. Compare the investment returns with that of a fixed deposit after adjusting best available rates for the bundled insurance (if any).

The Rs.15,315 pension per month for the Retirement Plan looks impressive on a cursory glance, especially for an outlay of just Rs.2,000 per month. The IRDA specified 6% and 10% returns are jacked up to 15% (or more) by the agents and last minute tax planning pressure gives in for most to opt for this plan.

But let's have a closer look. Let us put the Rs.2,000 per month in a bank fixed deposit (FD) at a nominal 8% interest compounded annually. That makes Rs.24,000 annual investment in FD. For the next 30 years, let us assume that the interest rate remains constant at 8%. The Rs.24,000 per annum investment at 8% will accumulate to Rs.29.36 lakhs.

This amount (Rs.29.36 lakhs) if reinvested again in FD at 8% interest will give annual interest of Rs.2.35 lakhs or a monthly interest of Rs.19,575 for life. Now compare with this the Rs.15,315 per month by the Retirement Plan. The FD comprehensively beats the returns of the Retirement Plan by a massive Rs.4,260 per month (21.8% more). And don't forget that the FD return is more or less guaranteed where as Retirement Plan's 10% return in risky and market dependent (it could be less, or more). Also, the accumulated Rs.29.36 lakhs is preserved for passing on to the next generation.

The case becomes even more compelling if we consider an SIP investment of Rs.2000 in a well diversified large cap mutual fund for 30 years (which can give returns in excess of 10% per annum) and then putting the cumulative amount in an FD to draw pension for life!

Click here to view an excel sheet with the above calculations.

So what's the verdict?

Isn't it obivious? In the above example a simple FD or a PPF (or mutual fund) would work much better than the pension plan. The situation is not very different for the other plans either.

Investors need to be extremely cautious while selecting investment options. Insurance companies trick the investor emotions with children plans and retirement plans and misleading returns. They have devised clever ways to disguise costs and still work within the regulatory framework to (mis) sell insurance products. Deviating from their fundamental purpose (and duty) of selling insurance, most of these companies (including nationalised ones) have aggressively marketed and promoted bundled and complicated products. The profit sucked out of the investor's money goes as profit to the insurance company and as hefty commissions to insurance agents.

Courtesy - Deepak Shenoy (@deepakshenoy)

Disclaimer: The views posted in this blog are my own and are based purely on my own way of assessments. Readers are  requested to consult with their financial/ insurance advisers before making any investment/ insurance decision, do their own due diligence and validate factual information.