The need for insurance

When I talk to anyone about insurance, most of the time I get a question is what I will get back. This question really gets me thinking, because even after literacy increasing, people still do not understand the meaning of Insurance. Insurance is an indemnity is the event of something happening or not happening. So when you look at insurance, you should not look at return but look at what is the eventuality or outcome you are trying to cover. The following are some major insurance covers available:

Life – This cover kicks in only on the death of the policy holder. So while taking a life cover ensure that you cover only death and do not ask for a return of premium in case you survive the period. This cover is to be taken only if people are dependent on you for their living. So if there is nobody dependent on you, you do not need this insurance. How much cover is needed, depends on the assets and liabilities you will leave behind, so preferably contact your financial advisor to calculate the amount of cover you would require.

Personal Accident – As the name suggests, this cover comes into picture only in case of death or disability in case of an accident. You could take this as a separate policy or as an add on to the life policy.

Home – This policy covers the damage caused to your home and its contents.. Most of us are not even aware of this policy.

Health – With increased awareness, many of us have started taking this policy, but still I know of many people who avoid it, saying my employer has got me covered, but what if you fall ill in between jobs or you lose your job. Think, your whole life savings would go in a flash.

Travel – Most of us take this policy only when we are on official travel, but ignore it when we go on personal trips. We should never ignore this policy.

There are many other types of policies, some of which you buy, just because it has been mandated by the government or your loan provider. Most of these policies do not cover terror attacks, as you know the world has become a very dangerous place, so my suggestion is as the insurance company if terror attacks are covered, if not then ask them to add it. A little extra money, but you would have peace of mind.

Should one invest in ULIP’s

ULIP’s were the most widely sold insurance products some time back. As they served a dual purpose of being market driven as well as giving insurance. They even gave mutual funds a run for their money. Why did this happen, only one reason, the commissions for the agents were good, whereas commissions were stopped for distributors. It was a good sale for the insurance companies as well with very low regulation. This also led to a lot of mis-selling. This is when IRDA stepped in and brought many changes. With changes made by IRDA, the playing field between ULIP’s and Mutual funds has almost become level.

Though the field has almost become level, people have stopped buying ULIP’s as because of mis-selling, people are scared of getting duped again. But now with the changes there is money to be made in ULIP’s as well. Many financial planners would say do not mix insurance with investment. But if you look at ULIP’s only as investment also makes sense, look at it from long term investment point of view.

The biggest advantage of ULIP’s is tax; we keep shifting funds from debt to equity and vice-versa depending on the portfolio value and your requirements. When you do that, you need to sell, and every sale has got tax attached to it. Though tax is not applicable on sale on equity mutual funds after a year, there is tax applicable for debt mutual funds. But in case ULIP’s since there is no sale of units, there is no tax involved. Also maturity proceeds are tax free as long as the premium amount is 10% or less of the insured value.

Most ULIP’s allow shifting of units free of cost certain number of times a year. Though most of you might not do it that often, you should do it at least once a year. Also as you near maturity, start moving from equity to debt, this will help, if there is a sudden crash in the equity market. Looking at the advantages, on should definitely go for ULIP’s but only as supplementary insurance and more from an investment angle.

Insurance – Buy Online

With the spread of internet, Insurance companies find it cheaper to sell insurance online. Since they do not have to do lots of paperwork and get rid of the agents commission. Of course there is the option of going through the agent, but then costs will go up. Why? Because the agents give you service and you pay for that service. But if that is true, then if you buy online you don’t receive service? You will, but you have to ensure that you take care and ensure you do not have to worry later.

What do I mean by that? When you go through an agent, he helps in filling the form; he takes care of all the small matters. It is a time consuming process, since you have chosen to fill the form online, ensure you fill the form with care. No pain is no gain. So if you save on premium, there would be some pain in filling the form, but it would only be once. This you have to go through so that when there is a claim, it is not rejected because of wrong information.

Another thing the agent does other than filling your form, is reminding you to pay your premium on time. This is very important or else your policy will lapse. Now almost all banks have ECS payment option, so just fill that form and be free of this as well.

As we always say, go for term insurance only, because that is what insurance is all about. Now what would be the difference in a term policy from one company to another, you guessed it right; Premium. So the best thing to do is compare the premiums of different companies for your age and term online.

So have you decided what insurance amount is best for you? If yes, compare the premiums for that amount. Now just because the premium is low, do not go for higher insurance, you do not gain anything for having a higher insurance. In fact you are just increasing your liability. You could use the savings to build your assets. Some companies might give you a good deal if you go for a longer term policy. But here again, your policy should be only till you are earning.

It’s always cheaper to buy a policy when one is young, so buy early and ensure that the policy lasts till you retire.

Should one get rid of insurance taken as investments

We all say you should take an insurance policy for insurance purposes only and not as investment. But Insurance companies come with different types of policies. So that means every insurance policy must be there for some purpose. Money-back policies give out periodic payments. Endowment policies help build a tax-free amount. Ulips help in wealth creation. So the first thing to do is find out if the insurance policy will help you taking your targets into account.

As we grow and take risks, usually our income will keep rising, so in this case the Money-back policy would be of no use, since the amount received at the end of the period would be very small compared to the investment made. Same with endowment policy, if you want guaranteed returns, put it in a Fixed deposit, which would give better returns even after tax.

Ulip’s would help but then it should be at a younger age and as you grow you could use your switch option and move the money to debt.

An insurance policy should ideally cover a person till he is earning and the amount of insurance should ideally be enough to help the persons dependent on him/her. This is because if something happens to you the financial dependency will go away from the persons dependent on you. Therefore if there are policies which mature before your retirement age they should be removed or extended till retirement age.

If circumstances have changed and you cannot afford the premium, you should discontinue the policy, because instead of helping you the policy is hurting you financially. Since insurance premium is like a regular liability. If you have built enough assets then there is no need for insurance policy.

The easiest way of getting rid of an unsuitable insurance plan is to stop paying the premium. This should be the preferred option if the insurance policy was just taken. It is better to discontinuing the policy with a small loss instead of continuing with the mistake just because you might lose some money. This is similar to the stock market, do a stop loss.

If you have paid a premium for 3 years or more, you can surrender the policy and get some money back. When you surrender the policy you lose the insurance cover, so if you want to continue with the insurance cover you can convert the policy to a paid-up plan.

A better alternative to surrendering your insurance policy and losing the life cover is to turn it into a paid-up policy. As in the case of surrendering, this is possible only if three years' premium has been paid. But if only some years are left it would make more sense to continue with the policy.

Have you got the right Insurance?

How many policies do you think you would require ensuring that you are adequately insured? Like investments should you spread them across different types of policies? What should be the amount to be put in different types of policies? Now what I am talking about is Life policies alone. You don’t know? You are not alone; there are many more persons like you.

Some persons treat life insurance like an investment for return, hence they go for the different types of policies. You should note that insurance is not an investment for return. You get a return only on the happening or non-happening of an event. Confused?

Many of us buy insurance as investment for return, but should actually buy it only as a cover for early death, so that our loved one’s do not suffer because of loss of income on account of our death. Funny, we call it life insurance, while it actually works as death insurance. Some buy insurance just because they tax benefits; this is the reason for having so many policies.

Before you buy an insurance policy, ask yourself if you really need one. In certain circumstances, you may not even need an insurance policy. If you do not have dependants, who are you buying it for? Also, if your spouse earns well, he or she may not require any financial support when you are gone. In such cases why should you spend money on premiums? It’s important to build assets and as your assets increase the need for insurance will decline.

Insurance became important, since as we kept growing we started creating assets, but creating assets is not easy. So to create an asset we take on liabilities. As our liabilities increase the need for insurance increases. So as our liabilities increase, we should start increasing our insurance, but as the assets increase and liabilities go down, you can stop taking more insurance.

The life insurance need of a person depends on several factors. There are also different ways to calculate this need. One of the simplest methods is to calculate the insurance requirement based on one’s future earning potential. The reason is if something happens to you, your dependents won’t have to worry about income. This is another reason, why insurance is usually brought on the life of a person who is earning.  

There is another way of calculating your insurance need; this takes into account the amount of money the family would require to maintain their current life style, in case something happens to the bread earner of the family.

One should carefully assess one's need for insurance and the features of a policy before signing on the dotted line. But what should you do if you have already bought an insurance policy that you now realize is wrong for you? What if you find yourself saddled with policies that offer you neither high protection, nor high returns?

Usually you should continue with such policies till the end. The Direct Taxes Code, which is likely to come into effect from April this year, states that an insurance policy should provide a cover of at least 20 times the annual premium for it to be eligible for tax deduction and other tax benefits. So if it provides less than 20 times and you had purchased it for the purpose of tax saving, then it would be best to surrender it. But if the time left is not much continue till the end.

You should be careful about ULIP’s, since the high charges are usually charged in the initial years. So if you have completed the initial years, continue paying premium till maturity, the returns would be better. If it is a single premium policy, no harm continuing it since you have already invested the amount.

Taxability on redemption of units from ULIP

So somehow you managed to get trapped into buying a Unit Linked Insurance Policy (ULIP) in the name of Insurance! Now you want to sell the units and get out of it. Is this amount taxable?

Under ULIP units are bought from money invested in the policy. Units purchased are capital assets under the Income Tax Act. So if Units are sold within one year of Investment, you have to pay short term capital gains. So ensure that at least 1 year has passed from the last premium payment date before redeeming your units.

If the units are held for more than a year, they become long term capital gains and long term capital gains are exempt from tax. Securities Transaction Tax would be deducted at the time of redemption of Units.

Now, though we said they would be tax free it would depend on the type of fund the amount was invested in. If the amount was invested in equity oriented funds and held for more than 1 year then the capital gains are tax free, conversely if they are sold within 1 year the short term capital gains tax has to be paid.

Similarly, debt-oriented funds attract a long-term capital gains tax, while a short-term capital gain would be tax at the investor’s normal tax rate.

For details on ULIPs click here

For details on Taxability click here

Insurance, Do I need it

What do you think is insurance? Insurance is a promise of reimbursement in case of loss. Many insurance companies keep advertising asking us to get insured. What is their interest in it?  When you go to an insurance company and ask them to cover a certain risk, they charge a fee to take a risk, this fee is called premium.

The more the premium collected and risk not materializing increases their profits, hence the reason for them to advertise. So should you insure yourself? When we go for insurance we usually go to the insurance companies to buy ULIP’s or endowment plans i.e. where we would get a return.

If we talk of return, we are not insuring, but are investing. We should understand that insurance and investment are two different things. Insurance is a tool for protecting your risk and insurance company’s main job is insurance and not investing. So when you go to an insurance company, go to them only for insurance.

So now we decided that we go to an insurance company for insurance, what is the amount I should insure myself for? Assume that if something happens to you today, how your family will be taken care of, it could be out of your savings or it could also be out of insurance.

Usually a person should insure himself / herself by around 10 times of his / her annual income. Another method would be to take into account the expected expenses the family would have to bear without you, include child’s education, marriage, loans and other expenses.

Now if you go for so much of insurance and go for money back plan the premium would be high, but if you go for a pure term plan it would be cheap. Another thing you could do is increasing your insurance cover over a period of time, so when you are young, your risk level is low, so you can pay a lower premium payments.

But remember the premiums are usually locked depending on your age, so when you are young the premium per year would be lower, so start your insurance policy early. One more insurance policy you should not forget is a health insurance policy. If you have a family, go for a policy with family floater, you get a bigger cover and less premium, than if you take an individual health insurance policy.

Home Insurance

Whenever we talk about insurance, we always talk about life insurance. But have we looked at the other type of insurances available. Insurance is available for almost everything and Home Insurance is one of them. We might say we stay in a society and as per the society laws, it is mandatory to obtain an insurance policy. But do we as a member of the society inquire if we do have insurance? If our maintenance bill goes up we start shouting.

When we take a home loan we buy the insurance, that time we do it just because we have no choice. We take it only because it is mandatory.

We insure our lives and our car, but our biggest asset, our home is usually not insured.

What is home insurance? Home insurance covers losses to the structure and contents of our home due to natural or man-made calamities. Like any insurance, it protects us in the event of unwanted, unforeseen damage to our home caused by fire or lightning or smoke, storms of all kinds, explosions, riots or civil commotion, burglary, breakage of glass, vandalism, hooliganism and vindictive mischief.

Now the question would be what is the value of the house and its contents? The value of the house is usually the area of the house multiplied by the construction cost of the house. The construction cost would be the current construction cost. So what happens in the case of a society, in that case the society insures the building and charges you the insurance cost based on the area of your house. So if your society is doing the insurance, you don’t need to do insurance on the cost of the house. You just have to insure the contents of the house. How are the contents valued? The contents are valued at the current market value of the items. That means it should be valued at replacement cost at current market rate. Confused? What if it is 2 years old? Then it will be valued at current cost of purchasing the same item less depreciation for usage.

So how does home insurance help? In case of loss, you do not have to worry, just file a claim with the insurance company and you will be reimbursed.

Let’s list some of the advantages:
- Your investment is safeguarded against a variety of unwanted incidents.
- The cost i.e. the premium we pay is as low as just 1% of the insured value.
- In case you are forced to shift to an alternative accommodation because of an insured peril, the cost of the additional rent will be taken care of by the insurance company.

It looks too good to be true, that is why it is important to look at the fine print or even ask questions to the insurance agent and get the answers in writing and make it a part of the insurance agreement. Also take care that the same terms are included during renewal.

- Find out whether the coverage offered by the insurance company is automatically adjusted as a protection against inflation or do we have to review the policy every year.
- Can you make extended coverage for new items purchased during the year?
- If you are in a flood and/or earthquake prone area, does the insurance cover flood and/or earthquake?
- Compare terms and rates with multiple insurance companies and you will be surprised to see the difference in the premium rates.

Almost all home insurance policies have exclusions. Some of the most common ones are:
The company is not liable to make payment for:

- Loss or damage to a human being during an attempted burglary
- Any loss or damage on account of loss of livestock, motor vehicles, cycles, money, securities for money, stamp, bullion, deeds, bonds, bills of exchange, promissory notes, stock or share certificates, business books, manuscripts, documents of any kinds, ATM debit or credit cards, unless previously specifically declared to the company.
- Any loss or damage to any property that is illegally acquired, kept, stored which is subject to forfeiture.Any loss or damage occurring while the insured person’s home is unoccupied, for a period of more than 30 days consecutively and if the insured failed to inform the company about the same.

ULIP’s

Now a day’s, I should not be saying now a day’s but some months back, many insurance agents used to keep saying buy ULIP’s as an investment cum insurance. While the market was going up it made a lots of sense investing in ULIP’s. Definitely they were better than endowment or moneyback policies, which gave very low returns. In endowment or moneyback policies you do not have an option as to where your money would be invested.

The returns in ULIP’s are market driven and you have a choice of deciding where you would like your money to be invested, depending upon your risk appetite. Having said market driven, we need to understand how they work. Remember ULIP’s are long term investments.

In most of the ULIP’s you need to pay premium only for the first 3 years after that you can withdraw the money. But it is usually after 3 years that the real returns start coming.

One of the main drawback is in the initial 3 years the initial charges are very high, after 3 years the charges come down. So if you go by what the insurance agent has told you and invest only for 3 years and after that withdraw, you would not have got much benefit. If your plan was only 3 years, then mutual fund would have been better.

The advantage of ULIP’s is long term investment. Though in the initial years the administrative charges are high almost 25 to 40%, they start going down after the 3rd year. Here the administrative charges are even below those of mutual funds, which keep charging 2 to 2.5% every year. In the long term, these small charges make a big difference.

Another huge advantage with ULIP is most of the companies offer 2 or 3 free switchs per year between plans. Also you need to check if they have a feature like top up. In case you get a raise or bonus, and would like to invest the money, check if the company has a topup facility.

So seeing the advantages, what age bracket should go for ULIP’s? As we have seen, you need to look at it as a long term investment. Therefore assuming a retirement age of 60, the persons who should go for ULIP’s are persons upto the age of 40.
Remember the premium amounts for ULIP’s are quite high, so only if you are sure of being able to keep investing for 20 years, go for it.

Note that the charges I have written above are just examples. Check with the insurance company, before investing. In case the charges excluding mortality charges after the 3rd year are above 2 to 2.5% do not invest in it. In that case it would be better to go in for a pure term plan and invest the balance in a good mutual fund.

Insurance

While doing financial planning we always talk about taking an insurance policy. Usually financial advisors would ask you to take the types of policies

1) Life
2) Health
3) Home

I am not talking about car, is because the law forces you to have one anyway.

Now let’s look at Life. The insurance agents usually will show you a range of policies, from wholelife, moneyback, etc. and they talk of riders, to take care of health, accident, etc. But what is best for you? First let us try and understand what is life insurance? Life Insurance is usually to take care of your loved ones incase something happened to you. So it would be best to take a policy, which would take care of the financial needs of you and your family in case something happens to you. You should not look at insurance as an investment.

Before we go into anything lets see how insurance works. Insurance does not protect you against something happening to you, it covers the consequence of an event. So if that is the case, why should we look at is an investment to get something in return. You should buy an insurance hoping the event does not happen, but if does happen. The reason for which you have taken the insurance will be taken care of. The premium you pay, is an expense to buy Peace of mind.

Basically what happens when you buy an insurance policy with a return of money? The insurance company breaks up the premium into 2 parts. One risk premium and another investment. The risk premium goes as expense to buy you peace of mind. Then investment premium is invested and what you get is return of your investment premium. So why should you ask an insurance company to do investment for you?

The core competency of an insurance company is not investment. You have scores of investment companies. Also check the historical returns of the same amount of investments with an insurance company vis-à-vis an investment company. The returns you get from an insurance company have always been less. So the best thing to do is go in for term insurance only.
Term insurance provides insurance for a specific period of time, or “term”. Term insurance provides only “pure” insurance protection and does not have the savings or investment feature. This type of insurance offers the users a choice of terms from 1 year renewable up to 30 year terms. The premium for the term remains the same throughout the term; the most popular nowadays is the 20 year term. In certain cases you can also opt for a term to a specified age, usually 65.