Tag - life insurance

November 2012

Understand : What is Paid Up Value in your Insurance Policy

What is Paid Up Value , Insurance Policy, Surrender Value, Life Insurance Concepts, Policy Lapse, Assignment, Nomination, .

Awareness precedes success

Most of the Insurance Policy Holders are unaware of the concept of Surrender Value and Paid  Up Value in case of lapse of a policy for any reason. This note with an example will help understand the concept. 

Guaranteed Surrender Value 

Under Sec 113 of Insurance Act 1938 if a person discontinues a policy, the insurer will not be allowed to forfeit all premiums paid. In every premium there will be an element of savings element accruing in a reserve fund. Insurance Act 1938 stipulates that the insurer should pay a guaranteed surrender value, if the premiums are paid for a minimum period of 3 years. Some Insurers pay more than the amount stipulated by the Act and this is called Special Surrender values. 

Paid Up Value 

When policy lapses after 3 years the Insurer will reduce the sum assured to a sum in the same ratio as the number of years premiums paid, bearers to total number of years in term of the policy. 

If Mr X. had taken a policy for 32 years for 10 Lakhs and he has paid the premium for 8 years only, then he would have paid for the term only. The Insurer offers to pay the Sum Assured, due payable on the maturity date or death if earlier as Paid up value that is Rs. 2,50,000. 

Reduced Sum Assured (RSA is the Reduced Sum Assured or the Paid up value) =
(Total number of years premium paid X sum assured) / (Total term of the policy)

Policies are with Profits or Participating polices wherein the policy holder will be eligible to get share of surplus of insurer called the bonus. 

No bonuses will be added to the sum assured of policies without profits or non – participating policies. 

 In case of policies wherein bonus eligibility is available, the sum total of Reduced Sum Assured + bonus allocated, shall be the Paid up Value. 

Where there is no bonus eligibility for the policy, the Reduced Sum Assured shall be the paid up value. 

Premiums are paid in advance in Insurance transaction. So the policy will be in force for the term depending on the mode of payment. Obviously, a monthly mode will keep the policy alive for 1 month, in quarterly it will be for 3 months, Half yearly for 6 months and yearly for 1 year.

Mr. X had taken a Half yearly mode of payment for 10 Lakhs with profits for 32 years term. The policy had commenced on 28th March 2002. He paid the premiums due on 28th September 2009. Due to certain financial constraints he could not pay further. Upon lapse of his policy due to non payment of premiums, not all of the money paid is lost.

What is Paid Up Value , Insurance Policy, Surrender Value, Life Insurance Concepts, Policy Lapse, Assignment, Nomination,

 

 

 

 

Reduced Sum Assured = Rs 2,50,000
Add Bonus Accrued = say 1,60,000
Total Paid Up = Rs 4,10,000

How much Life insurance is another article which you will find useful….

July 2012

IRDA Consumer Education website ~ Insurance ~ Educating Customers

insurance, IRDA, consumer education, life insurance, health insurance, car insurance, plans, Insurance is a sophisticated financial instrument which requires a fairly high level of involvement on the part of the consumer to make it effective. Yet insurance is also a basic requirement that every person should have. This universal need coupled with its complexity makes for a difficult combination since there is a mismatch between the perceptions of the customer and the reality of the product. It is this perception-reality gap that consumer education bridges.

The best protection for a consumer is education.

The IRDA website appears to be a sincere effort in this direction. Make use of the resources given in the website. It is useful.

You can access the site here : IRDA Consumer Education website

June 2012

Components of Life Insurance Premium for Endowment Plan

In many parts of the world, Insurance policies get sold. They do not get bought.

Almost 70-80% of the Insurance Policies which get sold in India comprise of the Non-Term Life Variety (means that approx 80% policies are not pure risk cover).

Do you know the components of the premium which gets paid periodically. Many agents miss-sell and never disclose the breakup of the premium components.

It makes a lot of sense to be aware of the breakup and make a wise decision when buying a life insurance policy (whole/endowment etc)

Components ,Life Insurance ,Premium , Endowment Plan, Insurance, Tutorials, Understand Concepts

 

Next time be sure to ask your agent. Here is an example.

e.g. Annual Premium = Rs.100000, Sum Assured = 25,00,000, 15 yr Endowment policy for a 35 year old
Then (these are approximate figures, meant only for illustration purposes)
Mortality Premium = Rs. 10000
Agent Commission Expense = Rs. 25000
Operational Expense = Rs. 10000
Profit/ Loss = Rs. 5000
Policy Holder Fund ( Investible Surplus) = 100000 – 10000-25000  – 5000         = Rs. 50000
 
Mortality premium is the pure risk premium in case of a fatal event on the life of the insured. This is same premium which will be paid when one insures using a pure term policy for a sum assured of 25,00,000. 
 
Agent Commission/Operational Expense … self explanatory
 
The Investible surplus is the amount which can be invested by the insurance company in G-secs (Government securities)/ Bonds. 90% of the interest generated is distributed in the forms of bonuses. 
 
More on Insurance Primer…

July 2010

The Simple rules to Successful Investing – Part 1

The Simple rules to Successful Investing , Understanding Investing, Stocks, Mutual Funds, Tax, Insurance, Estate, Wills.

“No amount of talking or reading can teach you swimming. You will have to get in the water.”

There are these little general rules which are applicable and useful for decision making and taking actions. And these simple rules are applicable in so many aspects of life, they are just some small reminders, some common-sense stuff which are really useful.

And yes most of them are applicable in investment planning as well.

a. Perfect Plan – Forget it.There is no such thing as a perfect investment plan and no such thing as a perfect time. The right time is now. Tomorrow is and always will be uncertain. Perfectionism is the enemy of action. Do not let perfect investment plan or a perfect time to invest stop you from starting.

b. Analysis Paralysis – Too much thinking will often result in getting stuck.Some thinking is good — it’s good to have a clear picture of where you’re going or why you’re doing this — but don’t get stuck thinking. Just do.

c. Get the Broad Picture and Start. You need to get the broad picture in your mind. You need to understand your future requirements or what do you want to achieve (goals). You need to know the time you have to meet those requirements. And, then you should have the broad plan to meet the goals. Once you have the broad picture. Get going.
All the planning will take you nowhere unless you take that first step, no matter how small it is.

d. Keep things Simple and take Small Steps. Small steps always work. Little tiny blows can break down that mountain. And then each step counts. Keep the big picture in mind, but start by taking small steps.

Understand the advantage of Investing Early here.

The Little Rules to successful action To be contd … Part 2.

“Free Lunch” Seminars—Avoiding the Heartburn of a Hard Sell

"Free Lunch" Seminars,Avoiding the Heartburn of a Hard Sell , Retirement Planning, Investment Planning, Tax Planning, Life insurance selling malpractices.

BEWARE —-Investors frequently get invited to free seminars. These seminars make tall promises. To educate  about investing, or profit from home trading strategies or about managing money in retirement. They also provide VIP treatment , sometimes provide an expensive meal at no cost.

Please remember that , just because someone buys you breakfast, lunch or dinner does not mean you that you have to buy into whatever these guys they are saying. And definitely you need not buy into all what they are selling. Believe me , you will avoid some serious heartburns……… Use your judgment to arrive at a decision later point in time.

The same holds true when specially you go to buy a car. Most people spend a good time looking at the car and take a test drive. Now just because the salesman spent his 30mins — does not mean that you need to buy the car.

The same holds for when you are being sold — Life Insurance, General Insurance, Boutique stores, Electronics etc.

Be careful – If you do not wish to purchase and are being forced into a deal , Use your judgement and Learn to say No – firmly. We live in an age where it is still a buyer’s market – do not forget this.

February 2010

Tax Savings – Section 80C – Part II

Tax Planning,minimizing the tax liability, section 80C, 80CCC and 80CCD,ELSS (Equity linked savings scheme), 5-Yr tax-saving bank fixed deposits (FDs) of banks, PPF (Public Provident Fund), EPF (Employee’s provident fund),In this part, I will cover the Life Insurance premiums, pension plans on mutual funds and from insurance companies, and various expenses which are also eligible for deductions under 80C.

Life Insurance premiums covered under Section 80C
Premium paid towards life insurance for yourself or your family (spouse and children) is eligible for section 80C tax break. The maximum deduction available is upto a maximum of Rs. 100,000/- under Section 80C. The sum received (including bonus) under life insurance policy (excluding Key man Insurance) is tax free. Please note that Life Insurance needs to be planned properly and should not only be taken for the purpose of Tax savings. (Note that most of the Life Insurance companies come up with innovative , yet inadequate products during the Jan-Feb-Mar period every year to lure investors into schemes which offer inadequate coverage and inadequate returns. They know that people are looking out for avenues). Be-aware.

Types of Life Insurance Policies briefly are :

– Term Policy : This is the undoubtedly the best life insurance scheme which covers only Risk of Death and no survival benefits. This offers maximum coverage for lowest premiums.

– Endowment Policy : This plan accumulates capital over a period of time, returns sum assured + bonus at end of period and covers risk in case of premature death

– Money Back Policy : This plan accumulates capital over a period of time, provides periodic payment during the policy + balance and bonus at the end of period and covers risk in case of premature death

– Whole Life Policy : This plan runs through the life of the policy holder, requiring the payment of premiums throughout the life. There are no survival benefits to the policy holder as he is not entitled. Sum assured + bonus is payable to beneficiaries.

– Annuities : This is an investment that is made ( single lump sum payment or through installments ), in return for a specific sum that is received every year/ 1/2 year or every month, either for life or for a fixed number of years.

– ULIP – Unit linked insurance plans : Unit Linked Insurance Plan – is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire – equity, fixed-return or a mixture of both. Ulips gets covered under life insurance – 80C, and they are popular. However, you should avoid ULIPS as far as possible. I will discuss about this more on my ULIP Awareness post later on.

Pension Plans from Mutual Funds covered under Section 80C

There are two mutual fund pension plans –Templeton India Pension Plan  and UTI Retirement Benefit Pension Plan. Both have a mandatory lock – in period of 3 yrs. And they encourage investors to invest for long term. THese funds are primarily debt oriented mutual funds and offer tax benefit under Section 80C. However these funds have not yet gained popularity among investors. Pls note that unlike traditional pension plans of insurance companies, these mutual funds do not provide pension or annuity.

Regular Pension plans of Insurance Companies covered under section 80C

 

Pension plans are offered by insurance companies and the contributions, qualifies for tax benefit under section 80CCC instead of section 80C.

Payment of premium for annuity plan of LIC or any other insurer Deduction is available upto a maximum of Rs. 100,000/-. (aggregate deduction under Sec. 80C, 80CCC and 80CCD)

What is adequate life insurance coverage?

What is adequate life insurance coverage,foundation of financial planning, current liabilities, financially secure the foreseeable future, .

“Death is certain and Life is uncertain.”

You work hard, You earn , You save. You plan and have dreams. You do this to secure your future and the future your loved ones.

However, your untimely demise, can jeopardize the future of your loved ones. Emotional needs, of your loved ones and your dependents cannot be replaced or compensated.
However in case of financial needs, you can always plan ahead, so that your loved ones are left behind with adequate financial resources to take care of their future needs. This is all the more important in case you have dependents who are financially dependent on you (like your non-working spouse, children , old parents etc.).

This is where “adequate”  insurance of  “life” assumes such a significance.
Life Insurance is the foundation of financial planning and you should ensure that it is properly planned, first.

Many a times , I am truly surprised when I ask clients and people about their insurance coverage. I get responses like the following :
“I believe I am adequately covered” (– Salary 20Lacs/yr, Home Loan 40K / month, Car Loan 3Lacs, 2 young school kids, Insurance coverage – sum assured around 40Lacs ONLY – 2 policies, annual premium around 2Lacs) And he believes he is adequately covered. Badly mistaken……………

“I have one investment flat, and one flat in which I currently live – In case something happens to me , my wife can sell that flat and that can easily service the needs of the future”. I told him, why does he need to wait for his death, in order to sell the flat. Why is he not doing it now.? An hence why should his spouse sell the property to finance family needs ……………? This person understood the crux and went ahead to increase his insurance………….

“My father tells me about the futility of insurance – See, he is 65 yrs of age and he is still going hale and hearty” – This is such a stupid response. It is really difficult to believe seemingly intelligent people making such comments………….

“I will get 20Lacs at the end of the policy” Upon asking , how much money his wife will get in case he were to die today  – His reply was ” I do not know, I will have to check my policy”. He does plans his weekend outing to Lonavla and Khandala or other places near Mumbai along with friends meticuluosly. But hey , no plans for life………

” I have a child insurance policy which will give me 15 Lacs in due course apart from my endowment life policy of 20Lacs” Again , this fellow has been sold into these policies is paying roof high premiums for paltry insurance. And by the way, why insure your child , when you yourself are inadequately covered. Also does one really need child’s life to be insured to cover financial needs. No……….

” I have a ULIP (Unit Linked) policy and the agent has promised me guaranteed (LOL……..) returns in next 15 years” ……… I am sure the agent also must be laughing his way to the bank ………..

” I had bought policy from LIC to to save taxes. And I am happy to save on taxes”Now buying insurance just to save taxes is one of the worst mistakes one can make. Buying Life insurance to save taxes or to invest is just not right………

These are responses of intelligent,hardworking , well educated people. However, they fail to get the financial planning act together. I am sure that they can also put in little extra effort to get this part right as well.

As you can see, all the responses above have one underlying theme – all of the different sets of people have inadequate Life Insurance coverage. In some  cases unplanned, some have planned but due to thier ignorance have been sold products which will truly not help in case of insurance.

Let us face it , no one likes to really think about his own death. However, the truth also cannot be denied that death is indeed certain.It can happen in (a) normal course of time (let us say avg 70yrs)  (b) earlier in an untimely fashion (let  us 30 -45yrs) — this is prime time when dependents really need you (c) or later than normal. (>85+ yrs)

All the three cases can be properly planned for.

So, that brings us to the question — What is adequate life insurance coverage?

Simply put, an adequate life insurance coverage should cover the current liabilities of the descedent and should financially secure the foreseeable future needs of the dependents in such a way that the lifestyle of the dependents remains unaffected going forward and life goes on normally as if nothing truly happened……………..

Later we will see , how much insurance do you need. Or How to arrive at the magic figure of sum assured. You can read the post here at How much life insurance do I need?