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.

March 2010

How much Life Insurance do I Need?

How much Life Insurance do I Need, Human Life Value, Need Based Insurance, Term insurance, Dependents, Future requirement, Current assets,You never know what is enough, until you know what is more than enough.  ~William Blake

There are so many people, who ask me the big question: how much life insurance do I need? I have heard it from 21 yr old working in BPO’s, 35 yr old married person with wife and children,from super rich HNI’s and so on.

Many life insurance sales agents who are out selling life insurance start out by asking the following question : ‘How much insurance premium do you want to pay in a year”. Unfortunately many people take up wrong life insurance product on the basis of thier premium paying capacity.

My advise to you is that if you come across such life insurance agent, simply get up and walk away. Insurance is a need and should not be reverse engineered. The sum assured has to be decided first. And then the appropriate life insurance product has to be chosen. So, this leads us to the question – How much life insurance do I need?

If at all you are looking for insurance coverage, and truly there is a need, then the term life insurance is the way to go. All Other types of policies have some kind investment built into the insurance policy and may turn out to be inadequate. Term policies are simple to understand. They offer a certain amount of coverage over a certain period of time. If you die within that time period, your beneficiary will receive the value of the insurance. Period. As simple as that. Pure insurance.

Point number 1Not everyone needs life insurance. The Super Rich HNI’s or People who have accumulated enough wealth throughout their lives often might have no need for life insurance as they’ve accumulated enough wealth on their own to sustain their family. Also, people with no dependents often have little need for life insurance.

The important question – how much insurance do I need? The following pointers should help in answering this all important question:

(A) Income shortfall for the dependents – How much money each year would your survivors need to maintain their current standard of living? Take into consideration the annual expenses like home loans , auto loans, Rent, Debt repayment, education expenses, household running expenses, entertainment expenses, home maintainance, general insurance, and various other expenses (which are recurring in nature) and add them up.

(B) Time for which they need this income – If children are young, it will be quite a while (say 20 yrs or so). If you just have a spouse, the need might not need it for as long. For parents, get a term which is long enough so that the children become independent before the term expires. Shorter terms tend to have cheaper monthly premiums, but you may find yourself buying a new, more expensive policy in 10 or 20 years time frame. Remember the younger you are the cheaper are the insurance premiums. Of course, one can plan to increase the policy in a staggered manner in 5-10 years depending on the major changes in life)

(C) Future Lump Sum requirements: Things which should be considered : child education cost in future (Graduation/ Post Graduation), child marriage cost in future,  any special care needs (for example, taking care of elderly parents after you’re gone?).

(D) Current Assets – how much do you have now? What’s in your savings? Your investments (FD’s, Provident Fund, Mutual Funds, Stocks, Real Estate)? What other insurance policies do you have? Will the dependents be willing to sell off the house and downgrade or would you like them to maintain the current lifestyle?

The above pointers are essentially doing a Gap Analysis and Identifying the Gap. A*B + C – D That’s how much life insurance you should have, Roughly speaking, which will be required to plug the Gap. Please read the time value of money in my previous post (What is Time Value of Money) , to better understand future value requirements and converting them to present value. This will help you to arrive at proper numbers.

In case of unsure of certain numbers, you can make a rough estimate. It is always better to make the estimates on the upper side rather than letting your loved one’s down in case if ever the unfortunate event were to happen.

Finally , be aware that life insurance is bought for the benefit of loved ones. Having sufficient cover provides you with a peace of mind.
Do the calculations, ask pertinent questions to the people selling insurance. Asking the right questions will help in procuring optimal policies. And of course the knowledge will give a good night sleep.

Good luck!
Pls note that the above method is to quickly and roughly estimate the insurance need. Inflation etc, needs to be considered in doing a detailed analysis. In future post, I will cover some quantitative methods  (Human Life Value, Need Based Analysis, Income replacement method etc.) and probably present a spreadsheet with case study which will help you in actually understanding the doing the calculation.

You will find this post on (What is adequate life insurance coverage) interesting.

February 2010

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?