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Financial Planning: Knowledge Center

Cash Flow Management|Insurance|Asset Allocation|Retirement Planning|Estate Planning|Taxation|Financial Mistakes|Risk Profiling|Small Savings Schemes|Pension Funds|Decoding the new tax code|Common mistakes in financial planning|Financial Planning Steps for Women|Creating a Medical Fund|A Contingency fund is not an option|Credit Rating|What´s your Networth?|Transparent pricing of home loans|The Budget within your home|Tax Implications - Reverse Mortgage Scheme [Sec 10 (43)]

Insurance

Adequacy of Protection/Life Cover | Mediclaim Policies: Clearing Cobwebs | Riders in Insurance Policy
Medical Insurance for the Elderly | Term Plan | ULIP (Unit Linked Insurance Plan) | Money Back Insurance Plan | Protect your dream house | How to evaluate Endowment Products | Term Insurance alone will not protect your financial goals | Surrender Value

Adequacy of Protection/Life Cover

We do not think (or do not want to think) of what will happen to our family, if we are gone - especially when we have not met all of life's responsibilities. Though the family goes through emotional trauma, financial burden adds to the pain. One has no remedy for the emotional pain, but smart financial planning can certainly ease the financial pain.

If one is under insured, it could lead to a slip in family's lifestyle in case of an unfortunate death of the breadwinner. The family may have to compromise on various fronts to make the ends meet. These could include cutting down household expenses like food, medical, entertainment expenses, marriage expenses of children or moving to lower grade school for your children and many more expenses.

While life insurance is critical to meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So having a cover is not enough - having adequate cover is critical. Also, investment planning is not enough because plan could work only if funding the plan is regular and enough wealth is built up to take care of all life stages responsibilities. What happens if the funding suddenly stops?

Life insurance has moved from protecting life to protecting lifestyle. Financial needs can be classified broadly into following two categories.
  • Protection: if anything happens to the breadwinner, the family continues to be financially protected and maintain the same life style.
  • Savings: one should be able to generate required corpus to meet milestones such as education / marriage expenses of children, buying a house etc.
The first step in buying insurance cover (Life Protection cover) is to adequately assess your need and responsibilities. One should ask the following questions:
  • What is my life stage? (Age, family etc.)
  • What are my responsibilities? (Buying a house, children's education / marriage expenses, protecting my income etc.)
  • How much corpus I require to meet the above financial responsibilities?
  • What is my current corpus / net worth?
  • What are my liabilities (like car loan / housing loan etc)
  • How do I plan (including selection of insurance plan) so that even if I am not around, my family can still sail through milestones?
The above data can be compiled in the following Protection Cover Computation Table to assess whether you are adequately protected:

A. Expenses protection
» Household expenses of family members

B. Goal protection» Education expenses of children
» Marriage expenses of children

C. Liabilities protection
» Outstanding Housing Loan
» Outstanding Car Loan
» Any other Loan (Personal Loan)

Total funds needed to cover expenses: (A + B + C)

D. Less: Existing Cover (if any)

E. Less: Current Assets / Investments (excluding assets for self consumption like house, car etc)

Additional cover required to be purchased = (A + B + C) - (D + E)

Note:
» If the result of the above computation is positive, one is under insured and needs additional protection. If the result is negative, one is sufficiently covered or over insured.
» Inflation needs to be considered while calculating expenses.
» Present value of future expenses to be discounted to compute protection required.

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Mediclaim Policies: Clearing Cobwebs

Mediclaim provides for reimbursement of expenses incurred for hospitalization for certain injuries, illnesses, and/or diseases. It not only covers the expenses incurred during hospitalization but also the pre and post-hospitalization expenses. Then there is facility of cashless settlement, which enables the individual to get admission in any hospital without any initial payment. However while choosing policies many individuals find comparisons of products difficult due to confusing terms and myths. I have tried to clarify a few.

Floater Policies

These cover two or more members of the family in a single policy while offering a discount on the combined premium .The family is covered for one single sum s with no upper limits per member. The discount in these is a great attraction but can leave you under insured. The risk in floaters comes when all family members fall ill at the same time. Floater policies give an impression of a high cover, but may not necessarily be a good product. It is preferable if each family member has a separate cover. To give you an example, Mr. Ramesh Rajan has a floating cover that covers self spouse and both parents for a sum of 5 lakhs. Looks like a decent cover on the face of it. Now the family meets with a road accident in which all four were injured. Ramesh's father has major fractures and his medical bill comes to over 4 lakhs. The other three incur an expense of 1 lakhs each. Total Medical bill comes to Rs.8 lakhs. Unfortunately the whole family will only get 5 lakhs of bills reimbursed. This would not have been the case if each were covered for a sum of Rs. 5 lakhs each. Even a lesser cover of Rs.3 lakhs each would have covered them better. (An out of pocket expense of only 1 lakh as compared to 3 lakhs with the floater scheme).

A case of mistaken identity: Hospitalization Covers

Hospitalization covers are not mediclaim policies. Hospitalization covers typically give you a lumpsum amount for every day of hospitalization. This means that if the cover offers Rs. 5000 per day up to 180 days will give you the sum of Rs. 5000 irrespective of actual medical bills for the number of days you are hospitalized subject to a limit of 180 days If you are hospitalized for 2 days you get Rs 10000 and so on . These covers are not a substitute to proper medical insurance policies.

Senior Citizens above 60 years

Yes, Senior Citizens above 60 can get medical insurance. The products offered are few but available. Even diabetes and hypertension can be covered and so are pre existing diseases subject to ' no claim' years ranging from one year to three years. Bajaj, Star Health, Oriental and National Insurance offer these covers.

Company offered Mediclaim covers

Consider these as bonuses only. You must have your own cover as a job change or a sudden stopping of premium payment by companies (due to rising costs of medical insurance) can leave you exposed. If the company insurance is large you can opt for a floater policy as a cheaper option.

Points to note will make comparisons

1. Pre hospitalization and post hospitalization expenses - Whether covered and for how many days?
2. Cashless facility and list of hospitals where available - If you have some preferred medical service providers check if they figure in the list
3. Whether no claim bonuses are provided - a no claim bonus ensure that your cover increase with the rate of inflation (if not entirely at least to some extent) during the initial years.
4. TPA (Third Party Administrators)-Run a check on the distribution network of the insurance company or it's TPA. It is preferable to have at least one of their offices in a location close to you for ease of payment receipts on claim. It will be good idea to check on the service record of such TPA too.
5. Certain Medical Expenses may not need a 24 hour hospitalization. Check if your policy covers such treatments.
6. Check for upper limits on expenses - For example limit on surgeons fee, limit on ambulance charges etc. A 'no limit ' cover is always preferable.
7. Try getting hold of policy document before you buy. Even after buying you can return the policy in 15 days without loss if you find anything in the policy document that does not suit your requirement.

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Riders in Insurance Policy

Riders are an important and integral part of insurance policies. A policy rider in an insurance policy is a provision or modification to an existing insurance policy that provides additional coverage. Riders on the insurance contract provide additional protection against risk. You can buy a basic insurance policy and add riders to it to include extra protection. The riders provide low-cost pure risk cover to the insured. These add-ons or riders, as they are called are a special policy provision or group of provisions that can be added to a policy to supplement the cover provided. They allow you to increase your insurance coverage or limit the coverage set down by the policy.

The need of a rider with a life insurance policy depends on the insurance seeker's existing insurance, as well as additional medical and non-life covers available with him.

The choice of a particular rider depends upon the life insurance coverage needs of an individual, which depends upon various factors such as age, family responsibilities and income, among others. It is, therefore, critical for an individual to make a sound decision after ascertaining his needs.

Different types of rider:
  • Accidental Death and Disability Rider: This rider ensures receipt of a sum over and above the basic sum assured.
  • Term benefit Rider: it endeavors to provide an additional sum, equivalent to a maximum of the basic sum assured should the insured die during the tenure of the policy.
  • Critical Illness Rider: Critical Illness Rider protects the insured in the event of a critical illness.
  • Waiver of Premium Rider: the future premiums are waived off if the insured becomes permanently disabled or loses his or her income as a result of injury or illness prior to a specified age. "This rider is very useful in case of a child policy where the life assured is a minor and therefore does not have any paying capacity
  • Income Benefit Rider: In case of death of the life assured during the term of the policy, certain percentage of the rider sum assured is paid to the beneficiary.
  • Surgical Procedure and Hospitalization benefit Rider: The former entails a payout, depending on the surgical procedure, the later covers the expenses involved in hospitalization by paying room charges subject to certain ceilings on both the amount and the number of days in a year that the insured can avail of the benefit.


Key Takeaways:
  • Riders are always attached to the basic policy, which a person takes. They cannot be bought separately or independently of a basic policy.
  • Riders are optional additional benefits that you can opt for with your insurance plan for a nominal extra amount.
  • One can also combine a set of riders and append it to the main policy.
  • Riders also cover risks, which are not considered important by a common man.
  • Riders also help one avoid owning excessive insurance, as one doesn't need to purchase separate policies for additional coverage.
  • There is a flexibility to stop the rider benefit without terminating the basic cover, which is not possible in the case of a separate policy.


A word of caution..

The policyholders should avoid those riders to the policy, which are least useful to them and include those, which may be critically important to their needs. One needs to choose the riders that are suited to one's specific needs. One should evaluate whether a policy rider offers additional protection that is worth the extra expense. While riders are important, they are essentially add-ons to an insurance policy. The lifer insurance cover therefore should always take precedence and be treated as the core necessity. Only after having adequately insured yourself, you should opt for the riders.

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Medical Insurance for the Elderly

Senior Citizens who have not had any medical insurance cover till 60 , or were covered by their employers and on retirement suddenly find themselves without a medical insurance net have the going tough for them, simply because many insurance companies do not take new policies after age 55 although they may renew policies till 75 years or even 80 years in many products. Also there is a myth that pre existing illness may not permit them to be covered.

We have tried to study the market for products that are available to senior citizens. There may be very few options but they are sufficient to provide a decent cover to those looking for medical insurance after 60 years of age. Some of the products we found are as follows -

1) The National Insurance Company offers the Varistha Mediclaim Policy upto 1 lakh only. Any person from above age 60 can avail of this policy .The premium of a 60 year old is about Rs.4180 which is expensive. A Critical Illness rider up to 2 lakhs is also available at extra premium

2) Oriental Insurance Company has a policy called HOPE - for Senior citizens. However there are too many exclusions and it covers only specified illnesses.

3) Star Insurance: This Company has two products
  • Regular Medicare the Regular product allows entry till age 65 subject to medical check up and allows renewals till 70 years. Cover upto 5 lakhs is possible
  • Senior Citizen Red Carpet - This product allows entry right upto age 69 and allows renewals till 80 years. However the Red carpet product allows a cover uptoRs.200000 only.

4) ICICI Prudential Medicare: A plain vanilla Mediclaim policy that allows entry till 65 and assures cover till 75 years. One can take a cover for upto 10 lakhs

5) Bajaj Allaince Silver Health - This is similar to the PRU ICICI product .Maximum cover is Rs.5 lakhs.

A policy cover of Rs. 4 lakhs will cost about Rs.12000 for a person of 60 years .Medical check up is a must except for the red carpet product offered by Star.Pre existing illness like Diabetes, Blood Pressure etc are covered after a certain number of years in all policies except that offered by Oriental.

Premium wise all policies offered by the private insurers seem to be on an equal footing. But look out of policy wordings for full list of exclusions and waiting period before inclusion of pre exiting illnesses so that you choose a product most suitable to you. You must take a look at the list of network hospitals should you have any preferred hospital for treatment.

You can also look at buying these policies for your parents if they have crossed the threshold limit of 55 years for new policies. Payment of insurance premium on behalf of parent entitles you for deduction upto Rs.20000 under section 80 D. This is over and above Rs.15000 for self.

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Term Plan

It's an Insurance only product without the complexities and high costs associated with traditional permanent policies. Term plans have no investment component and provide insurance cover only. Term life insurance is the original form of life insurance and is considered to be pure insurance protection because it builds no cash value. This is in contrast to permanent life insurance such as whole life, ULIP, Endowement plan etc.

If you have a family or dependents, term insurance is a must. Term insurance provides death protection to the owner of the policy or to the beneficiary / beneficiaries named in it should the insured die within the term of the policy. No other policy will offer you as much value for money as this one.

Let's say your current age is 30 years and you bought a term insurance policy for Rs 25 lakh. The term of the policy is for 20 years. If you pass away during this period, your family will be richer by Rs 25 lakh. But, if you outlive your policy, all your premiums (money that you pay to the insurance company to maintain your policy) would have gone down the drain.

Term plans have many attractive features.
  • Term plans provide life cover for different periods or terms at the lowest possible premium. For instance in the above illustration a person can get a Rs 25 lakh cover for an annual premium of Rs 5,505 for 20 years, a coverage that will cost him about Rs 1,12,850 and Rs 197,300 in endowment and money-back policies, respectively.
  • Term plans are especially beneficial for young people with dependents. Low premiums set you free to invest in high-growth assets such as equity, equity mutual funds, real estate etc.
  • Income and assets are generally not high in the early stages of one's career or marriage, but there may be dependents to care for. Later on, as assets build up, one can withdraw from this facility. As the premium is low, it is easier to keep the policy running even during career breaks.
The drawbacks of term plan are as under:
  • Cover is for a fixed term.
  • The cost of cover increases with the insured's age.
  • There are no bonuses and no cash value to accumulate within the policy.
  • The policy lapses unless the premiums are paid.


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ULIP (Unit Linked Insurance Plan)

ULIP is a scheme, which in addition to a life cover gives you an opportunity to make investments. It's a two in one plan that offers benefits of life insurance plus savings. In ULIPs, a part of the investment goes towards providing you life cover. The residual portion of the ULIP is invested in a fund which in turn invests in stocks or bonds; the value of investments alters with the performance of the underlying fund opted by you.

It is critical to understand how money gets invested once you purchase a ULIP. When you decide the amount of premium to be paid and the amount of life cover you want from the ULIP, the insurer deducts some portion of the ULIP premium upfront. This portion is known as the Premium Allocation charge, and varies from product to product. The rest of the premium is invested in the fund or mixture of funds chosen by you. Mortality charges, ULIP administration charges and ULIP fund management charges are thereafter deducted on a periodic basis.

Since the fund of your choice has an underlying investment - either in equity or debt or a combination of the two - your fund value will reflect the performance of the underlying asset classes. At the time of maturity of your plan, you are entitled to receive the fund value as at the time of maturity.

Why investment in ULIP makes sense?

Flexibility: You have an option to switch between the investment funds to suite the changing requirement in life. One can switch from high risk to low risk fund option. There is an added advantage of switching between funds, which offer different rations of equity, and debt, a few times without paying any extra fees. These options are designed to help you choose an option fitting your risk appetite, investment horizon, financial goals and life stage.

Multiple Investment options: If you are a risk adverse investor and believe in goal based investing, ULIP is an ideal financial product where you can park your funds. Depending on your life stage, you can decide on equity and debt mix in your plan.

Tax benefit: your investment is eligible for exemption under Section 80C of the Income Tax Act (subject to a limit of Rs 1 lakh). Besides the premium, the maturity amount in ULIPs is also tax-free , irrespective of whether the investment was in a balanced or debt plan.

Goal based investment: ULIP gives you a platform to plan for your child's education or child's marriage or your retirement needs. Since there is a life cover, in case you are not alive to take care of your family, your family financial goals remain intact and on track.

The Flip side of ULIPs:

High cost product: ULIPs are quite expensive, as most of the charges are recovered at the start of the tenure-usually in the first three years when your money is locked in. Insurers levy enormous selling charges, averaging more than 20 to 40% of the first year's premium, and dropping to 10% and 7.5% in subsequent years. So very little is actually invested during those years. Most investors discontinue early, or sign up for five- to 10-year terms, thus suffering high costs and poor returns. ULIPs make sense only if investments are made for a long tenure-say , 15 or 20 years-thus defraying initial costs.

ULIPs score low on liquidity. According to guidelines of the Insurance Regulatory and Development Authority (IRDA), ULIPs have a minimum term of five years and a minimum locking of three years. You can make partial withdrawals after three years. The surrender value of a ULIP is low in the initial years, since the insurer deducts a large part of your premium as marketing and distribution costs. ULIPs are essentially long-term products that make sense only if your time horizon is 10 to 20 years.

Death benefit: In case of ULIPs, policy holders gets either the sum assured or the value of the units one holds, whichever greater, in case of death. In case of mutual funds + term insurance, one avails the benefits of both; fund value and the sum assured in case of death.

ULIPS are subject to the vagaries of the market. Recently most of the ULIPs have under performed Nifty.

ULIPS does not fit into for investors with active fund management.

ULIPs are sold by agents promising very high return, which may not be achievable.

Conclusion:

It is always better to keep insurance and investment needs separate. A better alternative to a ULIP is a combination of low-cost term insurance and a direct exposure to equity / equity mutual fund. Term insurance provides coverage for a specified period and is amongst the cheapest insurance products. Its no-frills design only covers your life for a fixed period. Combining it with equity, balanced or debt mutual fund gives you the benefits of a ULIP at a much lower cost. In the end, your long-term returns are higher.

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Money Back Insurance Plan

Money-back plans can be defined as endowment plans that periodically return a certain percentage of the sum assured instead of waiting till the end of term. While in a pure term policy, the insurance company is liable to pay the sum assured only to the beneficiaries upon the death of the policyholder, the money back is insurance cum investment plan. The rider, however, is that the premium is significantly high in the latter compared to the former for the same sum assured.

Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money back policies provide for periodic payments of partial survival benefits during the term of the policy, of course so long as the policy holder is alive. An important feature of this type of policies is that in the event of death at any time within the policy term, the death claim comprises full sum assured without deducting any of the survival benefit amounts, which may have already been paid as money-back components. Similarly, the bonus is also calculated on the full sum assured. While the individual keeps getting a percentage of the sum assured during the lifetime of the policy, the percentage, the number of installments, and the intervening period between installments depend on the term and the policy opted for. If a policyholder outlives the term, he gets the remaining corpus with accrued additions like bonus. If he dies before the full term of the policy, his nominee or legal heirs get the insured sum, irrespective of the number of installments received, with the accrued benefits. Most insurance companies offer money-back polices and many package these as children's education plans to offer tailor-made solutions.

Money-back policies look expensive. For example: if a 30-year-old takes a policy of Rs 10 lakh sum assured for tenure of 15 years, the annual premium paid would be Rs 89,670 for a money-back policy, while it would be Rs 65,070 for an endowment policy. It gets worse if we look at buying a term policy of Rs 10 lakh and investing the difference of the premium in a risk-free PPF account that gives eight per cent return.

A money-back policy also takes a beating in terms of returns and performance. Look at it only as a forced saving tool and it works only if you reinvest the money returned at regular intervals. On the insurance front, you could be underinsuring yourself by opting for one.

Money back plans are ideal for those who are looking for a product that provides insurance cover and savings. You may also go in for this policy to utilize the tax-free sum of money receivable - to provide for certain financial goals like children's education, marriage expenses of daughter etc. It is a good safety net for individuals who are in their late 30s or early 40s and are looking at significant payouts after 10-15 years to fund certain expenses.

Before buying a money back plan, you should carefully check out the actual amount allocated towards the premium, how much of it is going to be accumulated and how much is the insurance company's charges. The most crucial aspect is reading the terms and conditions thoroughly and understanding each clause well. Also, you should make sure that the periodic payouts are sound enough to meet your anticipated needs. It is also beneficial to analyze the past performance in terms of declared bonuses. Though the past is not necessarily an indication of future performance, it gives a fair idea of the insurance company's commitment to its policy holders. An enquiry on the minimum number of years for which the premium is to be paid to keep the policy alive, is also a must check.

Also, while on the one hand, payout intervals are fixed and helpful for crucial life-stage planning, on the other, you don't have the flexibility to increase or decrease premiums and have a choice of sum assured to suit growing incomes and lifestyle. In case of surrender as well, it offers low paid-up value.

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Protect your dream house

Household insurance, in its basic form, covers the building structure and its contents against unforeseen events. Home Insurance policy secures the structure as well as the contents of your home against natural and man-made disasters. You can choose to buy insurance for only the building (structure) of your home, or only the contents (belongings) or both.

Home insurance policy covers broadly two things:

Building structure - Insurance covers for a building structure includes compensations paid for losses due to fire, storm, tempest, flood, riot, strike, lightning, explosion & implosion, landslides and rockslides, earthquake and damages to the structure due to acts of terrorism.

Contents inside the home - This coverage is for the loss or damage of the valuables inside the home like the electronic and electrical goods, furniture, clothing, jewelry and any other precious contents inside the home. The contents are covered on the market value of the items and in case of a loss the insurance claim is paid on the value of purchasing a similar new item exempting the depreciation value.

Some of the leading insurance companies that provide home insurance cover are ICICI Lombard General Insurance Co. Ltd. , IFFCO TOKIO , National Insurance Company Ltd , The New India Assurance Company Limited , Tata AIG , United Insurance, General Insurance Corporation Of India.

Most of the general insurance products being offered in the market today have sufficient cover for all kinds of perils that arise out of natural calamities. So whether it's flood, earthquake, storm, cyclone, fire or riots, among others, there's cover for all. Thus, while individuals can protect their homes, self and vehicles by taking householder's insurance, personal accident policy and motor insurance, respectively, fire and project insurance with earthquake extension may be a suitable option for business houses.

Coverage for structures and buildings pays for all the expenses related to the insured house's rebuilding or repair, while coverage for home contents protects your personal belongings, household items and furniture in case they are destroyed or damaged by one of the disasters you've been insured against.

As a package policy, a householder's insurance covers a combination of risks spread over 10 heads such as fire & allied perils, burglary & house breaking, all risk, plate glass, machinery breakdown, electronic equipment, pedal cycle, baggage, personal accident and public liability. While fire, lightning, explosion & implosion, riots, storm, cyclone and flood & inundation, among others, are covered under the head fire & allied perils, for instance, loss of or damage to jewellery and valuables caused by accident or misfortune while anywhere in India is covered under the all risk section.

Thus, if you want, you can also take individual policies like fire and allied perils and others to get limited cover. However, it is advisable to take a package policy rather than managing so many individual policies as it is very difficult to predict which natural disaster will strike you first.

Another advantage of a package policy is that by mixing and matching the sections, you can get the best mix of covers you need. Also, by buying cover under more than six sections, you can even get a premium discount of up to 20%. However, it is advisable not to buy a cover which you don't need. For instance, getting cover for loss of your personal baggage doesn't make any sense if you are not a frequent traveller. Similarly, the pedal cycle cover is not needed by a majority of households today. Fire and allied perils policy covers the building and its contents, whether it belongs to the policyholder or his family members. It includes cover against fire, earthquake, flood, landslide, storms, riots and terrorist attacks among others. Anyone who seeks just a plain cover from events such as fire or floods could take such a policy.

Then there are the other covers to pick and choose from. From cover against burglary to third-party liability cover, the scope of the cover could be broadened to the extent one wants to. But then, the greater the cover you go for, the premium also increases.

Insurance companies generally offer discount on the overall premium if one goes for multiple covers. Depending on the requirement of an individual cover must be chosen. One must also read the fine print carefully to look for noticeable exclusions. This could be known from the policy documents put on the website of many insurance companies.

It is important to make claims in a proper way. In case of loss or damage, insurance experts suggest that one should take photos of the damaged property to ensure effective claim settlement. It is also necessary to get quotations of repairs from the repairers as soon as possible. Home insurers also need to inform the insurance company about the damage at the earliest to start the process of claims settlement.

Home insurance, or house-owner/householder insurance as it is also known, is important, and you should purchase one. Be it a flat or a bungalow, rented or owned, it is advisable to insure your house and belongings to guard against unforeseen risks. It goes without saying that the loss of human life can never be compensated, but the financial shocks from unforeseen eventualities can easily be absorbed just by taking adequate and the right insurance.

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How to evaluate Endowment Products

A strong sales pitch and complicated return tables is all that insurance agents need to sell endowment or ULIP products. On the face of it most investors will find the product attractive because of the fantastic end values that it promises. Generally when return projection tables are shown to potential investors a rate of 6 %and 10 % is used as per IRDA guidelines. Since the products generally have a term of 15 to 20 years, the power of compounding ensures that end values for even small amounts of premium looks attractive.

How does the investor evaluate an endowment product in an uncomplicated manner?

Here are the steps to follow-

1) Find out the life cover and the period for which such a cover will be valid. Remember the most basic reason for buying a product from an insurance company is to get a life cover.

2) Most insurance companies offer premium quotes on pure term cover products on their websites. Check these sites and find out the cheapest cover available for similar term and amount.

3) From the premium payable on your endowment product reduce the term insurance premium cost to get the investment surplus. For example assume that an endowment product covers you for 20 years for a sum assured of Rs. 5 lakhs. The premium for a 35 year old would be Rs. 30,000. Lets say the end value of this investment as per the table given by your agent is Rs. 12 lakhs @ 10% p.a .A term cover for a similar sum assured would be Rs. 5,000. The investment surplus here would be Rs. 25,000 ( Rs. 30,000 minus Rs. 5,000)

4) Use the following formula to figure out end value of Rs. 25,000 invested every year in a mutual fund [((1+r) ^t)-1]/r
Where
r = rate of term used in the endowment table (10 % in our case)
t = Term of the insurance cover

You will find the end value of Rs. 25,000 invested for the next twenty years @ 10 % will amount to Rs. 14 lakhs. There is a difference of over two lakhs between the end values of the endowment and the term plus mutual fund investment combination. Clearly the better option for the investor is to buy a cheap term cover and invest the rest himself in long term investments like equity to get better returns than the endowment product. Remember even the 10% shown in the endowment table is only indicative and does not amount to a guarantee by the insurance company to deliver such returns. Hence there is as much chance of you achieving theses returns in a equity PMS or mutual fund as much as the insurance company would.

You are committing to a long term investment and it is better to be sure than sorry. Take your time to analyze the product and decide. For those already invested in endowment plans, where first two premiums have already been paid, it is suggested that you continue with the investment as you have already paid a large portion of the costs.

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Term Insurance alone will not protect your financial goals

Financial advisors have always tried to drive home the importance of buying term insurance cover. It provides protection at a reasonable price. The reasonable price tag comes because unlike most popular insurance products like ulips and endowment plans term insurance has very little selling and admin costs priced into the premium.

The amount of cover required is calculated by the following formula, to ensure that the cover is most adequate and avoid over or under insurance.

Present Value of dependants expenses till life expectancy
Add: Present Value of all Goals like child's education, purchase of larger home etc.
Add: Outstanding Liabilities
Less: Existing Assets
Less: Existing Insurance

While calculating this present value, we take into account a rate of inflation and a rate of investment return.

Lets us now take an example of a 35 year old, who wishes to educate his child abroad. He needs funds in the next 18 years and the amount required in today's value terms is Rs. 32 Lakhs .Let us assume he has assets worth 2 lakhs allocated for this goal and earns a return of 10 % on these assets . Inflation is at 8 %. Let's assume that this 35 year old buys term cover for 30 lakhs for the next 18 years. Thus today he will have adequate assets to meet his goal. This adequate amount is Rs. 30 lakhs of insurance claim plus Rs. 2 lakhs of assets i.e. a total of 32 lakhs.

In the next 5 years the value of this cover after adjusting for inflation would be about 19.7 lakhs. What this means is in real terms, the total assets allocated towards child's education will be equal to 19.7lakhs of insurance money and Rs. 2.04 lakhs worth of assets (asset value growing at real rate of return*). In short inflation has eroded the amount available from the term cover. Also the insurance cover will not be available if the person survives the term of the insurance.

It is for this reason that term cover has to be accompanied by regular savings that earn positive inflation adjusted returns.

So if our friend in this example does not want inflation to eat into his goals he will need to save not for a sum of Rs. 30 lakhs but a amount of 11.6 crores (cost of education growing at the rate of inflation less available assets at the end of 18 years). He will also need to invest regularly and accumulate assets that earn him a positive inflation adjusted return. At a return of 8 % p.a. he will need to save 3 lakhs a year, while at 10 % he needs to save 2.5 lakhs to achieve his goal. The greater the returns or greater the amount saved the sooner will the amount required for goals be achieved and the sooner can one stop or reduce the term cover.

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Surrender Value

What is cash or surrender value?

Cash value is the sum of money an insurance company will pay to the policyholder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs. This cash value is the savings component of life insurance policies particularly whole life insurance policies. If due to any reason when you wish to terminate your contract of insurance, you can surrender your policy to them and get its cash value.

When can I surrender my policy?

After you pay premiums for at least three consecutive years, your policy acquires a surrender value and you can surrender the policy. If you have a single premium policy, you can surrender your policy after the first year in certain cases.

Is it advisable to surrender insurance policy?

No. Unless there is a genuine and urgent need. During the early years of a whole life insurance policy, the savings portion brings very little return compared to the premiums paid. Should you decide to go in for another insurance at this stage further insurance would be available to you at a much higher premium because your age would have advanced since taking out the earlier policy. Therefore retention of earlier policies and continuation of all policies without allowing them to lapse is the best strategy for continuing life insurance protection. A mid-term surrender would result in the policyholder getting a sum of what has been allocated towards savings and the earnings thereon.

What do policyholders stand to lose when they exit the policy?

Once you decide to exit the insurance policy, all the benefits associated with it - including the protection cover - will cease to exist. Therefore, ideally, you should consider terminating the policy only if you believe that you have been sold a policy that does not fulfill your requirements, or the features prove to be different from what was promised to you. Also, if you surrender the policy during the early years of the policy, say three years from its inception, the surrender value will amount to roughly 30 per cent of the premiums paid to date. Also, insurance companies exclude the premium paid in the first year while calculating the surrender value. In case of unit-linked insurance plans (ULIP), particularly, the insured stands to lose a great deal as the premium allocation charges in these schemes are front-loaded. In other words, a sizeable chunk of the premium paid in the initial years goes towards charges, including agent's commission, and the remaining, substantially reduced amount, is directed to your fund.

Do all policies acquire surrender value?

No. Only those policies which contain an embedded savings component - like ULIPs and endowment plans - will partially return the amount invested for the life cover. Surrendering term plans, which are pure protection covers with no savings element, will result in lapsation of the policy.

Is surrender value relevant if a policyholder does not terminate his policy?

The surrender value acquired by your policy is also used to calculate the loan amount you are eligible for. Some insurers grant loans against life insurance policies to the extent of 85-90 per cent of the surrender value. You can also pledge the policy to a bank and borrow against the same. Do note, however, that borrowing during the initial years of the policy may not be a good idea because of the low surrender value it would acquired till then.

Can you can cancel or surrender the policy in total or in part?

Yes. If you surrender your policy in the early years, there may be little or no cash value. If you need to stop paying premiums, you can use the cash value to continue your current insurance protection for a specific period of time or to provide a lesser amount of protection to cover you for as long as you live.

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