Type of Annuities in Life Insurance

Annuities

Annuities are often described as the ‘reverse’ of life insurance; under a life insurance contract the insurer starts paying upon the death of the insured, but under an annuity contract the insurer usually stops paying upon the death of the annuitant.

Annuities are bought from life insurance companies. They may be purchased by a single lump sum payment or by a series of regular contributions spread over, possibly, many years. Payment may be made by the person who is to be the annuitant or another annuity purchaser such as the annuitant’s employer, other personal benefactor or a pension scheme.

An annuity is a series of regular payments from an annuity provider to an individual, referred to as the annuitant.

Annuities can be either immediate or deferred annuities:

• Immediate annuities vest (become payable) immediately after they have been purchased with a lump sum. The annuity payments commence at the end of the month, quarter, half-year or year as per the features of the policy/option exercised by the policyholder.

• Deferred annuities are paid for in advance. The annuity purchase price may be a lump sum paid at commencement before the annuity is due to vest (be paid). Alternatively, deferred annuities may be bought by paying instalments over a series of years before vesting date.

Life annuity

As the name suggests, in this type of annuity the annuitant keeps receiving annuity payments from the insurance company throughout their lifetime. The annuity payments cease on their death.

For example, if Sanjay buys a life annuity plan then he will keep getting regular annuity payments from the insurance company until he dies.

Be aware

Life annuities (immediate and deferred) are often bought with money that is tied to pension purchase and which cannot be used for any other purpose (see section B6 below on pension plans for more detail).

Guaranteed period annuity

In this type of annuity the annuitant can choose to receive the annuity payment for a minimum fixed number of years such as 5, 10, 15, and 20 or 25 years regardless of whether the annuitant is still alive. If the annuitant dies during the selected term, annuity instalments for the remaining part of the selected term will be paid to the beneficiaries. If the annuitant is still alive after the guaranteed period has elapsed the payments are continued until his death.

Joint life, last survivor annuity

In this type of annuity there are usually two annuitants, e.g. husband and wife. After the first death, regardless of who dies first, the remaining spouse continues to receive the same level of annuity payment throughout their lifetime, i.e. 100% of the level paid whilst they were both alive.

Another variant of this type of annuity is when the annuitant gets annuity payments during their lifetime, and after the death of their spouse (for example) gets annuity payments at a reduced percentage during their lifetime, e.g. 25%, 50% or 75% of the original amount of annuity. With this type of annuity the payments are made at the 100% level as long as the first named annuitant is still alive. If on their death the first named annuitant’s spouse is still alive, they will receive the reduced percentage, as stated in the policy, until they die.

Life annuity with return of purchase price

In this type of annuity the annuitant receives regular annuity payments during their lifetime. On their death, the original purchase price is returned to the nominee/beneficiary. The purchase price refers to the value of the investment at the end of the accumulation phase (with which the annuity was purchased) or the lump sum amount paid at the time of purchasing the annuity, depending on the circumstances.

Increasing annuity

With this type of annuity the terms can be similar to any of the above, but the annuity increases every year by a fixed percentage or in line with an agreed inflation index.

Anand Khemka
+91-9910936925
+91-8287041341

Health Insurance Products, Their Features and Benefits

Types of health plan

There are basically four types of health plan available in the market. Let’s look at each of them in turn:

Individual health insurance plan
As the name specifies this plan covers a single individual and caters for their health requirements.

Family floater health insurance plan
A family floater plan is different from an individual health plan. In this type of plan family members can be covered. An individual can cover themself, their spouse, children and parents. The insurance company may specify the number of people that can be covered. In this type of plan the insurance cover is shared among the family members covered in no fixed proportions.

Group health insurance plan
This health insurance plan provides cover to a group of people who are brought together for a common objective. For example, a group can be the employees of a company. Many employers provide health cover for their employees to protect them against medical emergencies and some extend the group health cover to the families of the employees.

Daily hospitalisation cash benefit plan
In this type of health plan the insurance company pays the insured a fixed amount on a daily basis in the event of hospitalisation. The daily amount is fixed at the time of taking out the policy and is paid for the number of days the insured is hospitalised, irrespective of the actual amount spent on treatment (subject to the terms and conditions of the policy). The daily amount paid is fixed and may be more or less than the cost of actual treatment.

The insurance company may pay an additional amount on a daily basis if the insured is admitted to the Intensive Care Unit (ICU). In the case of critical illness or surgery an additional lump sum amount may be paid subject to the terms and conditions of the policy. The daily amount paid under this policy can be in addition to any other medical insurance policy that the insured may have. The policy has a limit on the total number of days in a year for which the daily hospitalisation cash benefit can be used. This is specified in the policy terms and conditions.

Features and benefits of health plans

Health insurance plans come with various features and benefits. Some of these include:

1. Pricing: the premium for a health insurance plan depends on the individual’s age, fitness, habits and family medical history. If all other factors remain constant, premiums increase with the age of the policyholder. So it is always better to take out a health plan as early as possible as the premium paid at younger ages is not very significant but will increase as the policyholder gets older.
2. Cashless facility: some health plans offer a cashless facility. In these plans the person covered under the plan is given a photo identity card. The insured needs to inform their health insurance company at the time of their admission to a network hospital. This is the group of hospitals that have contracted with a health insurance company to provide healthcare services. On approval the insured does not pay the hospital deposit amount or the treatment expenses, rather the invoices are settled directly by the insurance company as per the terms and conditions specified in the policy.
   
   In the case of admission to a non-network hospital, the insured has to settle the hospital bill themselves and is later reimbursed by the insurance company, subject to the submission of required documents and other terms and conditions of the policy.
3. Medical examinations: most health insurance companies require the proposer to undergo a medical examination before the policy can be issued and, depending on the age of the proposer, a number of tests may be carried out. Based on the doctor’s report, the health insurance company decides whether to accept the proposal and at what price.
4. Pre-existing illnesses: most health insurance policies cover pre-existing illnesses after a specified time period; commonly referred to as a ‘waiting period’. Some insurance companies may exclude some pre-existing illnesses altogether and this information is specified in the policy terms and conditions; for example a pre-existing illness like diabetes may be covered after, say, three or four years. The terms and conditions relating to treatment of existing illnesses may vary from company to company.
5. No-claim bonus: if there is no claim in a year then, at the time of renewal, the insurance company may offer a no-claim bonus, i.e. the insurance company will give a discount in the premium due next year.
6. Permanent exclusions: health insurance plans have some permanent exclusions which are specified in the policy, e.g. misuse of drugs or not following medical advice.
7. Immediate care: treatment is available immediately and at a time convenient to the policyholder. There will be no waiting for a future appointment whilst the policyholder is suffering from a treatable medical condition.
8. No need for lump sums from savings or loans: the policyholder does not have to worry about how to manage when the need for medical payments arise because these will be paid by the insurance company as a result of the premiums already paid.

Riders

As discussed in section A2, riders allow policyholders to customise their insurance cover with additional benefits. In this section we shall consider some examples of riders.

Accidental death benefit (ADB) rider
In the event of the death of the insured due to an accident, this rider provides for an additional amount over and above the normal sum insured, as specified at the time of taking the rider. The death should be a result of an accident by external, violent, unforeseeable and visible means. The payment made under this rider is subject to terms and conditions specified in the policy.

An ADB rider has a high significance in India considering the increasing number of deaths due to accidents. The insurance company specifies the products with which this rider can be taken and also specifies the list of exclusions under which the benefit of the rider will not be payable.

Term rider
This rider can be used to enhance the death cover amount in a policy at a nominal cost. If an individual wants a savings policy like an endowment policy or money-back policy and at the same time wants to increase the death cover without buying a separate term insurance policy, then they can opt for this rider. The insurance company specifies the products with which this rider can be taken and also specifies the list of exclusions under which the benefit of the rider will not be payable.

Critical illness (CI) rider
This rider provides payment of a specified amount on the diagnosis of a critical illness (CI). The payment can be used for any purpose including payment for medical treatment, hospital admissions or assisting with the loss of income after the diagnosis of a CI. The illness should be covered in the list of CIs specified by the insurance company for this rider. The list may differ among insurers.

Insurers specify the minimum entry age, maximum entry age, maximum maturity age and minimum and maximum sums insured for the rider. These figures vary among insurers. The insurer may also specify other terms and conditions pertaining to the rider. The insurance company specifies the products with which this rider can be taken and also specifies the list of exclusions under which the benefit of the rider will not be payable.

Waiver of premium (WOP) rider
This rider waives future premiums in the event of the disability of the policyholder due to illness or accident resulting in their inability to work. The insurance company continues paying the premiums on behalf of the policyholder and the policy continues normally.

This rider is ideal for helping to prevent a policy lapsing due to non-payment of premiums arising from the disability or death of the policyholder.

In the case of some child plans the WOP rider comes built-in, while for others it is an optional benefit. The WOP rider ensures that in the event of the death of the premium-paying parent the policy continues normally and the child’s future does not suffer. In such cases, the premium is waived until the intended benefit, as per the policy terms, reaches the child.

Insurers specify the minimum entry age, maximum entry age, maximum maturity age and the minimum and maximum sums insured to which the WOP applies for the rider. These figures vary among insurers. The insurer may also specify other terms and conditions pertaining to the rider. The insurance company specifies the products with which this rider can be taken and also specifies the list of exclusions under which the benefit of the rider will not be payable.

Other riders offered by insurance companies
Some other riders offered by insurance companies include:
Surgical care rider: This rider pays the treatment costs for surgery involving the insured’s brain, heart, lungs, liver etc. subject to the terms and conditions specified at the time of opting for the rider.

Hospital care rider: This rider pays the treatment costs in the event of hospitalisation of the policyholder, subject to the terms and conditions specified at the time of opting for the rider. Under this rider payment may be made in two ways. An insurance company may pay the actual cost for the treatment (subject to what is covered in the rider terms) or it may pay a specified amount on a per day basis for the number of days the policyholder is hospitalised. The insurance company may also pay an additional amount on a per day basis if the policyholder is admitted to ICU. The practice among insurance companies varies. This rider is similar to the individual policies mentioned in section B1.

Guaranteed insurability rider: This rider gives the insured the right to increase their cover in response to different life events, such as marriage, child birth, buying a house etc.

Features and benefits of riders

Features and benefits of riders are listed below:

• Additional cover: by adding riders the insured can purchase extra protection. Riders help to enhance the quality and scope of cover.

• Nominal cost: riders come at a nominal cost compared to buying a new plan. For example if a person buying an endowment plan wants to enhance the death cover, then instead of buying a separate term insurance plan they can add a term rider and enhance the cover at a nominal cost.

• Customisation: riders help in customisation of the health plan according to the preference of the customer. Insurers also find it convenient to have a small number of basic plans with riders as options to help the client have a number of options to choose from. Each plan can be taken with one or more riders. Five basic plans and seven riders, effectively provide 35 or more options.

• Flexibility: many riders can be added or removed at the will of the policyholder, thus providing a high degree of flexibility.

• Tax benefits: premium paid for riders qualifies for deduction from taxable income under relevant sections of the Income Tax Act.

IRDA regulations for riders
As per the IRDA regulations issued in April 2002 and amended in October 2002:

• the premium on all riders relating to health or critical illnesses, in case of term or group insurance products shall not exceed 100% of the premium of the base policy;

• the premium on all the other riders put together should not exceed 30% of the premium on the base policy; and

• the benefits arising under each of the riders shall not exceed the sum insured under the base policy.

By these regulations the IRDA has put a limit on the number of riders that can be offered with any policy. It is possible that these limits may be amended from time to time.

Anand Khemka
+91-9910936925
+91-8287041341

Tax and inflation implications for savings products

Tax and inflation implications for savings products

An individual’s personal tax position will have considerable influence on the choice of suitable savings products. 

Tax implications
The last quarter of the financial year is the busiest time for insurance agents and other financial advisers. It is during this time of the year that salaried individuals and others are busy tax planning and making investments in tax saving products to minimise tax deductions from their salaries. In fact it could be said that many people make investments purely to minimise their tax liabilities.

This is the wrong approach towards savings and investment, as there needs to be a proper financial plan in place before a particular investment product is chosen. In this section we will look at the tax implications for savings products.

Income Tax Act 1961
This Act came into effect on 1 April 1962 and has undergone several amendments since then. Every major amendment is effected through a Finance Act (at the time of the union budget presentation) and other amending acts. Additionally, the Central Board of Direct Taxes (CBDT) issues circulars clarifying the various provisions related to income tax.

When working on effective tax planning, it is important to understand the exemptions and deductions provided by the Government. The investor can take advantage of the following tax deductions under various sections of the Income Tax Act as per prevailing income tax rules.

Section 80C

• Under section 80C a deduction from taxable income is allowed for investments made in the following products: 

• Life insurance premium paid for traditional products.

• Unit-linked insurance plans (ULIPs).

• Pension plans.

• Repayment of the principal component of home loan.

• Employee provident funds (EPFs).

• Equity linked saving schemes (ELSs).

• Tuition fees paid for children.

• Five-year tax saving bank deposits.

• Public provident funds (PPFs).

• National savings certificates (NSCs).

• Senior citizen savings schemes (SCSs).

• Stamp duty and registration charges.

• Infrastructure bonds.

• Pension funds. 

• Post office time deposit – five years.

Section 80D
Section 80D allows deductions from taxable income for the premium paid towards health insurance for the individual, their spouse and children. For premiums paid for health insurance for parents, an additional deduction is allowed. For premiums paid for senior citizens, a higher deduction from taxable income is allowed compared to the deduction made for other individuals.

The amount allowed as deduction from taxable income is subject to review from time to time.

Section 80DD
Under this section a deduction from taxable income is allowed for expenditure (up to specified limits) incurred on medical treatment/training/rehabilitation for a disabled/handicapped dependant. The expenses can be for the treatment for disability, disease/ailment (as specified under this section) of the individual or a dependent relative. To take advantage of this deduction a certificate in the prescribed format needs to be produced by a medical practitioner.

Section 80E
Under section 80E a deduction from taxable income is allowed for the interest paid on an education loan.

Section 24(b)
Under section 24(b) a deduction from taxable income is allowed on the interest paid (subject to specified provisions) on a home loan.

Inflation implications
We looked at the impact of inflation on insurance cover in chapter 5. When considering financial planning the investor must make sure that the amount required for meeting future expenses is calculated taking into consideration the impact of inflation on the prices of goods. If inflation is running at 5% and you earn 8% on your investments in a bank fixed deposit, you would have earned a return of 3% net of inflation.

Of course, in real life the situation is not quite as simple as this. The inflation rate would not be exactly as predicted. It could be higher or perhaps even lower. It is always a good practice to assume a higher rate of inflation rather than the actual inflation rate for the past five or ten years when producing future calculations. The returns on investments may also be subject to taxation. Inflation and taxation together suppress the real returns which may turn out to be lower than the anticipated returns.

As a result, an investor has to make sure that the returns on their investments should be sufficient to provide them with enough income after taking into account inflation and tax deductions.

Implication of interest rates on savings products

Changes in interest rates will affect those offered by savings and investments products and can, therefore, have an adverse effect on the investment decisions of an investor.

In this section we will look at the effects of changes to interest rates.

Increase in interest rates
In the case of an increase in interest rates, the interest rates on deposits and loans go up. The decision to increase interest rates is made by the Central Bank of the country (Reserve Bank of India) when it is in the interests of the country’s economy to encourage savings and to discourage people from borrowing for unnecessary expenditure, and thereby reducing the demand for credit. The effects of an increase in interest rates are as follows:

• The demand for lending products from banks and financial institutions suffer as borrowing becomes expensive for the individuals and they postpone their purchases. 

• On the other hand, bank deposits with higher interest rates become more attractive and people choose them resulting in an increase in savings. There is also an increase in the purchasing of bonds which have higher interest rates. 

• However, a high interest rate scenario is not good for the stock markets. Borrowing becomes costly for companies which leads to higher interest payments. This can put pressure on the profitability of companies which can lead to the selling of shares and subsequently lower share prices.

Decrease in interest rates
In the case of a reduction in interest rates, borrowing becomes cheaper and there is an increase in investments made by companies. This is done to stimulate the economy so that there are more investments and an increase in the demand for goods and services in the economy. The effects of a decrease in interest rates are as follows:

• Low interest rates increase the demand for lending products. Investors take out loans for the purchase of financial assets, which results in increased consumption. 

• Investment in other financial products (like equities and real estate) is preferred compared to investment in bank deposits due to the low interest rates offered. 

• Investors who have already locked-in their investments at a higher interest rate in bonds and bank deposits are at an advantage when interest rates fall.

Anand Khemka
+91-9910936925
+91-8287041341

Best Savings products

Types of savings products

In this section we will outline the following types of savings products:

1. Life insurance
2. Bank deposits
3. Mutual funds
4. Shares
5. Savings products
6. Bonds
7. Post office savings
8. Gold and silver

Life insurance

Many life insurance products, along with the primary life cover, come with a savings element. The savings component of the premium is invested by the insurance company on behalf of the policyholders and the returns earned are shared among policyholders in the form of bonuses.

In participating plans like endowment plans and whole life plans the insurance company takes the investment risk. In ULIPs the investment risk is borne by the policyholder.

Besides meeting protection needs, life insurance products are an excellent choice for investors to invest funds for long-term goals like children’s education and marriage, retirement and others.

Bank deposits

Bank deposits are one of the oldest and most preferred savings products. They are an instrument where an individual has to invest a lump sum amount with a bank for a fixed tenure at a fixed interest rate. Bank deposits are commonly known as fixed deposits or term deposits. Bank deposits are considered safer than many other investment products and they offer decent returns. In a bank deposit the amount, tenure, interest rate and method of payment of interest are decided at the inception of the deposit.

The investor can choose from three types of deposits:

Traditional deposits: With this type of deposit the bank pays the interest on the depositor’s fund on a monthly/quarterly/half yearly/yearly basis as chosen by the depositor at the time of making the deposit.

Cumulative deposits: With this type of deposit the bank pays the principal and the total interest at the end of the term. In a cumulative deposit the interest is normally compounded on a quarterly basis.

Recurring deposits: With this type of deposit the investor deposits a specified amount every month over a chosen time horizon. These deposits are ideal for people looking to accumulate money for financial goals like children’s education, marriage, buying a vehicle etc.

The interest rate on these deposits varies with the maturity period. Bank deposits provide returns in the form of an interest payment. The principal amount deposited with the bank at the time of opening the deposit is returned back to the depositor on the maturity of the deposit.

Mutual funds

A mutual fund is a fund that brings people with a common objective together. Money collected from these people is invested on their behalf and the returns are shared back amongst them. Mutual funds are managed by Asset Management Companies (AMCs). The AMCs invest the money according to the objective of the scheme in equities, debt instruments, money market etc. The AMCs employ qualified and experienced fund managers (also referred to as portfolio managers) who are responsible for investing the funds based on the type of fund (or scheme) that is chosen by the investor.

The main advantage of investing in mutual funds is risk diversification. The individual’s funds are spread over different securities to get optimum returns with minimal risk.

Mutual funds provide two types of income:

• regular income in the form of dividends declared by the mutual fund scheme from time to time; and

• capital appreciation where the mutual fund units are sold at a price higher than the price at which they were bought.

However, there can also be capital loss in mutual fund investments. If the financial performance of the companies in which the mutual fund scheme has invested is poor, it will lead to a fall in the share prices of those companies. This in turn will reduce the value of the investments of the mutual fund investors who have invested in the units of that scheme. You can see therefore that the performance of a mutual fund scheme is based on the performance of the securities in which the scheme has invested.

Shares

Equity shares represent ownership of a company. Whenever a company wants to raise money for its growth, set up a new production unit, acquire another company, acquire technology, working capital etc. the company may offer shares (ownership in the company) to the public.

Example

Let’s assume a company’s total capital of Rs. 10,00,000 consists of 1,00,000 equity shares of Rs. 10. If the owners (promoters) of the company want to raise money for the company’s expansion by offering 10,000 shares to the public; then it is said that the owners are diluting 10% of their ownership in favour of the public. If an individual acquires 100 shares from the total 10,000 shares on offer, they are said to have acquired 0.1% (100 shares out of a total 1,00,000 shares) shareholding (ownership) in the company.

Once the shares are offered to the public, the buying and selling of shares takes places through stock exchanges. Stock exchanges act as intermediaries and offer a trading platform for the buying and selling of shares between individuals. However, individuals cannot directly buy or sell shares through the stock exchanges, they have to place their buy and sell orders through stock brokers (members) of the stock exchanges. The two main stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Individuals who purchase shares have the right to receive a share in the company’s profits in the form of dividends. The profits are distributed in proportion to the number of shares held by the shareholders.

Equity shares provide three types of income to the investor:

Dividend income: The company may share a portion of the profits that have been earned with the shareholders in the form of a dividend declared from time to time.

Bonus shares: When a company accumulates large cash reserves, it capitalises them by issuing bonus shares (free shares) instead of distributing them as dividends. Bonus shares are issued in proportion to the existing equity share capital of the company. The issue of bonus shares is a vote of confidence from the management to its shareholders about the good financial performance and future prospects of the company.

Capital appreciation: When shares are bought at a lower price and sold at a higher price, the difference between the two prices is known as the profit or capital appreciation.

Bonds

Bonds are similar to bank fixed deposits in that they provide regular income to the investor in the form of interest payments. However, bonds can also be traded between buyers and sellers. Apart from banks, bonds are also issued by the Government, companies and other institutions to raise money from the public. In simple terms, a bond is a loan provided to the issuer by the investors. Hence in the case of bonds, the investors are the lenders who receive interest on their loan. At the end of the tenure the original amount (principal) is returned back to the lender.

There are different kinds of bonds in which the investor can invest, these include:

• Corporate bonds;

• Government securities (G-secs);

• Commercial paper; and

• Treasury bills.

Post office savings

Post offices in India offer several savings products such as:

• National savings certificate (NSC).

• Kisan vikas patra (KVP).

• Public provident fund (PPF).

• Post office savings account.

• Recurring deposit account.

• Time deposit account.

• Post office monthly income scheme (POMIS).

• Senior citizens saving scheme (SCSS).

These are all products in which an individual has to invest a lump sum amount for a fixed period of time (except for recurring deposits where regular investments are made and savings accounts). The investor earns a fixed interest rate which is specified at the time of investment.

Investment in gold and silver

India is one of the world’s largest importers of gold, and gold and silver are one of the most popular and oldest savings instruments in India. There are various ways of investing in gold and silver, the most popular in India being jewellery. Other ways of investing in gold and silver include bars and coins sold by banks and jewellers. Apart from physical gold, investing in gold in electronic format is also increasing. Gold ETFs (exchange traded funds) are like mutual funds in which gold units can be traded in electronic format on a stock exchange, just like shares. In gold ETFs one unit represents one gram or half a gram of gold.

Reasons for investing in gold and silver include:

• Good returns;

• Portfolio diversification;

• Hedge (protection) against inflation; and

• Insurance against uncertainties.

Features and benefits of savings products

We will now look at the main features and benefits offered by the various savings products and how these features influence their suitability to meet a particular individual’s needs.

Capital or income growth

Some savings products provide regular income (interest paid by a bank fixed deposit), some provide capital growth (gold) and others provide a mixture of the two (equity shares). All of these products will be discussed later in the chapter. Remember that the objective of the individual investor should be matched with the investment profile of the product.

Guarantees

Some products are available with guaranteed returns, some provide variable returns and others provide a mixture of guaranteed and variable returns. So products should be chosen based on the risk profile of the individual client.

‘Lock-in’ period

Most savings products have a stipulated ‘lock-in’ period during which the funds cannot be withdrawn by the individual. Therefore the client should carefully determine their needs and the length of time for which their money will be inaccessible before deciding which product to invest in.

Penalties

Penalties are associated with the premature withdrawal of funds from fixed term contracts. This is an important consideration which needs to be evaluated before investing in such products.

Risk

All savings products carry a level of risk and these can be rated as low risk, medium risk and high risk. Low risk products offer lower returns compared to high risk products. Hence the products should be carefully chosen based on the individual’s circumstances and their risk appetite.

Buying and selling mechanisms

Buying and selling mechanisms are important in two ways: convenience to the individual investor and the speed of the transaction.

Flexibility

Flexibility refers to the ability to switch between different forms of investment, the payment of variable contributions, and even to temporarily stop making contributions altogether. These features can easily increase the attractiveness of the product. Flexible products also allow for the partial withdrawal of funds without affecting the product in force. Generally, the greater the product flexibility, the more suitable it is. However, features like allowing a temporary break in contributions and partial withdrawals can result in lower long-term investment returns.

Example

Unit-linked insurance plans (ULIPs) allow policyholders to switch their investments from one fund (equity) to another fund (debt). They also allow policyholders to take premium holidays (temporarily stop making contributions) and to make partial withdrawals.

The need for savings/investment advice

The savings needs of each and every individual are unique. Most individuals do not make wise decisions in terms of investments as they will often invest in certain products without fully evaluating the product features and their own financial needs. These decisions are often taken at random, based on peer influence or even as a last-minute resort to save on taxes.

In this section we will discuss the two major reasons for which professional advice should be taken by individuals with regards to their savings and investment needs.

Ignorance about the

financial planning process

Individuals are often unable to identify their own savings and investment needs. They concentrate more on meeting their short-term needs rather than on their long-term requirement for funds. Also, the tendency to spend rather than save is greater as the immediate appeal of consumer goods is more apparent and persuasive than the intangible, future benefits of saving.

Professional insurance agents help individuals by taking them through the financial planning process in which they can identify their present and future financial needs. Some of the long-term goals an individual may have include saving money for their children’s education and marriage, saving money to purchase a house, or repaying the existing home loan at an earlier date and planning for their retirement.

Ignorance about the full range

of financial products available

The majority of people are not aware of the various savings and investment products that are available in the market. As a result they are unable to select suitable products which meet their financial needs.

It is here that the insurance agent can offer assistance by:

• having a good knowledge of the various products that are available;

• matching the products with the individual’s financial needs; and

• evaluating the tax efficient returns of the products, taking into account the tax treatment of the products and the tax eligibility criteria of the individuals.

In summary, agents should guide the prospective investor using their financial planning skills to offer quality advice thereby encouraging saving in a purposeful and needs-based manner, and not necessarily just for maximizing returns. 

Anand Khemka
+91-9910936925
+91-8287041341

Basic life insurance products

Basic elements of a life insurance plan

Life insurance companies offer various plans covering the risk of dying early and the risk of living too long. Most insurance plans offered by insurance companies in India have two basic elements: 

• Death cover – this amount is paid to the nominee/beneficiary in the event of death of the life insured
  during the term of the policy. 
• Maturity benefit – this amount is paid on the maturity of the policy if the life insured survives through the term of the policy. Some policies like money-back policies also make periodic payments to the life insured during the term of the policy before maturity, known as survival benefits. Money-back policies will be discussed in detail in section B2M of this chapter.

Basic life insurance plans

The main types of life insurance plans offered by the insurance industry are discussed below. 

Term insurance plan

This is the most basic plan and simplest form of insurance offered by the life insurance industry. In this plan the life insurance company promises to pay a specified amount (sum insured) if the insured dies during the term of the plan. If the life insured survives the entire duration of the plan then they will not be entitled to anything, meaning that there is no maturity benefit with such policies.

So in short, this plan offers only death cover in the event of the death of the life insured during the period of the plan.

Key points: 

• Term insurance plans offer only death cover. 
• They are the simplest form of insurance plans offered by insurance companies. 
• Term insurance plans are the cheapest insurance plans available in the market. For a small premium an individual can take out a big protection cover against their liabilities. 
• Tenure: as the name suggests these plans offer protection only for a specified term. Normally the term starts from 5 years and runs to 10, 15, 20, 25, 30 years or any other term chosen by the insured and agreed by the insurer. 
• Protection against liabilities: to cover larger liabilities like home loans or car loans, term insurance cover is the best solution. 
• Insurance companies, under some term plans, allow the life insured to increase or decrease the death cover during the term of the plan. 
• Minimum and maximum sum insured: for most term plans the insurance company specifies the minimum and maximum sums insured. For some insurance companies the maximum sum insured is subject to underwriting. 
• Minimum and maximum age: most insurance companies specify the minimum and maximum age at entry and exit for term plans. 

Return of premium (ROP) plan

Some insurance companies also offer variants of term insurance plans in the form of return of premium plans. If the life insured dies during the term of the plan, the insurance company pays the specified amount (sum insured) to the nominee/beneficiary. If the life insured survives the entire policy tenure then on maturity the insurance company returns part of the premium, or the entire premium, to the life insured according to the terms of the policy.

In another variant of term insurance plans, some companies also pay some interest along with the premium on the maturity of the plan if the life insured survives until maturity. 

Pure endowment plan

A pure endowment plan is the opposite of a term insurance plan. In this plan the life insurance company promises to pay the life insured a specified amount (sum insured) only if they survive the term of the plan. If the life insured dies during the tenure of the plan then they will not be entitled to anything.

So in short, this plan offers only maturity benefit in the event of the life insured surviving the entire tenure of the plan. There is no death cover. 

Endowment insurance plan

An endowment insurance plan is basically a combination of a term insurance plan and a pure endowment plan. It offers death cover if the life insured dies during the term of the policy or survival benefit if the life insured survives until the maturity of the policy. 

Key points 

• Endowment insurance plans pay a specified amount on maturity of the plan if the life insured survives the entire term of the plan. 
• Death cover: these plans also have a death cover element. If the life insured dies before the maturity of the plan then the death cover benefit is paid to the nominee/beneficiary. 
• Savings element: these plans, apart from the death cover, also have a savings element. After deducting the death cover charges and administration charges from the premium, the remaining amount is invested by the insurance company on behalf of the life insured. The returns earned are later paid back to the life insured in the form of bonuses. 
• Goal-based investment: these plans can also be bought for accumulating money for specific plans like a child’s higher education or marriage etc. 
• Some insurance companies also allow partial withdrawal or loans against these policies. 
• This plan also comes in different variants. Some plans have a higher death cover than the maturity benefit and vice versa. 
• In some plans the maturity benefit is double the death cover. This type of plan is known as a double endowment insurance plan. 

Whole life insurance plans 

• A term insurance plan with an unspecified period is called a whole life plan. Some plans also have a savings element to them. The insurance company declares bonuses for these plans based on the returns earned on investments. 
• As the name of the plan specifies, this plan covers the individual throughout their entire life. 
• On the death of the life insured, the nominee/beneficiary is paid the sum insured along with the bonuses accumulated up until that point in time. 
• During the individual’s lifetime they can make partial withdrawals to meet emergency requirements. An individual can also take out loans against the policy. 

Convertible insurance plans

As the name suggests, this insurance plan can be converted from one type to another. For example, a term insurance plan can be converted into an endowment plan or a whole life plan or any other plan as allowed by the insurance company.

A convertible plan is useful when the life insured cannot initially afford to pay a higher premium. They can therefore start with a term insurance plan with a lower premium and then later convert it into an endowment plan or a whole life plan with a higher premium. Also, at the time of the plan conversion the life insured is not required to undergo a medical check-up.

Another advantage of convertible plans is that at the time of conversion there is no further underwriting decision to be made. 

Joint life insurance plans 

• Joint life insurance plans offer insurance coverage for two persons under one policy. This plan is ideal for married couples or partners in a business firm. 
• With some joint life insurance plans the death cover (sum insured) is payable on the death of the first joint policyholder and then again on the death of the surviving policyholder, along with the accumulated bonuses up to that date, if the death of both the policyholders happens during the tenure of the policy. 
• If both the joint policyholders survive until maturity or one of the joint policyholders survives until the maturity of the policy, then the maturity benefit along with the bonuses accumulated until that date is paid. 
• For some joint life policies the premiums have to be paid until the selected term or premium payment ceases on the death of the first joint policyholder. 
• In the case of joint life policies each life will be underwritten separately.

Annuities
An annuity is a series of regular payments from an annuity provider (insurance company) to an individual (called the annuitant) in return for a lump sum (purchase price) or instalment premiums for a specified number of years.
According to the manner in which the purchase price is paid, annuities can be either: 

• an immediate annuity; or 
• a deferred annuity.

An annuity is the reverse of a life insurance policy. In life insurance the insurance company takes on the risk, but with an annuity the annuitant takes on the risk that they won’t die in a very short space of time after paying the purchase price.

There are a number of different types of annuity available (such as a joint life, last survivor/life annuity with return of purchase price/increasing annuity) and we will look at these in detail in chapter 7. 

Group insurance plans 

• A group insurance policy provides insurance protection to a group of people who are brought together for a common objective. 
• The group of people can be: 

1. employees of an organization; 
2. customers of a bank; 
3. members of a trade union; 
4. members of a professional body like an association of accountants; or 
5. any other group of people who have come together with a commonality of purpose or are linked to each other for a common objective. 

• In a group insurance policy the insurance company issues one master policy covering all the members of the group. For example, the insurance company will issue a master policy to an employer covering all the employees of the company. The employer would be known as the ‘master policyholder’. 
• The contract of insurance is between the master policyholder and the insurance company. The employees are not a direct party to the insurance contract. 
• Group insurance schemes are also used by the Government as instruments of social welfare to provide insurance cover to the masses (people who are below the poverty line). 
• In July 2005 the insurance industry regulator (IRDA) issued guidelines on group insurance policies.

Micro-insurance plans 

• In November 2005 the IRDA issued guidelines for micro-insurance through the IRDA (Micro-insurance) Regulations 2005. Micro-insurance aims at providing insurance cover to low income groups. 
• The IRDA has specified that the life cover provided under micro-insurance products should range from Rs. 5,000 to Rs. 50,000. 
• A life insurer may offer life micro-insurance products as well as general micro-insurance products and vice versa. (This is only allowed for micro-insurance products, and no other types of general insurance products.) 

Unit-linked insurance plans (ULIPs) 

Unit-linked policies carry a higher risk than with-profit policies and contain fewer guarantees. However, they are much more flexible. Unit-linked policies are suited to people prepared to undertake some investment risk to obtain the benefits of flexibility. Returns are subject to movements in the capital markets where investments such as equities (shares) are traded (shares will be discussed fully in chapter 6). 

Key points 

• Unit-linked insurance plans (ULIPs) offer the benefits of both life insurance and returns on investment. 
• In traditional plans the insurance company takes a decision on the investments to be made on behalf of the insured. However, in a ULIP the insured has a variety of funds to choose from like equity funds, debt funds, balanced funds and money market funds etc. for their investments. 
• ULIPs give the insured the option to participate in the growth of the capital markets. 
• On the death of the insured the sum insured or the market value of the investment (fund value), whichever is higher, is paid. 
• On maturity of the plan the fund value is payable. 
• Settlement option: instead of taking a lump sum amount, some plans provide the policyholder with the option to receive the maturity benefit amount as a structured payout (periodic instalments) over a period of time (say, 5 years or any time up to 5 years) after maturity. This is known as the settlement option. If the policyholder wishes to take the settlement option they need to inform the insurance company well in advance.

 Child plans 

• Child insurance plans help parents to save for their children’s future financial needs such as education, marriage etc. 
• Child insurance plans offer the dual benefit of savings along with insurance. 
• It is important to note that the child does not have any income of their own. Instead, they are entirely financially dependent on their parents. The parent pays the premium to the insurance company towards accumulating money for the child’s future financial needs. 
• The child is the beneficiary who is entitled to receive the benefit on the maturity of the policy. 
• In these plans, risk on the life of the insured child will begin only when the child reaches a specified age as stated in the policy. The time gap between the policy start date and the date of commencement of risk is called the deferment period. 
• The date on which the risk will commence at the end of the deferment period is known as the deferred date. The deferred date will be a policy anniversary. 
• There is no insurance cover during the deferment period. 
• When the child reaches the age of majority (18 years old) the title of the policy will be automatically passed on to the insured child. This process is known as vesting. The date on which the policy title passes to the child is known as the vesting date. 
• After vesting the policy becomes a contract between the insurer and the insured person (the child in this case).
• Some child insurance plans come with a built-in ‘waiver of premium’ rider, whereas in the case of other child insurance plans the parent can opt for the waiver of premium rider for a small additional premium. In this case if the parent dies during the policy term the insurance company will continue to pay the premiums on behalf of the parent (until the child reaches the age of majority) and the policy is left intact. The child receives the benefit at the end of the policy term according to the policy terms and conditions. More details on riders will be discussed in chapter 7. 
• Child insurance plans can be taken out in the form of endowment plans, money-back plans or ULIPs. 

Money-back policies 

• Money-back policies combine the dual benefits of savings and insurance, and are somewhat similar to endowment plans in terms of features. 
• In an endowment plan, the policyholder receives the maturity benefit at the end of the policy term. However, in money-back policies ‘partial survival benefits’ are paid to the policyholder during the term of the policy at specific intervals.
• The policyholder may receive the survival benefits in fixed proportions or variable proportions during the policy term as per the terms and conditions of the policy. 
• The benefits received by the policyholder at specific intervals are tax-free according to prevailing tax laws. 
• If the policyholder dies during the policy term, the nominee or beneficiary receives the entire sum insured along with the accrued bonus (if any) without the deduction of survival benefits that have already been paid to the insured.

Salary saving schemes (SSS) 

• Salary saving schemes (SSS) are intended to cater to the needs of the working classes.
• In these schemes the insurance company has an arrangement with the employer, whereby the employer deducts the premium from the employee’s salary and passes it on to the insurance company every month. 
• As the premium is deducted from their salary before it reaches the employee they do not need to worry about defaulting on the premium. 
• The insurance company also benefits as it receives the consolidated premium from the employer for all the employees who have enrolled on the scheme. 
• The employer makes the deduction for the premium from the employee’s salary based on an authority letter signed by the employee, which is collected with the proposal form and is sent to the employer by the insurer, when the policy is accepted. 
• A demand list containing the list of employees, their designation along with the amount to be deducted is sent to the organisation periodically by the insurance company. 
• A salary saving scheme is not a specific insurance plan. It is just a convenient arrangement to collect the premium. It can be used for a term plan, an endowment plan or any other plan as offered by the insurer under the SSS arrangement.

Anand Khemka
+91-9910936925
+91-8287041341

Protection need from Life insurance

protection needs arise when unpredictable events occur that can potentially result in financial disaster for individuals and/or their dependents. We also saw that protection against unpredictable events is provided by insurances that aim to replace much of the monetary loss produced by the occurrence of the insured event.

Even if a person knows that they would benefit from some form of insurance protection, they don’t always have a real understanding of what their individual protection needs really are.

It is the role of agents to help such people to make the right choices.

In this chapter we will learn about the features and uses of various life insurance plans available in the market and – importantly – which features affect their suitability for a client. In chapters 6 and 7 we shall turn our attention to the savings needs of individuals and the range of savings products that are available to meet those needs, and also the other financial products that agents need to understand, such as health insurance.

This understanding will enable you to advise your clients to take out the right type and level of insurance cover for their individual needs and circumstances.


Protection needs
As a life insurance agent you are concerned about the protection needs that arise as a result of a person’s death or disability.


General protection needs of an individual
There are various reasons for which a person needs financial protection in the form of insurance. These needs are as follows:

Income
There is a strong need for an individual to protect the income that they are currently earning and expect to earn the future. We saw in the above case study how an untimely death combined with no income protection can lead to a family landing in a financial mess. Term insurance can help to protect the future loss of income.

Medical needs
Medical emergencies strike when they are least expected. We saw in the above case study that Prashant’s parents are retired and are dependent on him. If ill health strikes in old age, treatment costs can burn a big hole in the pocket of a family’s income provider. Medical insurance can help protect against unexpected medical emergencies.

Dependants 

• Children’s education: these days with so many children wanting to go for the same MBA/engineering/medical course and a limited number of good institutions offering quality education, the cost of education is rising at a rapid pace. As a result, parents need to plan well in advance for their child’s education. In the above case study we saw how the untimely death of a parent can ruin the education plans of their child. Therefore, there is a need to protect the child’s education fund. A child insurance plan (which we shall study in more detail in the next chapter) can help to address this issue in the absence of the parent.
• Children’s marriage: parents will do everything it takes to provide the best quality of everything their child needs. Parents dream that their only daughter’s wedding should be the best in town and should be the most talked about event for every guest. To fulfil their dream, parents will start investing for their child’s wedding right from the beginning of the child’s life. But the premature death of a parent can result in the wedding plan dreams going sour; hence the need for protection. A child insurance plan can help provide protection against the untimely death of the parent. 

Assets and liabilities
Assets such as our house, car or business are very important to us. 

In building these assets – due to the huge initial investment involved – we have to apply for loans to finance them. It is the responsibility of the person who provides the family’s income to make sure these loans are repaid on time. But if the income provider dies prematurely who will take care of these loans? We saw in the above case study how Prashant’s family lost their car and house as they were not able to repay the EMIs in Prashant’s absence. Hence there is a need for protection of these assets (loans) in the absence of the main provider of income. Home insurance or additional term insurance can provide protection in this case. Additional term insurance can provide protection against the credit card dues, personal loans, car loan and any other loans in case of the untimely death of the income provider. 

Family’s maintenance
There is a need to protect the family in the absence of the income provider. We saw in the case study that after Prashant’s death the family’s survival is at stake. If there is only one income provider then the insured should make sure that they have enough life insurance to take care of their family in the case of an early death. Here a term insurance plan can provide a lump sum amount to the family, or a pension plan can provide regular income.



Anand Khemka
+91-9910936925
+91-82870413411