Author: Mr. P. Subakaran, Managing Director, Subakaran Associates
There are a myriad of investment opportunities available for an individual in India today. They are broadly divided into three categories which are provided below.
- Guaranteed Debt Instruments like Fixed Deposits, Public Provident Fund (PPF), Post Office Schemes, Treasury Bills and some of the Life Insurance Policies.
- Non-Guaranteed Debt Instruments like Corporate Bonds, Debt Mutual Funds, Unit Linked Insurance Plan (ULIP) Debt Funds and Participating Life Insurance Policies.
- Non-Guaranteed Equity Instruments like Stocks, Mutual Funds, Shares, Commodity Trading and ULIP Equity Funds.
Customers are generally seen playing in only one type of instrument as per financial experts. It is advisable to play on larger ground to ensure Guarantee and Growth. Life Insurance companies allow you to play across the different types of instruments. In our initial working years, we sacrifice our health to create wealth, and then we spend our wealth to get the health. Life Insurance enables you to balance Health and Wealth and ensures enhanced Lifestyle without breaking the assets.
The type of investment depends upon the risk appetite of the customer. The risk appetite primarily depends on the age of the customer. For instance, if the age of the customer is 40 years, then 40% of his or her investment should be in Guaranteed Debt Instruments and the remaining 60% between Non-Guaranteed Debt Instruments and Non-Guaranteed Equity Instruments.
Would you not want protection against Death, Disease and Disability, and get Cash Flow for meeting liabilities? Life Insurance Policies provide this. A customer is concerned with Safety, Returns and Liquidity. The plans of Life Insurance companies cover the three aspects and also provides protection.
Let us understand how Life Insurance Plans are basically classified. It is provided below.
- Protection or Term Plans
- Savings Plans
- Participatory – Policy holders are eligible for bonuses based on the performance of the company.
- Non-Participatory (or) Guaranteed Plan – Policy holders receive guaranteed payment after the tenure of the policy.
- Retirement Plans
Suppose you want to earn a monthly income of INR 50,000, there is Guaranteed Monthly Income Plan whereby you pay annualized premium for certain number of years. Then you receive Guaranteed Monthly Income for an extended period of time taking care of your retirement life requirements.
We all have precious goals in life such as Child Education, Child Marriage, Retirement and Wealth Accumulation, and we all aspire to achieve them. But there are number of Ifs such as Death, Disability and Disease. Risks that we face in life are Early Death, Disability and Living Too Long. Life Insurance enables you to achieve your life goals and covers death, disability and disease. In Life Insurance, you get a combination of Protection, Health and Wealth. There is the opportunity of experiencing both Growth and Stability. For instance, this can be achieved by investing 30% in Equity and 70% in Debt.
Most of us put our savings in Fixed Deposits. While Fixed Deposits are a safe investment option that guarantees consistent interest rates, special interest rates for senior citizens, and no market-related risks with income tax deductions, the rates offered are very low. The current interest rates offered by banks in India for Fixed Deposits below INR 2 crores for general citizens is in the range of 5.25% to 6.25%. Funds performance of Life Insurance companies are much higher than Fixed Deposits. All the Funds are rated by Morning Star which rates Funds across the world.
There is a lot of flexibility in Life Insurance Plans. You have flexibility in premium amount to be paid, premium payment term, policy term and premium payment mode. You have the choice of including Basic Riders such as Accidental Death Benefit (ADB), Accidental Total and Permanent Disability Benefit (ATPD), Criticare Plus Benefit (CPB) and Hospicare Benefit (HCB). Other Riders include Lumpsum Rider, Income Rider, Lumpsum+Income Rider, Waiver of Premium (WOP) Rider and Partner Care Rider. You have the opportunity to choose Regular Income or Lumpsum Benefit. For aged persons, there are Annuity Plans with options of Immediate Life Annuity, Immediate Life Annuity with Return of Premium (ROP) and Deferred Life Annuity with ROP.
Today, we are living in Smart Age. You are looking for Smart Solution which provides Safety, Savings, Convenience and Peace of Mind. Life Insurance provides Assurity (Guarantee Regular Income), Growth (Market Upside), Security (Life Cover), Reliability (Return of Premium), Saving (Tax Benefit) and Liquidity. Life Insurance takes care of Terminal Illness, Terminal Illness is any illness where doctor says that one will not live more than 6 months. In this case, advance amount of 50% of Sum Assured (SA) will be paid.
In a Life Insurance Plan, your total income earned is much higher when compared to the total premium paid including GST. Also, the total premium paid including GST is only a small portion of the Basic Sum Assured. Some Life Insurance Policies provide excellent Rider Coverage with the options of Lumpsum+Income With/Without ROP, Partner Care With/Without ROP and Waiver of Premium (WOP).
On purchase of some Life Insurance Policies, you will have access to Practo which is the world’s leading tele-consultation healthcare platform. Features include 1.Consult with Specialists 24×7 2.100% safe consultations 3.Convenient and Easy 4.Similar to Clinic Experience. The benefits for customers include the following.
- 4 Free Online Consultations across 22+ specialties per month which is 48 consultations per year.
- Privilege access to unlimited Health Articles, Webinars, Doctor’s Q&A
- Free COVID-19 Assessment to help you assess symptoms
- Live Chat Support for quick help, 24×7
Some of the objections that you may have while looking at a New Life Insurance Policy are no money (out of budget), already invested in life insurance policies, not meeting your goals, other commitments, not the appropriate time now, product related and company (brand) related. Before rejecting the idea of purchasing a life insurance policy, write down the names of people who will be able to take care of your family if you were not there. Not many of us will be able to identify people who can support our family.
Even if you have purchased life insurance policies earlier, it is imperative that you calculate whether the coverage is sufficient. Do remember that “Low Cover is No Cover”. Human Life Value (HLV) concept is used to assess the coverage that you need to have. It is calculated by three formulas namely Annual Income x 20, Monthly Income x 200 and Monthly Expenses x 200. For example, if your annual income is 12 lakhs, then your HLV is 240 lakhs (2.4 crores). If your current life insurance policies total coverage is 1 crore, you need an additional coverage of 1.4 crores. As per the Swiss Reinsurance Survey, there is 82.7% Protection Gap among Indians. You need to purchase Protection Plans based on HLV.
There is Rule of 72. According to this rule, 72 divided by Rate of Return provides the time period for doubling the Investment Value. For example, if your Fixed Deposit Interest Rate is 6%, it takes 12 years to double your Investment Value. You may not be willing to wait for 12 years for your Investment Value to double. Look at the option of Life Insurance where the Rate of Return is in double digits. While choosing Life Insurance Policy, you need to compare the Internal Rate of Return (IRR). This is also known as the Discounted Cash Flow Rate of Return. Please note that IRR is applicable for Guaranteed Plans.
In Life Insurance, there is an excellent law that provides protection for one’s Wife and Children which is the Married Women Property Act (MWPA) 1874. MWPA option has to be chosen at the beginning of taking a life insurance policy. Under this Act, the proceeds of life insurance policies cannot be attached by Creditors, Courts or Government of India. In this way, one’s Wife and Children get the benefits after one’s demise.
You need to understand the difference between “Men at Work” and “Money at Work”. Men cannot work under four situations which are Death, Disease, Disability and Living Too Long. In all these situations our money should work for us. This is possible in Life Insurance. According to research, Indian Customers have only INR 17.30 out of INR 100 to meet an eventuality. You should allow your Income to Work after retirement.
Term Plans have a minimum Basic Sum Assured (SA). For example, you purchase a Term Plan with a Basic SA of 50,00,000. The ADB will be 50,00,000 (If the accident happens in a public transport, your nominee will receive double the benefit which is INR 1 crore), ATPD will be 50,00,000, CPB will be 20,00,000 and HCB will be 10,00,000. Life Insurance companies usually have different number of funds for allocation. You can decide to allocate 100% in one fund or split the amount and allocate to a multiple number of funds. According to Insurance Regulatory and Development Authority of India (IRDAI) Norms, Policy Benefits which are the Death Benefit and Maturity Fund Value are to be projected for 4% and 8%. However, the actual fund performance is more than 8% and hence the Maturity Fund Value that you will receive is more than the committed value.
Minimum Educational Qualification for Savings and Term Plan is only HSC. If the customer is 10th class pass, there is minimum annual income requirement. For income proof, Standard Income Proof is required or you can show any one of the Financial Surrogates. This includes Investment Portfolio, Monthly Systematic Investment Plan (SIP), Car Ownership, Credit Card, Home Loan Statement and Bank Statement for Savings Account held in individual name. However, Annual Income and Financial Surrogates cannot be combined together. They will be treated separately and only one Financial Surrogate will be considered. Your Annual Income requirements vary based on the SA in Term Plans.
What customers look for in a Protection Plan?
- Simple and Affordable
- No Medicals
- Flexible Policy Term and Premium Paying Term
- Tax Benefits
- Additional Protection with Riders
If you have not taken the Riders at the time of taking a Life Insurance Policy, you can add the Riders on the Policy Anniversary. Customers are looking for One Stop Solution and Life Insurance companies are coming out with Insta Protection Policies with lower Annual Income requirement.
Life Insurance Policies are better than Mediclaim. This is because Mediclaim has the following shortcomings.
- It does not cover all expenses like non-medical expenses.
- Co-pay is involved.
- It is insufficient in case of major illness involving huge expenses.
- There is limited coverage of pre and post hospitalization expenses.
Here are some rules for you to remember.
Rule 1: Do not put all your eggs in one basket. It is important to diversify.
Rule 2: Where do Investment Returns come from?
Asset Allocation – 91.5%; Stock Selection – 4.6%; Market Timing – 1.8%; Others – 2.1%. This is as per Brenson Study.
ULIP follows the Asset Allocation factor by spreading the risk across different sectors and segments. ULIP Plans are for a minimum of 10 years.
Rule 3: When the market is up, it is not that all the sectors will be up.
Rule 4: “Time in the Market” beats “Timing the Market”. Long term investment allows the volatility to taper to zero. History shows a smaller number of downturns in the Indian Market. The longer you invest, the lower the risk of losing money.
To conclude, in Life Insurance, there is Protection, Savings, Growth, Liquidity, Tax Benefit, Flexibility and above all it is Safe and Secured. Life Insurance companies are happy to Connect, Protect and Engage with you. So why do you wait? Contact a Life Insurance Company and purchase Life Insurance Policies.
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