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Insurance-Is it Investment or Cost

Insurance is a contract, represented by a policy, in which an individual receives financial protection or reimbursement against losses from an insurance company. The insurance company pools clients' risks to make payments more affordable for the insured. Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or his/her property, or from liability for damage or injury caused to a third party.

Different types Of Insurance policies:

· Health Insurance

· Auto Insurance

· General Insurance such as Fire, Theft, Transit (Transportation of Goods), Liability etc.

· Life Insurance

Health Insurance: Health insurance (also known as Mediclaim) policy is designed to take care of one's healthcare expenses up to the sum assured, in case the person faces any sort of medical emergency, be it an illness or an accident that has led to hospitalization.

Public Health Insurance system in India like USA, UK etc.: Public health services in India provides free basic health care to all, the care provided by most state health systems suffers from inadequate resources and poor management. As a result, the majority of the population turns to private health services that offer more expensive care and of very unequal quality. Public health facilities - local clinics providing basic care, regional hospitals, national hospitals - are funded and managed by the state authorities. Factory workers are covered under ESIC for which contributions are made by employers and employees.

Ayushman Bharat health insurance (Modi Care): Modi launched 'world's largest' publicly funded health insurance scheme “Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB PM-JAY)” programme dubbed 'Modicare' which promises to insure 500 million poor people across the country and aims to provide free health coverage at the secondary and tertiary level to its bottom 40% poor and vulnerable population. It provides a cover of Rs. 5 lakh per family per year for medical treatment in empaneled hospitals, both public and private (cashless and paperless).

What is so special about Medical Insurance?

· Health insurance in India typically pays for only inpatient hospitalization and for treatment at hospitals in India. Outpatient (OPD) services are not payable under health policies in India.

· Pre-existing Diseases can be covered. It is not true that pre-existing illnesses are not covered by any health insurance provider. During the waiting period, you will have to wait until the specified illnesses are given a cover. During the waiting period, your claim will be rejected for such specified diseases.

· You can also take a top up plan to cover some diseases requiring huge costs.

· Health insurance policies offered by non-life insurance companies usually last for a period of one year.

Medical Insurance cost: Insurance companies offer health insurance from a sum insured of Rs.5000/-for micro-insurance policies to a higher sum insured of Rs.50 lacs and above. The common insurance policies for health insurance are usually available from Rs.1 lac to Rs.15 lacs. This costs around Rs.5, 000/- to Rs. 40,000 for a family. There are top-up health policy is an additional coverage for people who have an existing individual plan or a Mediclaim from the employer. It is for reimbursement of expenditure which arises out of single illness beyond the limit of the existing cover. Such Top Ups are in the range up to Rs, 1 cr for which premium would be very less.

Auto Insurance: Auto insurance is a policy purchased by vehicle owners to mitigate costs associated with getting into an auto accident. Instead of paying out of pocket for auto accidents, people pay annual premiums to an auto insurance company; the company then pays all or most of the costs associated with an auto accident or other vehicle damage. Car insurance provides protection to the car's owner against third-party liabilities, theft or damage to the car. It also provides cover against accidental injuries.

General Insurance: General insurance is insurance for valuables other than our life and health such as Fire, Theft, Transit (Transportation of Goods), Liability etc. General insurance covers the insurer against damage, loss and theft of your valuables. The premium and cover of general insurance depends upon the type and extent of insurance. A general insurance policy typically has a period of a few years but standard tenure is one year.

Life Insurance

Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured. The insurance company promises a death benefit in consideration of the payment of premium by the insured.

Why insurance is not an investment?

The reason why the line between insurance and investment is due to lack of adequate financial knowledge and push by Insurance advisors/ agents on account of very high commissions offered on most life insurance products. When you purchase insurance, you are effectively ‘buying’ protection against unforeseeable events that can have an adverse impact on your family’s financial future. Even though no value can be placed on human life, a life insurance plan aims to mitigate the financial uncertainty for your family in case of an eventuality like unforeseen death. You are required to ‘pay’ a fixed premium (for a specified duration) to make available the monetary benefits known as a sum assured (SA) for your family/ nominee in case of your untimely demise. You have to continue paying the premium as per the terms of the insurance to enjoy the risk protection. If you stop paying the premiums, the insurance benefit ceases just as would happen with any other fee-based service.

How much, in what kind of Product

Insurance plans are meant to manage the life contingency risk first before extending their reach to cater to other life goals. A lot of financial goals of a household can be adequately covered by way of insurance plans.

How much Life Insurance we should take?

Deciding how much insurance cover you’ll need to buy is not actually that tedious process. It’s just a matter of keeping the following factors in mind:

1. Your Current Annual Income

2. Your current and future Financial Liabilities & Financial Assets

3. What are your Financial Goals, milestones with current cost for each of the goal and when

4. Your age at the time of purchasing the policy and at what age you will retire

Amount of Insurance will be equivalent of gap in your Corpus that means Total Funds required as Gross Corpus to meet recurring expenses and all wish list at current cost minus available assets & Current Liabilities. At the very basic level the sum assured should cover the normal lifelong expenses of the surviving family members.

Steps for choosing the right insurance cover:

· Assess your needs carefully: You need life insurance to protect your family from facing any financial trouble after you are gone.

· The costs involved: Like everything else in life, you must consider the cost factor while buying life insurance cover. Check out the premium, the administration and fund management fees, the mortality charges, the riders and how much you need to pay for them. Make sure you compare similar kind of products before you decide one that is best for you.

· Cost-benefit ratio: The cost of the insurance cover depends upon many reasons, some mentioned above and other factors depending on what is covered in the cover or its riders. Thus, you have to keep a close eye on the cost of buying insurance and ensure that it justifies the benefits covered under the policy. Simply put, a right balance must be struck between the cost and benefits available.

Are you looking at Insurance cover only or it`s coupled with Investments

The promises made by different insurance companies are all fine. However, it depends on you whether you need a pure insurance cover or you need an insurance cover coupled with an investment opportunity. Remember that Insurance Agents gets much higher Commission on complicated policies where Insurance cover is clubbed along with Insurance Product as against pure Life Insurance product like Term Insurance (where Insurance Agents gets very less commission).

Why we should look at Claim settlement ratio?

The main purpose behind purchasing life insurance is that your loved ones do not face any financial hassle after you are gone. However, most people do not give enough thought to what would happen if the insurer makes it difficult for your family to obtain the money that you have painstakingly put aside. This is the reason why you must check out the claim settlement ratio that is expressed in percentage terms. The higher the ratio, the more trustworthy the insurer is.

Important tips for Life Insurance:

· Do not go overboard: Life insurance policies should be purchased only for the purpose of protecting your family, so do not go overboard in purchasing a number of policies that are not in sync with your overall financial plan, not because you get Income Tax benefits under section 80C.

· Revisit your insurance needs: The thumb rule of investing and making a financial plan is to assess your investments periodically. In the same way, your insurance needs must be re-assessed from time to time as well, ideally every 3 to 5 years.

· Term Insurance vs. Endowment policies: Term Insurance is pure Insurance product and you can cover insurance of your life with very small payment. As against this Endowment policy is Insurance cum Investment product. Remember that Insurance agents get much higher commission in endowment product as compared to Term policy. Also Returns from endowment policy would be around 4-5%, much lower than NSC even after considering premium expense for term insurance policy.

Term insurance policies: The basic premise of a term insurance policy is to secure the immediate needs of nominees or beneficiaries in the event of the sudden or unfortunate demise of the policy holder. The policyholder does not get any monetary benefit at the end of the policy term except for the tax benefits he or she can choose to avail of throughout the tenure of the policy. In the event of the death of the policyholder, the sum assured is paid to his or her beneficiaries. Term insurance policies are also relatively cheaper to acquire as compared to other insurance products. Currently for Rs. 1 cr Term Insurance the premium for 40 year person is Rs. 14,400/-P.a. One of the primary benefits of term insurance is its lower initial cost when compared to permanent insurance.

Insurance cum Investment products: Life insurance products come in a variety of offerings catering to the investment needs and objectives of different kinds of investors. Following is the list of broad categories of life insurance products:

Endowment policy: A life insurance endowment policy pays the full sum assured to the beneficiaries if the insured dies during the policy term or to the policy holder on maturity of the policy. An endowment policy is essentially a life insurance policy which, apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time so that he/she is able to get a lump sum amount on the policy maturity in case he/she survives the policy term. A life insurance endowment policy pays the full sum assured to the beneficiaries if the insured dies during the policy term or to the policy holder on maturity of the policy if he/she survives the term. "This is life insurance plan with a saving component and lump sum maturity benefit” Endowment policies are basically of two types - with profit and without profit. Within these two classes there are many variations of endowment plans structured to meet the need of child education, whole life protection and pension, among others. Generally, people with a regular stream of income with no time available for regular investment headache (even with lower returns) and need for a lump sum amount after a period of time may consider buying an endowment plan.

Money-back policies: Money back policies are basically an extension of endowment plans wherein the policyholder receives a fixed amount at specific intervals throughout the duration of the policy. In the event of the death of the policyholder, the full sum assured is paid to the beneficiaries. The terms again might slightly vary from one insurance company to another.

Whole life policies: A whole life insurance plan covers the insured over his life. The primary feature of this product is that the validity of the policy is not defined so the policyholder enjoys the life cover throughout his life. Whole life or permanent insurance pays a death benefit whenever you die, even if you live to 100 years of age.

Unit-linked investment policies (ULIP): Unit-linked insurance policies belong to the insurance-cum-investment category where one gets to enjoy the benefits of both insurance and investment. While a part of the monthly premium pay-out goes towards the insurance cover, the remaining money is invested in various types of funds that invest in debt and equity instruments. ULIP plans are more or less similar in comparison to mutual funds except for the difference that ULIPs offer the additional benefit of insurance.

Pension policies: Pension policies let individuals determine a fixed stream of income post retirement. This basically is a retirement planning investment scheme where the sum assured or the monthly pay-out after retirement entirely depends on the capital invested, the investment timeframe, and the age at which one wishes to retire. There are again several types of pension plans that cater to different investment needs.

Role of Agents: Since you started earning, agents are continuously trying to sell you one or other life insurance policy. But do you trust them blindly? In fact, we know some people who feel trapped and cheated because of the insurance agent. Thus, we should to choose best life insurance policy ourselves with aid of expert who should not have conflict of interest like agents having interest in their commission. The Agent commission will be dependent on term of the policy and type of the policy. The maximal commission the Insurance Agent gets in the first year is approximately 25-28% which in some cases can go to 40% and the commission is cut down to approximately 5% after the 4th year. For term plans they get 7.5% and hence it appears that agents push for policies other than term policies.

Returns from Life Insurance Products: Although actual returns would depend on one's age, term and the premium amount, the average IRR (internal rate of return) in most traditional plans, including money-back and endowment, lies between 4 and 5 % per annum and this is likely to do down further with fall in interest rates The plans with guarantee would carry even lower returns. You need to compare these returns with returns from Fixed Income products like Postal schemes. PPFs or Bank FDs minus cost of term insurance premium (which could be around 0.3% to 0.5%) and then take your decision. Agents have vested interest in pushing various plans as they have inherent conflict of interest vis. a vis. your returns.

Is investment in LIC Safe?: We hear that LIC acts as government`s ATM to bail them out in their disinvestment objectives and to stabilize markets during market turmoil. We have seen that many times when Foreigners are selling LIC becomes buyers. LIC has corpus of RS.31 lakh cr. with 25 cr. customers, a giant by any standard. This requires highest level of governance, which has been missing for a long. A question crops up regarding safety of LIC Investor`s money because it is custodian to most Indians. How can we forget what happened to UTI? This can be solved with listing of LIC which should bring transparency in their working, disclosure of their investments, returns on those investment and finally safety of policy holder’s money. Government has recently announced their intention to list LIC on stock exchanges.

Regulator: IRDA

Taxation:

80C-Insurance premium up to Rs.1.50 lakhs is eligible for tax rebate. Policy should have tenure of at least 5 years

Maturity proceeds will be exempt from taxation Section 10(10D):

Medical Insurance Premium qualifies for deductions under section 80D

· Self & family Rs.25, 000

· Self & family and Parents Rs.50, 000

· Self & family and Senior Citizen Parents Rs.55, 000

· Self (senior citizen) & family and Senior Citizen Parents Rs.60, 000

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