How to go about getting Life Insurance

In one of my previous blogs, I had mentioned that you must never mix up investments and insurance. In this post, I will focus on Life Insurance. It is always advisable to go in for a pure risk product for Life Insurance as opposed to an Unit Linked Scheme giving both Insurance & Investments.

By pure risk term insurance I mean a Life Insurance Cover without any returns attached to it. You pay a fixed annual premium (which may be paid in monthly, quarterly or half yearly instalments) and you are entitled for a Life Cover ranginf from 10 lakhs to 1 Crore. This Insurance will be paid out to your nominee in the event of death or permanent disability.

The extent of cover can be determined by the following 3 rules.

1. A thumb rule for determining the extent of cover should be 8 times your annual slary package or 1 Crore whichever is lower.
2. The insurance cover should be more than the value of assets for which you have taken a Loan. I have a Home Loan of 40 lakhs, a Personal Loan of 10 lakhs and a Card Loan of 5 lakhs, hence I need to ensure that my life insurance cover is more than 55 lakhs. (please use the outstanding amounts for calculation at any given point of time)
3. You should insure yourself only upto the age of 40 years or lastest 45 year. After 45 your investment pool will be far in excess of the insured amount. In my case, I am working towards getting a corpus of about 10 Crores by the time I am 40, so after that the insurance cover is immaterial as in the event of death, I have significant investments to take care of my family. So my suggestion is that we should insure ourselves only upto the age of 45. If you insure yourself for longer periods of time beyond the age of 45 the annual premium charged to ou is also higher.

There are several companies where you can apply for Life Insurance, however I would suggest that you apply to LIC. The reasons for recommending LIC are as follows.

1. Simple process and no hidden charges, personal service from agents, they come to your house / office and are more knowledgeble with regards to product features and claims processes. Other company agents will try to cross sell other products which are more profit making for the company and will also give you incorrect information to prevent you from taking pure term insurance. These insurance companies love to sell Unit Linked Plans which are more profitable for the companies.
2. Medical tests conducted at convinient locations.
3. Vareity of options for making payments. LIC has tied up with various banks to receive online payments. Payments can be made through agents as well.
4. The are supposed to have the easiest claims procedure (though this opinion is based on information prevailing in the market and not my on experience)
5. The premium for a fixed insurance cover is lowest in the case of LIC. All other insurance companies charge a higher premia.
6. In case of premium payment delays and policy revivals in case of delays, the LIC charges are the least and the most customer favouring.

LIC has a fairly simple process for applying for Insurance. The agents visit you and help you sign up for the same. I have a policy of 1 Crore and the annual premium for the same is Rs.24,000. In the first year, the agent refunds a part of the premium between Rs.3,000 and Rs.5,000 back to the customer as a sign on bonus. This is paid out in the first year from the agents commision as he will make a percentage out of every annual payment you make thereon. Be sure to ask the agent for this rebate in the first year if you are signing up for an LIC Policy. This rebate may be available with som other company agents as well.

For most life insurance companies, you will have to undergo a medical test and fill up a detailed application form. Be sure to fill the Nominee details correctly.

For more details on which life insurance policy is best suited for you and for contact details of insurance agents, you can write to me on Ask.Pranav@Gmail.com and I will revert to you within 48 hours.

Beware of Unit Linked Insurance Plans (ULIP)!

Before signing up, we need to be aware of the various features of Unit Linked Schemes which are sold by insurance companies such as ICICI Prudential Life Insurance, HDFC Standard Life Insurance, Birla Sun Life and many others in partnerships with banks.

To summarise the message of this post ...... Stay away from Unit Linked Schemes. I am yet to find out what the benefits really are, other than the fact that these Equity Lined Saving Schemes (ELSS) count towards the Rs.100,000 mandatory deductions for tax filings. I was a fresh graduate from IIM Lucknow and was filing my taxes for the first time, when a Citibank relationship manager coaxed me into subscribing for a Unit Linked Insurance Plan (ULIP) with the following features.

1. An assured return of 10% every year (assured return was only 3% when I read the policy document)
2. An unheard off insurance cover which turned out to be only 6 lakhs (woefully short of the 50 lakhs plus cover I was looking for)
3. She also said that I could make this my retirement plan and would leave me with enough savings to last me a lifetime.

I signed up for the same however the actual features of the scheme turned out to be as follows.

1. You need to pay a fixed amount very year, which may be split in monthly, quarterly or half yearly instalments. The tenor also ranges from 5 to 25 years. In my case I signed up for a Birla SunLife Policy paying Rs.60000 every year for 20 years.
2. There is a commission which is charged by the Insurance Company for the first 3 years. In my case 60% of the Rs.60,000 (Rs.36,000) in the first year, 7.5% of the Rs.60,000 (Rs.4,500) in the second year and 5% of the Rs.60,000 (Rs.3,000) in the third year was the money I lost upfront by signing up for the policy (i did not realise it then though). This money (Rs.43,500 over 3 years) is retained by the insurance company and is lost for the customer as you cannot exit the policy for the first 3 years. Some relatively better policies charge lower rates of commission, but the lowest I have seen is ICICI Prudential which charges 25% in the first year. A part of this commission is paid to the partner bank (and also as incentive to the Relationship Manager) which sources this policy. It is another issue that the bank officials are completely unaware of the policies they are recommending and are driven by those that give them the highest revenue.
3. In addition to this, from the remaining yearly investment, policy administration fees and insurance charges are deducted which amount to a couple of thousands every year. The remaining amount which was Rs.20,000 for the first year gets invested in a mutual fund and will keep growing with the NAV of the Mutual Fund. Policy Administration charges are similar to Fund Management Charges and the Insurance Charges are counted towards the Insurance Cover which I get on signing up for the policy which is Rs.6,00,000. It rarely exceeds Rs.15,00,000 for most of the ULIP’s I have reviewed till date.
4. The Insurance Cover you get ranges between Rs.5,00,000 to Rs.15,00,000 and is woefully inadequate if you are a working individual. You are better off with a pure life insurance policy from LIC.
5. The amount which is invested in the market also does not grow in line with expectations as I have observed that fund managers from Insurance companies are not as good as Fund Managers from Mutual Funds. My Mutual Funds give me much better returns than the ULIP Fund.

My advice to you, if you are contemplating Investment in a ULIP is as follows. Do not link up your Investments and Insurance. Keep them separate.

1. Better to go for a pure risk Insurance Plan rather than going in for a return oriented plan. A pure risk plan is you get a fixed cover ranging from Rs.10,00,000 to Rs.1,00,00,000 in event of death and you pay a fixed annual premium for the same.
2. Mutual Funds which have an entry load of 2% are much better for investments than ULIPs which have a minimum entry load of 25% in Year 1 and higher entry loads than MFs in Year 2 and Year 3 as well. The damage done in 3 years cannot be recovered in the next 5 years even if you have a superb fund manager for your ULIP. You would be better off investing in Mutual Funds in the first place.

I am yet to break even on the amount invested. Find attached the Excel Sheet that I maintain to track the performance of my ULIP. You will realise how I have lost money on the same.

If you want any policy to be evaluated before you signup for the same, you can feel free to write to me at Ask.Pranav@Gmail.com and I will try to revert to your query within 48 hours.

Why you need financial education ..

It is beneficial for all to be well versed with the details of Personal Finance, especially if you are a young working executive earning anything from Rs.10,000 per month upwards. In India, we have over 50 different banks which are proactively approaching us for products which vary from Credit Cards, Personal Loans, Holiday Packages, Demat Accounts, Unit Linked Insurance etc and we rarely do any research before signing up for these products and land ourselves in a soup. Experts (as well as your long time chartered accountant) can be wrong in their facts and recommendations.

You need to be able to choose products which satisfy your banking / personal needs and believe me, it is not easy doing that!! I have personally faced numerous problems in the last 2 years and I thought I would share some of my insights on the various products which are on offer today.

1. Credit Cards can be your best friend or worst enemy, with an Interest rate upwards of 35% p.a. you need to be very careful of how you use this product, but it is important to note that the best deals and discounts are only offered to Credit Card customers. Over 200 credit card offerings throng the Indian Market today and many more are launched everyday, you need to know which works best for you.
2. Bank Accounts come in different shapes and sizes such as Savings Account, Current Accounts and Overdraft Accounts. They have different Interest rates and different minimum balances, the fines imposed for not maintaining the minimum monthly balances are also different. What should I really look for before choosing my Bank? Home my subsequent posts help you answer these questions.
3. Personal Loans and Home Loans all appear the same - however in reality they are very different in terms of the fees and penalties. You need to match your loan, not only to your finance requirements, but to your long term financial strategy as well. Processing Fees, Preclosure Fees, Manner of computing Interest (Daily Reducing Balance, Monthly Reducing Balance, and Yearly Reducing Balance) will make a huge difference to you financially. It is a pity that these points seldom feature in our discussion while availing a loan.
4. There are a plethora of Investment Options available to the average Indian Customer, ranging from Stocks and Mutual Funds to Fixed Deposits and Gold. What are the details of each of these investment options and which one is best suited to you? A lot depends on the liquidity that you require at any given point in time.
5. Insurance, this is the most mis-sold product by banks and agents in
India. Be rest assured that most insurance companies and referring banks, do not disclose all that you need to know about your policy. I myself have a Birla Sun Life Insurance Policy (ULIP) where 60% of my first year premium of Rs.60,000 was eaten up by the agent / insurer / partner bank and only the remainder was invested. Believe me these agents are ruthless. However, Insurance is a great product which can be extremely beneficial - but please be in the know on what you are signing up for.
6. Tax Planning is something which most people spend very little time on. The prevailing opinion is that it is best left to the Chartered Accountant. But no one knows your financial needs better than you. So please pull up your socks and learn the ways in which you can save tax. Some of the best options are Rent Benefit, Interest on Educational Loan, and Interest on Home Loan, Health Insurance Policies, and Donations to Educational Institutions etc.

There are several questions which come to your mind when you apply for a financial product, I will try to help you find answers for them. My objective is to promote financial education through my posts which will cover various issues pertaining to the above mentioned products.

You can feel free to write to me on Ask.Pranav@Gmail.com and I will reply to your queries within 48 hours. Thanks & Happy Banking!