How ULIPs can make you rich!

Ever since unit-linked insurance plans (ULIPs) made their debut, they have become a subject of much discussion and debate. On the one hand, they were a trifle too complicated for individuals not yet exposed to the stock markets; on the other hand, they were much-maligned because of the 'unusually high' costs. ( Not all are with high cost, there are very few ULIPs with less cost ).

As ULIPs made their presence felt, insurers were more open to discussing the costs and how they evened out over the long term. This and the flexibility that ULIPs offer became important points that made individuals consider adding them to their portfolios.

Today, more individuals are open to using the ULIP-way to create wealth over the long term. Here we outline exactly how ULIPs can help you fulfill that responsibility.

If you are between 25 and 35 years of age:

You are young, probably married and even have kids. If you are the sole breadwinner in the family, then you have quite a few responsibilities to fulfill right from planning for your child's education/marriage to planning for your own retirement to providing for the family in your absence.

The last responsibility is the most critical and ironically it is the easiest and cheapest one of the lot to fulfill. At Personalfn, we have always been votaries of term insurance -- the cheapest way to get a life cover for yourself.

Term insurance is also insurance in its 'purest' form, in other words there is no savings element in it, which ensures your premiums are very low. There is no better product to provide for your family in case of an eventuality and all individuals must consider taking a term plan.

Term insurance of course takes a huge burden off your chest as also your wallet. But it still leaves you with a problem. If term insurance is only going to take care of the 'risk' element, who is going to take care of the 'savings' part.

This is where ULIPs come in. Of course, that is not to say that ULIPs do not have an insurance element, they do, but it is limited largely to the earlier years and after a point they don the mantle of an investment product.

So how can ULIPs help you save for child's education/marriage, planning for retirement and other investment-related objectives? ULIPs can do all this and more because they come with a lot of variety.

Consider this; except for term insurance (because it does not make sense), just about every life insurance product has a ULIP option. So you have endowment ULIP, child plan ULIPs and pension ULIPs. As a matter of fact, there are some life insurance companies that only have ULIP products; they don't have traditional endowment, pension and child plans at all!

What that tells you is that if you are willing to take on some risk, a ULIP can help you meet a lot of your financial objectives.

If you are looking to set aside some money for your child's education, the 5%-6% return on an endowment plan may not even take care of inflation, let alone provide for a medical or MBA degree. The return you earn on a child plan should not just counter inflation, it should be enough to cover the cost of education.

And the way cost of education is spiralling, your insurance plan must work very hard. Given their equity component, ULIPs are ideally placed to fulfill this role.

As we mentioned before, ULIPs are flexible; there are various options within a ULIP with the equity component varying right from 0% to 100%. This ensures that you are able to select an option that best suits your risk profile. Let us understand how ULIPs can be tailor-made to serve your financial planning needs.

You are in the 25-35 years age bracket. Your most pressing financial objectives are providing for your child's future and your own retirement. ULIPs can help you achieve both. Although you can take a single endowment ULIP to achieve both objectives, we think it is more prudent to make a demarcation between the needs and take separate ULIPs dedicated to each objective.

Opt for a ULIP child plan to provide for your child's higher education, marriage and seed capital for business to name a few needs. One way to handle this multi-faceted objective is to take a ULIP money-back plan. This way you get monies at regular intervals to address multiple needs.

Sponsored link for this article is Birla Sun Life Insurance


The other important plan that individuals must consider taking earlier on their lives is a pension plan. Building a corpus to face the rigours of retirement should be given the priority it deserves.

Again, a long-term investment objective like retirement planning could do with an equity 'push'. Here is where a ULIP pension plan can add value to your retirement portfolio. Likewise a ULIP endowment plan can help you meet investment objectives like buying property or setting up a business for instance.

If you are between 35 and 45 years of age

By the time you reach the 35-45 age bracket, some of your existing ULIPs are probably nearing maturity. For instance, if you had taken a ULIP child plan earlier on, it is likely to mature in this age bracket to coincide with the need (higher education/marriage) you had in mind at the time of taking the ULIP.

However, if you married late or did not begin planning your finances at an early stage in your life, now is the time. If you haven't insured yourself as yet, go for a term insurance plan.

The advantage of taking a term plan at a slightly advanced age is that you have a better idea of how your lifestyle is likely to pan out going forward. In terms of costs, term plans remain your cheapest option no matter when you take one.

You can opt for some of the ULIPs we mentioned for individuals in the 25-35 years age bracket depending on your needs. Remember, unlike endowment, which gets really expensive at an advanced age, ULIPs because of the way they are structured, do not turn out that expensive.

If you are over 45 years of age

In this age bracket, it is likely that you are insured. However, you still need to review your insurance cover taking into consideration the changes in your lifestyle, income, needs and financial commitments. Beef up your insurance cover through a term plan.

By this time, your ULIP pension plan will have matured. You can then opt for an annuity, immediate or deferred, depending on your requirements.

6 points to note

Since ULIPs offer a lot of flexibility, you need to keep some points in mind to optimize the benefits associated with them.

* There are so many new plans which offer much more flexibilities than the old schemes for more information you can talk with you insurance consultant.

* Notice we have recommended ULIP child plans/pension plans and even term insurance for most individuals. When you opt for these plans it is important you do this after taking your insurance consultant into confidence. He is the one who is going to help you with the numbers, so you need to tell him exactly what you are looking for in an insurance plan.
* Remember there is an insurance cover associated with ULIPs. Since it is also likely that you have other insurance plans like term and/or endowment, it is important you have a clear idea of exactly how much your insurance cover is worth after considering all your insurance plans. This number will prove helpful when you review your insurance cover at regular intervals.
* Likewise, ULIPs also have an investment element. You are likely to have investments in mutual funds, stocks, bonds and fixed deposits as well. You need to add up the market value of all these investments while calculating your investment worth. This number will prove useful when you wish to beef up your investments in a particular asset.
* ULIPs derive their 'power to perform' from equities. When you have a lot of aggressive ULIPs in your portfolio it means that you are overweight on equities. Add to this your investments in stocks and equity funds, and your exposure to equities increases even further. To temper your equity exposure, it is generally advisable to opt for conservative/balanced ULIPs (maximum 50% equity exposure).
* Even if you are a high-risk investor, you must gradually shift your assets to a conservative ULIP option as your age advances. Financial prudence dictates that risk reduces as age increases; this needs to reflect in all your investments including ULIPs.
* Like with all investments, it is prudent to diversify your ULIP investments. This is necessary due to several reasons with financial prudence being the most important reason. Varying flexibility levels in ULIPs across insurance companies is another factor that should make you opt for a ULIP from more than one insurance company. Varying level of expenses in ULIPs is another reason to opt for ULIPs across insurance companies to keep expenses on the lower side.

For more information please contact :
Venkata Ramana
email id : sriram.adviser@gmail.com

Buying insurance? Here's a checklist

Since the nationalisation of the life insurance business in 1956, the state-owned Life Insurance Corporation of India had been the only source of life insurance to the Indian consumer for over 40 years.

With the opening up of the insurance industry in 2000 and the activation of private participation, the Indian insurance landscape has changed entirely. Today the consumer is presented with unprecedented choice and will benefit from the liberalization and competition in numerous ways.

This article aims to help customers select their insurance from the abundance of choices available.

LIC has done an admirable job in the past 40+ years. Nonetheless by its own admission, market penetration in insurance has stagnated at 12-15 per cent. India has more than 250-million strong middle class segment, much of which is uninsured or underinsured. As a result, life insurance premia has been contributing a mere 3.2 per cent of the GDP.

Obviously, there is need to raise this figure to globally competitive standards of two-digit share percentages. As in every sector of world economies, competition will benefit the consumer through enhanced market savvy and consumer responsiveness of players. With the entry of the private players, the Indian insurance individual retail market is estimated to be worth $25-27 billion in the next 7-8 years.

Most certainly, premium contribution to our GDP will increase to double-digit share percentages, up from the current 1.4 per cent of GDP.

In many international markets, the product offerings of the insurance industry are fairly similar. The true differentiators come from delivery and service. Consumers while studying the market for an insurance plan should certainly look at an innovative and comprehensive product line in companies. This helps in times of repeat sale and for addressing differing needs at various stages of one's life.

Certainly, the service the company offers is an important criterion for careful examination. An agent trained to consider long time needs, who is helpful and believes in full disclosures for a consumer to make informed decisions about his / her financial planning, will help in making the choice.

Global experience has shown that life insurance is never bought but always sold and the only real way of reaching consumers is face to face. Hence personalized service that includes regular reviews, updates and the flexibility to adapt insurance solutions to suit consumer's changing needs are also important.

A strong business foundation and a robust distribution network are some of the essentials while considering any life insurance company. The reputation and standing of a company are also indicators that reveal the kind of products and service one can expect.
Sponsored link for this article is Shriram Life Insurance



Insurance companies are periodically rated by international rating agencies for their financial stability and ability to settle claims. Large insurance companies receive high ratings from rating agencies, like Standard & Poor's, Moody's Investors Services and A M Best.

A company's reputation will also indicate its ethics, its integrity and best practices. These metrics too are significant and go a long way to inspire confidence in consumers and also shareholders. Companies with solid a reputation usually believe in fairness to all stakeholders (consumers, shareholders, employees and agents) and it is reflected in all aspects of the business including financial prudence in all its dealings.

Insurance coverage is essential for every individual. How much and what type of insurance one needs will differ with every individual. Review the following with your financial advisor to arrive at the life insurance solutions that suits your needs:

* Review your own insurance needs and circumstances. Choose the kind of policy that offers benefits that most closely fit your needs.
* Make sure you can afford the premium payments. If the premium amount increases later, can you still afford it?
* Do not sign an insurance application until you review it carefully to be sure all the answers are complete and accurate.
* Do not buy life insurance unless you intend to stick with your plan. It may be very costly if you quit during the early years of the policy.
* Do not drop one policy and buy another without a thorough study of the new policy and the existing one. Replacing your insurance may be costly.
* Read your policy documents carefully. Ask your advisor or company about anything that does not appear clear to you.
* Review your life insurance programme with your financial advisor or company every few years to keep up with your changing requirements.
* Your insurance policy gives you long term protection while offering immediate tax benefits. Your insurance needs are usually greater than the need for a tax benefit in the current financial year.

Insurance in the future will no longer be bought as a savings tool but will be sold for protection. An insurance policy offers much more than returns from tax planning and investment. It offers one the ability to plan for unforeseen events that could affect the individual and the family's financial well being adversely.

Life insurance is universally acknowledged as an effective tool to eliminate risk, substitute certainty for uncertainty and ensure timely aid of the family in the unfortunate event of the death of the breadwinner. Hence life insurance provides assistance if premature death occurs which may leave a dependent family to fend for itself and also for old age without visible means of support.

Buying life insurance cannot be compared with other investment decisions especially stock market investments where one waits for the right time to buy or sell. As far as life insurance goes, the best time to buy it is right now!

4 ULIP 'sales pitches' you must know & Some Tips

Given the trend in recent times, there is a fair chance that the advisor would recommend an unit-linked insurance plan (ULIP). In this article, we present 4 ULIP ‘sales pitches’ that insurance advisors are most likely to use and investors must beware of.

1. Premium has to be paid only for the first 3 years
Often insurance advisors pitch ULIPs claiming that premium payments need to be made only for the first 3 years. The policy will be in force even if premium payments are discontinued thereafter. That’s only part of the picture. The other relevant bit is that, though the policy will continue to be in force, mortality charges will be deducted from the ULIP’s corpus in the future as well.

Put simply, the insurance company will continue to make necessary deductions from the policy’s total accumulated money. Hence, the accumulated amount will continue to erode with each unpaid premium. Only the balance amount (net of mortality charges) will continue to be invested in the markets. Furthermore, when the ULIP’s corpus is insufficient to service the mortality charges, the policy will cease, thereby depriving the investor of an insurance cover.

2. New ULIPs make cheaper buys
Mutual fund distributors have been known to mis-sell new fund offers (NFOs), i.e., new mutual fund schemes by using the Rs 10 net asset value (NAV) pitch. Investors are convinced that buying into an NFO makes a cheaper buy on account of the lower (Rs 10) NAV. Investors tend to draw parallels between stock investing and mutual fund investing and fall for the bait. In fact, this is one of the most common fallacies in the mutual funds segment.

Now insurance advisors have ‘borrowed’ the same sales pitch from mutual fund distributors for selling new ULIP offerings. Investors are conned into believing that buying into new ULIPs (which are market-linked investments like mutual funds) translates into a cost-effective purchase.

Sponsored link for this article is Birla Sun Life Insurance

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3. ULIP investors are provided with dedicated fund managers
Like mutual funds, ULIP monies are also managed by fund managers. Fund managers are responsible for making investment decisions for the entire ULIP corpus i.e. for the monies invested by all unit holders in the given ULIP.

However, insurance advisors often claim that ULIP investments will be managed by dedicated fund managers. In other words, ULIPs are likened with investments under a Portfolio Management Service (PMS). In the latter, the investor has access to a dedicated fund manager who manages the portfolio in line with the mandate provided by the investor.

4. ULIPs offer guaranteed returns
ULIPs are market-linked investment avenues and are susceptible to the same risks that any market-linked investment avenue would. Broadly speaking, a downturn in equity and debt markets would adversely affect the performance of an ULIP. Of course, the fund manager’s skill sets, the ULIP’s portfolio structure and the investments will play a part in determining how it eventually fares.

Thanks to the upsurge in equity markets over the last few years, insurance advisors have begun pitching ULIPs as products offering guaranteed returns. Nothing could be farther from the truth. Investors should be wary of such fraudulent claims.

4 Steps for selecting the right ULIP

For a versatile profuct that is capable of adding significant value to investor's portfolios, unit-linked insurance plans(ULIPs) seem to have far too many critics. We have interacted with a number of investors who were very disillusioned with their ULIPs investments; often the disappointment stemmed from poor and inappropriate selection. We present a 4 step investment strategy that will guide investors in the selection provess and enable them to choose the right ULIP.

1. Understand what ULIP are all about:Do as much home work as possible bewfore investing in an ULIP. This way you will be aware if what you are getting into and make an informed decision. More importantly it will ensure that you are not faced with unpleasant surprises at a later stage. Fortunately for investors, the regulator has issued guidelines(on areas like sum assured and tenure), which have simplified the new breed of ULIP to a large extent.

Our experience suggests that investors on most occasions fail to realise what they are getting into and insurance agent/advisor's should get a lot of credit for the same . So you must gather information on ULIPs, the various options available and understand their working. Read ULIP-related information available on financial websites, newspapers and sales literature circulated by insurance companies.

2. Focus on your need and risk profile:Identify a plan that is best suited for you(in terms of allocation of money between equity and debt instruments). Your risk appetite and needs should be the deciding criteria while choosing the plan. As a result if you have a high risk appetite, then an aggressive investment option with a higher equity component is more suitable. On the other hand, if you are a low-risk investors, find you if the ULIP offers a minimum guarantee and the costs associated with the same.

Likewise, you existing investment portfolio and the equity-debt allocation therein also need to be give due importance before selecting a plan. Opting for plan that is lop-sided in favour of equities, only with the objective of clocking attractive returns can and does spell disaster in most cases.

Sponsored link for this article is Shriram Life Insurance



3. Compare ULIP product form various insurance companies:Compare product offered by various insurance companies on parameters like expenses, premium payments and performance among others. Make it a point to compare the ULIPs performance vis-a-vis comparable ULIP options from other insurers. Study the portfolios of various ULIPs across companies. expenses are a significant factor in ULIPs(Since they impact returns), hence an assessment on this parameter is warranted as well.

Wnquire about the top-up facility offered by ULIPs i.e. additional lump sum investments which can be made to enhance the policy's savings portion. This option enables policy holders to increase the premium amounts, thereby providing an opportunity to gainfully invest any surplus funds available. Find out about the number of times you can make free switches from one investment plan to another. Some insurance companies for instance, offer multiple free switch every year.

4. Go for an experienced insurance advisor:Select an advisor who is not only conversant with the functioning of debt and equity markets, but also independent and unbiased. Ask for references of clients he has serviced earlier and cross-check his service standards. when your agent recommends a ULIP from a given company, put forth some product-related questions to test him and also ask him why the products from other insurance should not be considered.

Insurance advice at all times must be unbiased and independent; also your agent must be willing to inform you about the pros and cons of buying a particular plan. His job should not be restricted to doing paper work like filling form and delivering receipts; instead he should keep track of your plan and offer you advice on a regular basis.

3 ways to calculate your insurance needs - by Amar Pandit

Calculating how much life insurance you need is one of the most important financial decisions you will ever make. It should never be an isolated decision depending only on how much of a premium you can afford.

Having said that, there are many ways in which you can determine how much insurance you need.

Here we give you a few.

Income Replacement Value

This is one of the basic methods of insurance calculation and is based on your current annual income.

Insurance needs = annual income * number of years left for retirement.

Let's say your annual income is Rs 5,00,000. And you are 45 years old with 15 more years for retirement.

In this case your insurance cover equals Rs 5,00,000 * 15 = Rs 75,00,000.

Another way in which income replacement works is to multiply the annual income by 10 (also known as Income Replacement Multiplier).

Another variant states that the Income Replacement Multiplier changes with age. So between the ages of 20-30 years, the income multiplier is 5-10, and from 30 to 40, the income multiplier is 15-20.

It drops to 10-15 between the age of 40 and 50 and further to 5-10 between 50 and 60.

Some calculations also take into account any outstanding loan amount that you may have on your housing loan, personal loan etc.

Human Life Value (HLV)

This method of calculating life insurance is based on contribution that one makes and would have made to her/his family in case of sudden demise.

So HLV is defined as the present value of all future income that you could expect to earn for your family's benefit. It also includes other value you expect to contribute, less personal expenses, life insurance premiums and taxes through your planned retirement date.

Let's see this example for better understanding.

Ram is 40 years old and plans to retire at 60. His current salary is Rs 3 lakhs and is expected to remain same every year. His personal expenses, life insurance premiums that he pays and taxes are around Rs 1.25 lakhs. His contribution to his family is rest of his salary of around Rs 1.75 lakhs.

Here, Ram's Annual Life Value (his economic contribution to his family post his expenses) is Rs 1.75 lakhs.

Suppose Ram dies at 41, then the economic value (namely Rs 1.75 lakhs) he would have added every year (from age 41-60) to his family is no longer there. So to protect this economic value, Ram can use life insurance as a safety valve so in case of his death, this economic value can come to the family.

Gross Total Income: Rs 3 lakhs

Less Self - Maintenance Charges: Rs 1 lakh

Tax Payable: Rs 10,000

Life Insurance Premium: Rs 15,000

Surplus Income Generated for Family: Rs1.75 lakhs

If this surplus income is capitalised at a discount rate (expected return rate) of 8 per cent per annum for 20 years, then the HLV will be = Rs 175,000*10.6 = Rs 18.55 lakhs.

In short, Human Life concept arrives at an estimate of insurance cover required as on date to protect the income earners' economic value to their families including their future earning potential and capacity.

This multiplier 10.6 above can be calculated using the Present Value Function in an Excel spreadsheet.

Go to excel spreadsheet; click on Insert tab; click on the 'Function' option; select function PV (that is the present value of your investment; it gives the total value of a series of future payments that is worth today).

A box opens up where in you can fill in the above values for rate (8%, that is the return one can expect over the next 20 years), period (20, assuming you will make payments for the next 20 years) and pmt (payment made every year and which cannot change during the next 20 years) and Type (a logical value which should be 1 at the beginning of the period; it becomes 0 at the end of the period, that is, at the end of 20 years).

Rate = 8 %

Period: 20 Years (Age 41-60)

Pmt: Rs 1 will give you this multiplier. If you put Rs 1.75 lakhs here it will give you the value of Rs 18.55 lakhs

Needs Analysis

In this method, you can assess your needs -- and the needs of your loved ones -- and make a calculated assessment.

The most critical factors are the number of dependents you have and their needs.

Other major factors to consider are:

*
Loans
*
Kind of lifestyle you want to provide to your family
*
Provision for non-working spouse who would no longer get an income
*
Child's education
*
Child's marriage
*
Providing for financially dependent parents
*
Special needs
*
Dreams and aspirations such as contributing to charitable causes

Once you determine the above factors, you run the following calculations:

1. Lump sum needs on Life to be Insured's death

a. Home loan payoff

b. Car loan payoff

c. Child's education

d. Child's marriage

e. Emergency fund post death

2. Monthly income needs

a. Monthly expenses

b. Income of Living spouse in case she earns, or rent or interest

c. Shortfall = (a-b)

Shortfall is a-b. Suppose, expenses are Rs 50,000 and spouse's income is Rs 30,000 post tax, then shortfall is Rs 20,000 (50,000-30,000).

d. Monthly income needs till child turns 21 or is self-sufficient:

e. Number of years to go: For the child to reach 21 and post that for the spouse till her age of 80 or 90 years

f. Annual income needs: Of spouse, children or dependents

g. Total income needs: Of spouse, children or dependents

3. Sum up the current invested assets and current life insurance cover. Now see how much this total differs by what you have calculated above. This will be the shortfall (considering that you die today) that you will need to get covered. But do note that invested assets exclude residence, car and other personal assets.

Picking the right one

The one that I prefer and is mostly followed by reputable financial planners for decades is the Needs Analysis Method. Once you determine the amount of life insurance need, just buy the lowest cost insurance plan that's available to you.

You should buy insurance after a thorough calculation of capital (lump sum needs on death such as paying off a loan, daughter's marriage or education) as well as the income needs of your family after you are gone.

Ask yourself: If something were to happen to you, what kind of corpus would your family need to maintain their current lifestyle, to fund your child's education as you had envisaged, retirement income for your wife etc.

Most middle-class individuals have insurance policies in the range of Rs 1,00,000 to Rs 10 lakhs. Some of the wealthier ones have more than this.

The question they need to answer is: How long would Rs 10 lakhs suffice?

Finally, remember that your insurance needs go down over a period of time. Hence if you find yourself with a sudden windfall or have accumulated enough wealth, then you can evaluate the need to altogether terminate your insurance policy.

Want to discontinue your policy?

we come across many individuals who either have not been able to cough up the high premiums on their unit linked insurance plans (ULIPs) or they do not wish to pay the premiums on their low yielding traditional insurance policies. Either ways, they are not clear about the impact of discontinuing the policy. In this article, we explore this scenario at length and the implications involved.

Having obtained a life insurance policy, you are required to pay the premiums on the due dates as mentioned in the policy document. However, insurers do allow for a “grace period” for the premium payment. Payments within the grace period are stipulated to be “on time” payments. The grace period usually lasts for one month for yearly, half yearly and quarterly premium payment modes and 15 days for the monthly payment mode. The trouble begins if the premium is not paid even within the grace period or if you decide to discontinue the policy like many ULIP investors have done in the recent past, after realising that the policy doesn’t quite fit into their scheme of things.

In such a scenario, the policy is considered to have lapsed and all the premiums paid are forfeited. More importantly, the insurer doesn’t entertain any claims once the policy lapses. However, it should be understood that the policy is not necessarily forfeited i.e. the policy’s value doesn’t become nil. The Insurance Act does not allow for forfeiture as every policy acquires a reserve based on the premiums already paid.

The Insurance Act provides for a return to the policy holder of an amount that is representative of the reserve and this is referred to as the ‘Surrender Value’ or the ‘Cash Value’. The Insurance Act stipulates that every insurance policy shall have a guaranteed Surrender Value, if at least 3 years’ premiums have been paid. This reserve arises due to the following:

1.Premiums in the early years of the policy being more than what is justified.

2.Savings element in the premium.

Apart from the option of surrendering your policy, insurers like LIC also provide other options like making a policy ‘paid-up’, whereby the policy remains in force with a reduced sum assured, depending upon the number of premiums paid. Another option is to keep the policy in force by deducting future premiums, from the Surrender Value. A third option is to provide term insurance subject to the condition that the Surrender Value is more than the sum assured.

Since surrendering the policy is the option most commonly availed by policy holders, let’s explore how the Surrender Value (obtained at the end of 3 years) is calculated.

The following table illustrates the returns that a policy holder can clock from a ULIP, if the same is surrendered after premium payments have been regularly made for the first 3 years. We have assumed that the policy holder pays an annual premium of Rs 30,000 and that his investments (after adjusting for the expenses) grow at 15% per annum.



Given the above-average returns provided by ULIPs over the last few years, thanks to the stock market rally, our assumed rate of return (15%) may seem rather conservative. However, this is the return we expect domestic equity markets to generate over the long-term.

As is evident from the above calculations, the portfolio value of a ULIP in the intial years can be rather disappointing; in effect the Surrender Value, which is a percentage of the portfolio value, could be even smaller. The prime reason for this is that in the initial few years, a substantial proportion of the premium paid is utilised for servicing the various expenses related to the policy – as high as 70% in some cases. This means that the proportion of the premium used to provide for the Surrender Value is not the entire premium amount, rather it is the premium net of expenses.

It is evident that surrendering a ULIP after having paid the premiums for the first three years may be an unwise option. But then, continuing with high ULIP premiums only at the behest of your agent is even more unwise and over the long-term this could hurt your finances a lot more.

The solution lies in exercising due care and making an informed decision at the outset while deciding to take life insurance. However, for individuals who are saddled with the wrong policy it’s an unenviable situation. We recommend that they consult their financial planners/insurance advisors and then decide on continuing the policy based on the merits of the case and their finances, among other factors.

How ULIP schemes mislead investors? -- By Amar Pandit

Unless you are the kind who does not watch television, “Bajaj Allianz super agent mujhe apna tax bachchana hai” is an advertisement one can see over and over again, these days.

Given the fact that it is that time of the year when insurance companies hope to get a bulk of their business, this flood of advertising is not surprising. The advertisement emphasises on the time tested cliché of insurance being a tool to save tax rather than a tool to hedge against the risk of dying early.

Likewise the advertising billboards of Mumbai are loaded with Chintamani advertisements with punch lines like ‘don’t just settle for tax planning but also do life planning’.

These advertisements are a part of the misleading sales pitch that most insurance companies and insurance agents make these days to solicit business.

One of our acquaintances Rajesh, who had seen the Chintamani and Bajaj Allianz advertisements, was approached by a private bank to sell him an insurance policy from Bajaj Allianz. The usual sales pitch was made emphasising the following points:

This Unit-linked insurance plan has delivered 40% return in the last few years.

You just have to pay the premium for 3 years and you can exit after 3 years if you want.

You will save tax of around Rs 33,666 if you fall in the highest tax bracket.

We are the number 1 private insurance company in the country.

“What more do you want from a policy? How come I missed this gem” he thought. The same pitch was made to around 30 more of his colleagues who work for a renowned hospital in Mumbai.

Rajesh was recently shocked to see Bajaj Allianz charging around 72 % as premium allocation charge during the first year of policy. What this meant was that only 28% of the amount would be invested. He failed to understand the rationale.

The bank had not told this while selling him the plan. His colleagues had the same experience. They couldn’t figure anything out looking at the statement either because most of the insurance statements are so complex that it would require a higher than normal financial quotient to decipher the charges.

So they innocently shot of a letter to Bajaj Allianz asking for a refund of the 72 %, which they thought was rightfully theirs. Several reminders yielded no response from the insurance company. Finally they managed to speak to someone at Bajaj Allianz. The company shrugged it off and blamed the bank for the mis-selling. Such cases are common where insurance companies often wash their hands off after such bouts of mis-selling and look for scapegoats. This example is essentially a microsm of the whole.

The marketing and selling systems of insurance companies are prone to such messes as insurance agents are incentivised to sell ULIPs by running various contests right from a Free Trip to Dubai to a Toyota Corolla Car. When insurance companies dangle the carrots of paid foreign trips & more money for selling more, the advisory model is likely to take a backseat as the interests of policy buyers are not aligned with the interest of policy sellers. Incentives are a part of any business. But it is one issue if an incentive by an FMCG company makes a retailer sell a different brand of shampoo vis-a-vis mis-selling an insurance policy. Unless insurance companies are penalised for such misgivings, such stories are bound to happen over and over again.

Here is my interpretation of the sales pitches made by insurance companies:

You can exit after 3 years: This does not make sense. The insurance companies typically recover a lot of money in the initial few years of the ULIPs through a very high premium allocation charge. So it takes several years for the investment to just breakeven. Additionally, the agent will sell you more insurance next year because even after buying this policy , you are still underinsured.

We are number 1: I am not too sure what that means. How does it help the individual taking the policy?

And if you hear the tantalizing returns, it means: “Though we say 30-40 % returns, it is only an appreciation in the net asset value (NAV) of the scheme and not the actual returns that you have got”.

A lot of ULIPs buyers still cannot believe they have not made any money despite the unprecedented bullrun in the equity market as insurance companies are smart enough to take out the expenses from the units and not the NAV.

How to avoid these mistakes

Take these ads not with a pinch of salt, but with a truck load of salt.

Your objective for tax planning should be to maximise your post tax income and not just to save taxes. These statements have different meanings and you would do well to understand them.

See if you are maximising investments under Section 80C. If not start with voluntary provident fund, public provident fund, equity linked savings schemes (tax-saving mutual funds) etc in that order of your risk tolerance for investments and opt for term insurance for insurance if you need one.

insurance questions you MUST ask

Hi All,
There are some questions you must ask your insurance agent before taking buying the insurance from the agent.
Is there any other policy that offers the same cover at a lower premium?
Which portions of the maturity benefits are guaranteed?
Are the advertised returns of the policy for real?
Is there a free look period?
What are the exclusions to the policy?
Can I backdate my policy?
Is there a discount on the yearly premium?
What are all the internal hidden charges?

Buy health Insurance for your family

Cost of insuring of family of four for 1.5 lakh each is Rs 6000. The total premium paid over 20 years would be Rs. 1.3 lakh. Two instances of hospitalization in 20 years would cost the family at least Rs.1.2lakh not only that we need the money at right time(if we are not having the health insurance). So the premium pays for itself. And the tax saved is a bonus.

Note:Under sec80D, Premium for a medical insurance plan is fully deductible for the taxable salary

Get yourself insured

Life today has become a lot more uncertain then ever before. Therefore, taking life insurance is another objective that should rank high in the priority list of all individuals. Simply put, the purpose of life insurance is to indemnify the nominees/dependents of the insured against an eventuality. So life insurance must form an integral part of the individual's financial planning exercise. In addition to life insurance, individuals should also be equipped with adequate medical insurance.

There are three types of life insurance plans; term plan, endowment plan and ULIPs(unit - linked plans), available at investor's disposal. While ULIPs are not an ideal avenue to take life cover, term plans, the cheapest and most effective form of life insurance are best suited for this purpose.

Life Insurance

The need for life insurance comes from the need to safeguard our family. If you care for your family’s needs you will definitely consider insurance.

Today insurance has become even more important due to the disintegration of the prevalent joint family system, a system in which a number of generations co-existed in harmony, a system in which a sense of financial security was always there as there were more earning members.

Times have changed and the nuclear family has emerged. Apart from other pitfalls of a nuclear family, a high sense of insecurity is observed in it today besides, the family has shrunk. Needs are increasing with time and fulfillment of these needs is a big question mark.

How will you be able to satisfy all those needs? Better lifestyle, good education, your long desired house. But again - you just cannot fritter away all your earnings. You need to save a part of it for the future too - a wise decision.



This is where insurance helps you.

Factors such as fewer number of earning members, stress, pollution, increased competition, higher ambitions etc are some of the reasons why insurance has gained importance and where insurance plays a successful role.

Insurance provides a sense of security to the income earner as also to the family. Buying insurance frees the individual from unnecessary financial burden that can otherwise make him spend sleepless nights. The individual has a sense of consolation that he has something to fall back on.

From the very beginning of your life, to your retirement age insurance can take care of all your needs. Your child needs good education to mould him into a good citizen. After his schooling he need to go for higher studies, to gain a professional edge over the others - a necessity in this age where cut-throat competition is the rule. His career needs have to be fulfilled.

Insurance is a must also because of the uncertain future adversities of life. Accidents, illnesses, disability etc are facts of life which can be extremely devastating. Other than the hospitalisation, medication bills these may run up it’s the aftermath of the incident, the physical well being of the individual that has to be taken into consideration. Will the individual be in a position to earn as before? A pertinent question. But what if he is not? Disability can be taken care of by insurance. Your family will not have to go through the grind due to your present inability.

Moreover, retirement, an age when every individual has almost fulfilled his responsibilities and looks forward to relaxing can be painful if not planned properly. Have you considered the increasing inflation and taxes? Will your investment offer you attractive returns under such circumstances? Will it take care of your family after you? An insurance policy will definitely take care of these and a lot more.

Insurance today has opened up new vistas for every section of society. Even for the village farmer insurance holds a lot of potential. Considering how dependent our agricultural system is on the monsoon, the farmer sees a dim future. The uncertainty of the monsoon too can be taken care of by insurance. Looking at the advantages of an insurance policy a number of farmers have gone in for insurance. Insurance has become a necessity today. It provides timely financial as also rewards with bonuses.

Why a Term Policy scores

I will talk about Term plane with out money back in this article

1. It is cheap
Let;'s compare a term Policy with and Endownment Policy in teerms of how much you will pay as premium. If you are say, 30 years of age, you would pay a premium of about Rs.1,800 to 4,740 every year ofr a 30 years Term Life cover of Rs 5 lakh.
In contrast, if you took a 30-years Endowment policy cover for Rs 2 lakh, you would end up paying a premium of around Rs.6,500 ot Rs.20,000 a year.
So, a Term Policy offers you double the cover for about one-fourth the premium.

2. You can circumvent the additional returns you would get from othere policies.
Going with the above example, if you do survive three decade, Nothing comes back in Term plane. But under the Endowment cover, you would get the assured sum (which is also known as your cover -- the amount you are insured for), plus a bonus (additional amount).So you could end up with around Rs 5 lakh (Rs 2 lakh + Rs 3 lakh as bonus) in total.

If you think that this is a good deal, hang on.
~ You pay the comany Rs 1,800 every year for the Term Policy.
~ For the Endowment Policy, where you get a hefty Rs 5 lakh back, you pay the company Rs 6,500 every year.
Now think about this alternative:
i. Pay the company Rs 1,800 every year.
ii. Take a Term Policy.
iii. Invest the balance of Rs 4,700 (Rs 6,500 - Rs 1,800), that you save as premium, wherever you want.
Consider stocks or equity mutual funds as an investment option over a long term. Your risks would be equally low, but your returns would be higher.
But remember: the key word is 'long term'.

3. You can get better liquidity if you put only a portion in Term Insurance.
Liquidity is a term used to denote how fast you can sell your investment and get money (liquid cash). So if you invest the notional 'difference' in premiums (Rs 4,700) between a Term and any other kind of plan in some investment (say, in a mutual fund), you can cash out all of it in an emergency in around 48 hours. In contrast, in an insurance policy, you have to pledge the policy and seek a loan against it.

Then pay an interest of about 8% to 10% on that loan.

4. You may end up getting underinsured.
If the premium is high, you might be tempted to go for a smaller sum as cover. Say you are 30 years old and looking for a life cover of Rs 20 lakh. You would spend about Rs 7,200 in a Term Policy.
In contrast, an Endowment Policy would set you back by about Rs 26,000.
Now, because you cannot afford Rs 26,000, you might be tempted to go for an Endowment Policy of only Rs 10 lakh that would cost Rs 13,000 a year.
Do you know what you have done? In one stroke, you have halved your life's financial worth!
If something were to happen to you, your family would get much less than they deserve.
Whatever policy you choose, don't meddle with the sum that you think your family deserves when you are gone.

The last word
Most life insurance companies in India offer at least one term plan each. Consult your insurance advisor for details. But don't expect him/ her to be enthusiastic about Term plans since insurance advisors get the least incentives for selling term plans. Insist on information till you get it.