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For meeting your unpredictable needs, get insurance coverage
Financial needs of individuals can be broadly divided into
two
categories unpredictable needs and predictable needs. Unpredictable needs should always
come first because they can arise any time. Most people ignore this basic fact of personal
financial planning. It is not unusual for financial planners to come across clients who
have built a substantial capital to meet their predictable needs but have neglected their
unpredictable needs altogether.
Predictable needs are many, such as buying a house, children's
education and marriage expenses and most importantly planing for retirement. Predictable
needs are normally met through prudent investment planning and wealth creation.
Unpredictable needs on the other hand are met mainly through adequate insurance.
Risk of something all of us face every day of our lives,
recognizing this we should take steps to avoid or reduce the risks encountered. Insurance
against personal risks (death, disability, medical,) property risks (household) and
liability risk (under statute of common law) is must in the portfolio of a prudent person.
By payment of premium the financial consequence of these risks
are effectively transferred to another party - the insurance company. This is the cheapest
and best and best way for accomplishing risk management.
The first step in financial planning is to make provisions for
emergency needs such as a critical illness, disability or unemployment. As a thumb rule,
one should keep aside four to six months income for meeting emergencies. Liquid funds are
a good alternative to savings bank account for the cash component of your portfolio. They
generate higher returns while offering the same degree of liquidity.
Certain insurance policies also give you protection against
emergency needs. A personal accident policy guarantees you an amount of money to replace
any loss of income. Interruption to income as a result of a disability, whether short or
long term can be devastating at any stage. Perhaps the most important type of insurance
for any individual are health insurance or medical insurance. These types of insurance
reimburse your hospitalization and treatment expenses arising out of an accident or
illness. Death is a certain event but not a predictable one. Every individual who has
dependents should purchase adequate life insurance especially if he or she is the sole
earning member of the family. The value of human life is to estimate.
Most people pay little attention to this vital aspect of
personal finance and end up being grossly under-insured. An individuals health lifestyle
number of dependents occupation anticipated needs etc. all affect the purchase decision of
life insurance. The sum assured on a person's life is a tricky thing to calculate and one
should seek the services of a financial planer to buy adequate insurance. The other aspect
of insurance is to safeguard your as sets from unpredictable events. The ownership of
property carries with it risks since assets may be damaged destroyed or stolen. It is not
just enough to seek adequate insurance for the assets but also to protect against any loss
of income arising from the assets. Individuals also face liability risks.
Liability risks when our actions or inaction's result in loss
damage or injury to other people or their property. The motor insurance you normally
purchase protects you from all the risks of the motor car being damaged destroyed or
stolen.
It also protects you from liability risks if you were to cause
damage or injure to other people or property while driving your motorcar.
  
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Insurance
Provides Nothing but a Peace of Mind
Most
people hate paying insurance premiums, as many do not make claims. But for long term
security, insurance is a must. Here is the positive aspect of taking an insurance policy.
Most of us spend a lot of our time and effort in establishing ourselves materially. These
goals are building a career, creating the best opportunities for our family accumulating
wealth and so on. These are very important things. However all these things are also
fairly fragile. In the blink of an eye through some disastrous event, what you have one
moment may be let in-tatters the next moment, with years of blood, sweat and tears going
straight down the drain. Floods, riots, burglaries, earthquakes, heart attacks banana
skips on the pavement and the list goes on.
The
trouble with insurance not surprisingly is that most people hate paying for it, as most of
the times they make no claims but insurance is perhaps one of the most important parts of
our long term security. It protects the assets we have presently and therefore helps
secure the future. Ask yourself the following question " If I don’t want to pay
for insurance, How am I going to be able to replace my home, my personal possession or my
car, If something happens to them?"
There
are hundred ways to make insurance payments more affordable. New insurance schemes have
plans for automatic debit of bank account or credit card for the premium on a monthly
basis, rather than paying one large annual fee. This helps your cash flow. However it may
be noted that paying one annual premium is often cheaper than 12 monthly premiums. You
should also factor insurance in to your budget just as you do with basics like food,
clothes and power bills.
Another
misconception about insurance is that it is a static one-shot affair, where you decide on
your sum assured and then pay the premiums as and when demanded. The fact is that as we
move through life, the insurance need varies. One needs to be careful of the throwing
money away to over insurance or have the wrong type of insurance or even more dangerously
to be under insured.
As a
general rule, insure your belonging to a level where thy can be fully replaced with
something comparable and new in the event of a claim and insure your life and income to
the point where you and / or your beneficiary will be free of debt and capable of living a
life of reasonable comfort for many years, preferably until the time you and/or your
surviving partner dies . This involves regularly updating all your insurance to reflect
your changing position in life. You will also need to ensure that all your insurance are
indexed to inflation, both in terms of the amount of cover you have and with claim, any
ongoing pay-out you might receive.
The two
main groups of non-commercial insurance are property and personal life. Say we need car
insurance as a legal obligation. This is compulsary as it provides insurance against any
claim bought by another person for any injury or death caused to them by your car. Due to
this provision, most of us unfailingly ensure that the vehicle is insured and it would be
unthinkable for us to drive out of the showroom in our brand new car without first getting
an insurance cover note. Other types of property insurance are home insurance, contents
insurance or a combination of both.
Home
insurance covers your home, the actual building itself-against damage caused by all sorts
of disasters, including fire, earthquakes, hurricanes, vandalism, riots and floods.
Contents insurance covers all your belongings inside your home such as furniture,
clothing, electronic equipments, and so on against all these dangers and most
significantly also provides coverage against theft. Combined home and contents insurance
is exactly what the name implies - a single policy that covers both the building and
everything in it, what's more, there are usually cheaper than a separate home and a
separate contents policy providing the same level of cover. Personal insurance includes
life, income and health insurance. At times, it is the most important insurance we can
have. People tend to under-insure themselves in these areas, based on the assumption that
misfortune will never happen to them- but it can and does.
It's
best to look upon insurance as a protection product rather than as an investment product.
Most of the popular policies share their investment surpluses with the policyholders in
the form of bonuses. But these policies may also have a higher cost component to them in
the form of higher premium. You also have a choice of low- cost high -cover plans. Where
you pay a lower premium but don't share surplus. A good choice in this category is Bima
Kiran from LIC. As far as finding the right insurance is concerned, you can get it through
insurance agents, financial planners, or straight from insurance companies. A great change
we are witnessing now is that we now have the flexibility to shop around for insurance.
This point can't be stressed enough. This change from that of a seller market to that of a
buyer's market is the best news for you. Premium and conditions will vary significantly
will vary significantly, as to companies themselves. The day is not far when you will not
be afraid to ask and insurer to give you a better quote than the one first offered
particularly if you have a policy or two already with them or have been a customer for a
reasonable time.
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Understanding
Auto Insurance
Every
body wanted to know about vehicle insurance
What
is insured: Any light motor vehicle used for social, domestic, and pleasure
purpose.
Insured
against what risk: loss or damage by accident, fire, lighting, self, ignition,
external explosion, burglary, house breaking or theft, malicious act; riot and strike;
terrorism; earthquake flood, cyclone and inundation whilst in transit by rail, road, air
elevator, left perils under liability for third party injury \ death third party property
and liability to paid driver. On payment of appropriate additional premium, damage to
electrical \ electronic accessories, personal accidental cover for driver, insured or any
named person, un-named passengers can also be taken.
Who
can insure: Individual and corporate owners of private cars and financier of the
car having insurable interest in it.
What
will the policy pay and how much: The insurance premium shall vary depending up
on the type of vehicle, age of vehicle, the types of insurance cover taken etc.
When
will the policy not pay: Consequential; depreciation; wear and dear; mechanical
and electrical breakdown; when vehicle is used out side the geographical area; when used
country to limitation to use; driven by a person other than the driver stated in driver
closed- war perils, unclear perils and drunken driving.
Third
party insurance cover for personal injury includes: Liability for death or injury
to third parties means that you are insured against that or injury pedestrians, occupant
of other vehicle, for unlimited amounts. Passengers of private vehicles and pillion riders
are also deemed covered.
Pure Insurance vis a vis with investment
Insurance
is not an investment. It is a necessity for those who need it. Such people should always
go in for higher cover and low premium policies. "True Insurance" called
‘term insurance ‘ covers the policyholder for a desired number of years against
death. It does not have any maturity, paid up or surrender values. If the policyholder
dies, the beneficiary (nominee or legatee) gets the sum assured. But, during the lifetime
the policyholder does not get anything. Amazingly, the LIC does not have any pure
insurance cover to offer. All its policies are a mix of term insurance and investment.
The LIC
mixes up security with investment and leaves the investor little option other than buying
the mixed product. Amongst such mixed products, there are a few policies where the weight
age of term insurance is quite heavy. We shall examine such policies:
LIC 2-year Term Policy
This is
essential a pure term insurance product. However this policy is not found very popular.
Convertible
Term Assurance
The
convertible Term Assurance (Without profit) is the closest to real insurance. It is given
in Table-58 of the LIC premium table. Policies under this plan will be issued for five to
seven years. This policy does not offer any surrender value, loan or paid up values.
However this policy provides the option to convert the policy into either a Limited
Payment Life Policy or an Endowment Assurance policy.
Triple
Cover
There
are two policies namely Jeevan Mitra and Jeewan Griha.
Triple
cover means that if the policyholder dies during the term of these policies, the LIC pays
triple the sum assured. On endowment, it pays only the single sum assured on survival at
maturity.
Jeewan
Mitra is a with profit policy. Presently the bonus rate is Rs.80/-per thousand. In case
the policy with a sum assured of Rs. 10 lacs gets matured due to death of the insured with
in the cover period, the sum paid shall be Rs.50 lacs. Rs. 50 lacs consist of sum assured
of Rs.10 lacs plus double of Rs. 20 lacs. The bonus element is presumed to be Rs.20 lacs.
In case the policy holder survives, the sum of Rs.30 lacs ( Rs. 10plus 20) shall be paid
to him.
New Jeevam Dhara
Is New Jeevan Dhar's 11.25 Percent Return Real?
Though
offering an attractive return of up to 11.25 %, a number of tax issue relating to LIC New
Jeevan Dhara Pension plan need to be clarified.
New
Jeevan Dhara is essentially a deferred annuity, under which either single premium or
annual premium for a deferment period of 2 years to 25 years is required to be paid. On
vesting the annuity, annuity holder ant has the option to receive annuity at guaranteed
rates, or exercise a cash option if a deferment priod is 10 years or more.
This
plan has received popular attention, mainly on account of the cash option available after
the deferment period of 10 years. According to the plan, by paying a single premium of
68500/- the cash option available at the end of 10 years’ deferment period works out
to Rs. 2 lakhs. This equates to an effective annual compounded yell of proximately 11.25%.
The
above return about 11.25% p.a. is being received as attractive, particularly keeping in
view the cut in interest rates on small saving and RBI relief Bonds. However, a number of
taxes related question are perplexing the investor, particularly since even LIC is silent
till date on this issue.
Are the annuity and cash option amounts received under the
plan taxable?
For
finding the answer, we may need to look into various sections. Sec. 88, Sec 10(10D),
Sec.10(10A) are the related sections. Sec 10(10D) provides that income from any sum
received under a life insurance policy, including the sum received as bonus on such policy
shall be exempt from tax. However the proceeds from Key man Insurance policy and the
policies made under Sec. 80DDA shall be not be exempt. New Jeewan Dhara is not a life
insurance policy but a deferred annuity or a pension plan of the LIC. Thus the tax
exemption as applicable on such policies is in doubt.
In case
the policies are commuted, the commuted value shall be governed by the provisions of
sec.10(10A). Sub clause (iii) of Sec 10(10A) provides that any payment in commutation of
pension received from a fund under Sec. 10(23AAB) is considered as tax exempt. Clause
(23AAB) of Sec.10 refers to a fund set up by LIC of India on or after 1/8/96 under a
pension scheme as approved by the controller of Insurance or IRDA. We are not clear that
the pension fund presently set up for the new Jeewan Dhara scheme is approved by these
authorities. If approved comes thru, such commutation shall be tax exempt.
Are the rebate u/s 88 available?
The next
issue is whether investors are entitled to avail of the benefits of rebate u/s 88 for the
single premium or annual premium. Sec. 88(2)(ii) and (xiia) are the related sections. Sec
88(2)(ii) provides for the benefit of income tax rebate in respect of any sum paid to keep
in effect a contract for deferred annuity provided such contract do not contain any option
for the investor to receive a cash payment in lieu thereof. Therefore the tax rebate under
this section is not available.
However
it is interesting to note that Sec. 88(2)(xiia) makes a separate provision for granting
income tax rebate in respect of any sum to effect such contract for annuity. Such plan
should be notified by the Central Govt. Till date there has been no such notification.
Why purchase an insurance policy
The
insurance scene in India is opening up, the now, customers can get a good deal on this
vital instrument which saves more than money.
A young
tech in a software company refuses to take out a life insurance policy. What's reason? His
wife too was well employed, so he didn't think it made any sense to insure his life. And
as everyone knows, the return from an insurance policy is not too good.
Do you
think of insurance as an investment? The answer is no. Naturally, because you can’t
equate an insurance policy with the other investment products, in other sense is in fact
that contribution to insurance products qualifies for tax rebate. "You need an
insurance policy for protection of actual value of vehicle and protection of family in
itself is an investment," If you do not consider the rate return on insurance policy,
surely going for it makes a lot of sense.
For one,
it helps inculcate the saving habit, and for the long term. Too even if your spouse is
employed, you should think of an insurance policy, simply, because the choice of
nomination to take a policy lies with you. You can always make a non-earning member of
your family as a nominee. Beside, insuring your life, you can take a policy for varies
other products, your car, mobile, phone and house can all be insured for a nominal
premium. Not many are aware that by paying a monthly premium of just Rs 100, one can
insure his mobile phone. Even if they know, very few actually get down to insuring their
handsets. In fact, it wouldn't be a surprise if insurance companies withdraw this scheme
altogether for lack of insurance. However awareness is far better for motor insurance,
mainly because it has been made compulsory by law. In fact with theft of vehicle on the
rise in Delhi, car insurance helps rid you of a major worry. If you don't want to spend
too much on the premium, you can opt of a third party insurance, which costs less than Rs
400. However it is always better to go for a comprehensive insurance cover. The list of
insurable products can only grow if you make insurance a habit of life.
But if you have a home
of your own, house insurance should be on top of your agenda. Not only does it provide
cover, it even takes care of your house loan repayment commitment.
Buying insurance is not
easy beside worrying about which is the right policy for you, there is a whole
maze of terminology to negotiates. We make your task easier with this glossary
These plans provide for a "pension" (or a mix
of a lump sump amount and a pension) to be paid to the policy holder or his
spouse. In the event of death of both of them during the policy period a lump
sump amount provided for the next of kin.
A policy which primarily provides coverage of
benefits to a business as contrasted to an individual. It is issued to
indemnify a business for the loss of services of key employee or a partner who
becomes disabled.
- Convertible whole life policy
A mix of "whole life policy" and "endowment
policy" it provides for very low insurance premiums with maximum risk cover
while the life assured is just beginning his working career and possibility of
converting the policy to an "endowment" policy after five years of
commencement.
- Double/Triple Cover Plans
These offer to the beneficiaries double/triple
the sum assured on death of life assured during the term of the policy. On
survival to the date of maturity the basic sum assured is paid to the assured.
These are low-premium plans, most useful for situations such as housing.
The assured has to pay an annual premium which
is determined on the basis of assured's age at entry and the term of the
policy. The insured amount is payable either at the end of specified number of
years or upon the death of the insured person, whichever is earlier.
A life insurance policy providing insurance on
all or several family members in one contract, generally whole life insurance
on the principal breadwinner and small amounts of term insurance on the other
spouse and children including those born after the policy is issued.
- Guaranteed Insurance Sum (GIS)
A lump sum purchase of is given to purchase
future pensions under the Jeevan Akshay Plan. This amount is referred to as
GIS. And the monthly pension that is payable one month after payment of first
premium is calculated on the basis of age of at entry.
Life insurance usually without medical
examination of a group under a master policy. It is typically issued to an
employer for the benefit of employees, or to members of an association for
example a professional membership group. The individual members of the group
hold certificates as evidence of their insurance.
Legal principle that specifies as insured
should not collect more than the actual cash value of a loss but should be
restored to approximately the same financial position as existed before the
loss.
- Joint Life Endowment Assurance Plans
The sum assured (plus any accrued bonuses)
under this type of policy is payable on the end of the endowment term or on
the first death of the two lives assured, whichever is earlier. Typically
(though not a necessity) taken out by a couple, a variation is available for
couples only. In this case, the sum assured will be payable on first death and
then again on the second death (along with all vested bonuses) if both deaths
occur during the term of policy . If one or both lives survive to the maturity
date, the sum assured along with all wasted bonuses will be payable on
maturity date. Premiums during this plan cease on the first death or the
expiry of the selected term, whichever is earlier. Another variation provides
Fr annuity to both/surviving spouse or a lump sum amount to the legal heirs.
A policy which has terminated and is no longer
is force due to non-payment of premium due.
- Limited Payment life policy
Premiums need to be paid only for a certain
number of years of until death if is occurs within this period. Proceeds of
the policy are granted to the beneficiaries whenever death of the policy
holder occurs. Again this policy can also be of the "with profits" or "without
profits" type.
The loyalty addition is given upon the
maturity of the policy, and not before. It's a small percentage of the sum
assured. Broadly speaking loyalty addition is the difference between the
performance of the insurance company and the further additions. It is LIC's
effort to further share its surplus after valuation with the policy holders,
as LIC is a non-profit organization.
Unlike endowment plans, in money back
policies, the policy holder gets periodic "survivance payments" during the
term of the policy and a lump sum amount on surviving its term. In the event
of death during term of policy the beneficiary gets the full sum assured,
without any deductions for the amounts paid till date, and no further premiums
are required to be paid. These types of policies are very popular, since they
can be tailored to get large amounts at specific periods as per the needs of
the policy holder.
- Premium Back Term Insurance Plans
These provide for refund of all the premiums
paid, in the event of the life assured surviving to the beneficiaries in the
event death occurs during the policy term.
The age at which the recceipt of pension
starts in an insurance-cum-pension plan.
Premiums are paid throughout the lifetime of
life assured. this can be with profits or without profits (A "with profit"
policy is eligible for various bonuses declared by LIC every year, while a
"without profit" policy does not have this privilege.)
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