LoanRaja Blog- Personal Finance Guide

For the last few days, the entire country has been glued to images of the horrifying images of the Mumbai riots on TV. We have debated the issue from every possible angle – political, social, religious, from the point of view of bilateral relations, international relations, and crass though it may sound in the light of the lives lost, from the economic angle too.

One initial estimate put the loss to the Taj Mahal Hotel alone at Rs 4000 crore, while loss to businesses in all of Mumbai could be in the range of Rs 50,000 crore, according to news reports. Some industries face direct losses – the tourism industry for instance. The holiday season next month, will definitely not be a time for cheer this year. Business plans and investments from foreign partners are likely to be put off if not cancelled, given that various countries have issued travel advisories, warning against travel to India. Foreign business partners may put off travel, and perhaps even investment, at least until the dust settles (One cold comfort is that there wasn’t too much room for the stock markets to drop further. The current economic conditions had already pulled the stock market to the depths).

Many see the attack on the business capital of Mumbai as actually being a direct attack on the Indian economy. Russia has observed some sort of pattern in the way terrorists have been targeting the emerging BRIC (Brazil, Russia, India and China) economies.

But for those of us trying to make a living in this country, the larger intent is not important. Terror attacks have unfortunately become a part of our lives, no matter which state we live in. And even personal economic stability is a big challenge in these uncertain times.

While the risk to life is certainly the most horrifying, there are others – risk to business and risk to property. And in both cases, one instrument that could help lessen the pain is insurance.

In fact, ever since 9/11 attacks in the US, terror insurance or risk cover for terror attacks came into focus. Terror insurance is not only for large corporates; small business people, media persons who are on the ground covering such attacks, as well as the common man – the biggest loser in terror attacks – are equal beneficiaries.

In India, we have had some kind of terror insurance – the IRDA has directed the creation of a terror pool which has been created where all general insurance companies pool the terrorism premium they have collected into a fund. The pool will fund claims with a limit of Rs 700 crore per location. So far not many demands have been made on this fund, but the latest attacks in Mumbai are very likely candidates to use this and affected hotel companies are reported to have taken risk cover for terrorism.

Most large corporates in the country have all taken some kind of liability cover, but terror cover is different, and requires an additional premium.

However, it is very difficult to predict or assess the risk associated with terror attacks. Secondly, in case of a claim, it can only be for covering losses directly caused by terror attacks (damage to property and possible business disruption), though the loss to the business may be far more. Experience has shown that companies buy low volumes and can never be fully prepared for the extent of the damage that can be caused.

Call it any name – terror cover or simple insurance, in today’s uncertain world, the instrument becomes even more important.

In the last couple of months, mutual fund companies have been trying hard to attract fresh investments. Mutual funds aim being Systematic Investment Plans popularly known as SIP’s. Mutual funds strategies are understandable considering that equity market has eroded the gains of last few years in a matter of few months. With the stock market hitting new low, fresh investors have been a little concerned about their investment strategy, option being mutual funds, though they should be actually looking at equity at current levels with a long term strategy. However, fresh investments should be in a staggered way and systematic investment planning (SIP) perfectly does the job as it allows the investors to take advantage of market volatility. Now there is an additional carrot for investors to look at SIPs as mutual funds are offering free insurance.

The product, Mutual fund SIP insurance, is the new word in the mutual fund sector these days and as the name tells you, investor gets insurance cover for his SIP investments. At present, the mutual fund product is being offered by select funds like Reliance and Birla but it may not take long for others follow suit. The big advantage for investors in the scheme is that insurance cover is being provided free of cost and is dependent on the instalments and the value of SIP. For instance, if an investor signs up for a monthly SIP of Rs 5,000 for the next five years, his outgo would be Rs 3 lakhs over a period of five years and the mutual fund is providing life cover of Rs 3 lakhs under the scheme. In the case of Birla Mutual fund, the cover is 100 times the SIP amount.

The SIP insurance product, however, has its own set of catch lines. For instance, mutual fund houses have pegged the insurance cover at certain limit and the life cover feature is not available to all schemes though most schemes are covered. In addition, the eligibility age too is not beyond a certain limit and in the case of Reliance Mutual Fund, the maximum age for an investor is 45.

Despite these shortcomings, the mutual fund product is not a bad deal as the insurance cover is being offered without extra cost. Also, since insurance amount on mutual funds is invested in the event of death, the investor is in a way ensuring future contribution for his family. For instance, an investor with a death benefit of Rs 3 lakhs cover dies before the completion of tenure, the death benefit is transferred to the corpus of the investor and would be paid on maturity to the nominee. However, the nominee also has the option of not continuing with the policy and can take back the policy amount. In such instances, the Mjtual Fund SIP would get terminated.

Investors who are looking at Mutual Fund SIP in the current market environment can look at schemes which offer SIP insurance as it can improve the overall life cover for the investor. However, the feature should be viewed as an additional feature and should not be the main driving force for your investments. In fact, the product had faced obstacles earlier as it was referred to insurance regulator, Insurance Regulatory & Development Authority of India (IRDA). Obviously, the insurance companies had felt threatened as investors were being doled out free insurance. In fact, Mutual fund SIP insurance is similar to ULIPs where the primary objective of the later is to provide insurance cover and returns are secondary. Similarly, Mutual fund SIPs which carry insurance cover need to be looked at for their ability to offer returns. Hence, if the scheme of your choice does not offer the feature, don’t dump it.

When the stock market goes through an uncertain phase, it is not only the equity investors who have tough times but even those who have invested in insurance plans with ULIP features. Unit-linked plans, as you know, allows investors to take exposure to equity markets as the premium amount gets invested in a combination of various equity schemes or debt schemes chosen by the insurance policy holder. The popularity of ULIP was in direct proportion to the stock market performance as investors realised that their insurance policies were capable of offering a annualised returns, in excess of 20%, besides providing the comfort of risk cover.

With the stock markets changing gears completely in the current year, many have suddenly turned away from ULIPs. While market uncertainty should not be a concern for those signing up for long term insurance plans, investors can also look at other options. One of the simpler strategies is to go for a combination of insurance policies and those who don’t like endowment or ULIPs can settle for a combination of both! In fact, ICICI Prudential Life Insurance has this combo product, Invest shield.

As the name suggests, this is an insurance plan with the primary objective of protecting the premium paid by the policyholder. Hence, the policy offers the guarantee of premium, similar to endowment plans. The similarity between this product and endowment ends there. Some of the other features are a derivative of ULIP with much lesser risk. For instance, the premium paid by the policyholder gets into a balanced fund which will have an equity allocation of 60% and the balance would be in debt.

However, the investor does not enjoy the choice of funds like ULIP. The allocation of 40% in favour of debt enables the fund manager to reduce the risks of equity and arrests the negative returns in a bearish market. Even in the current market environment, the performance of balanced funds has been less painful when compared with diversified equity funds.

Life Insurance Policy with Tax Benefit & Flexibility In Payment of Premiums

One of the key features of ULIP is that it allows flexibility in payment of premium. For instance, an investor can discontinue his premium payment after five years and still enjoy the life cover for the next five years. ICICI’s Invest Shield too offers similar advantage as an investor can discontinue the premium payment after three years. However, he would not be eligible for premium guarantee in such a case but would be eligible for survival benefit (or death benefit as the case may be). The maturity amount in this case would be the fund value depending on the market conditions.

The product is ideal for those who worry about their contribution in an investment product. The premium guarantee ensures that the investor gets back the amount contributed though in reality, one can expect double digit returns as the premium is invested in a balanced fund. Over the long term, balanced funds have the capability to provide good returns and in a bull market, their returns are on par with diversified funds. However, investors should take a long term view as this will enable them to enjoy the cycles of equity markets.

Besides providing the comfort of premium guarantee, the product also offers tax benefit under Section 80C and offers higher insurance cover like ULIP. For instance, a premium of Rs 25,000 per annum can ensure a life cover of Rs 1.25 lakhs the multiple goes up when the premium amount is high. The product can be part of a young investors tax planning portfolio in the early stage their of career. LoanRaja can help you help you narrow down the right options for ULIPs and other life insurance investments — all you need to do is fill out our short life insurance application.