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.

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.

After deciding to go in for a life insurance policy one has to make up his/her mind how much life insurance he/she needs. Ideally the sum assured should provide for all the needs of your family like children’s education and marriage while meeting the daily basic expenses when the insured person is no more. It may not be an easy decision to make. Firstly, your income level has to permit you to opt for the policy that you want to take. Your need may be more than the disposable income you can spare for paying premiums. Even if you want a higher sum assured the insurer need not oblige you citing your present income.

There are many factors that are relevant in determining the amount of life cover you should buy. One way of doing it is to calculate the level of income a family needs to maintain its standard of living when the breadwinner is not around. Suppose a family’s present need is Rs 30,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family’s monthly expenses of Rs 30,000. To compensate for the fall in value of the rupee one needs to take policies for higher amount.

Changing need

Life insurance needs change through different stages of life. Young people with no dependants may not have much need for life insurance. As one’s family responsibility grows, life insurance needs too increase. When one is single he may not bother much about life insurance. However, at middle age a person having children will feel the need to have more life insurance as the need to give good education to children and marriage expenses will dog him. Thus, a periodic review based on your family circumstances is required in order to ensure that the coverage is adequate. A person employed in some hazardous profession will need more life insurance cover than an ordinary individual.

Basically, the amount of insurance one should buy is dependent on his/her economic value, which is also called human life value. This varies from person to person. Human life value is the capitalized value of the net earning of an individual for the rest of his working life. It is the present value of the total income of the individual, which is lost to the family in the event of his untimely death. Imagine a 25-year-old person earns a gross income of Rs 3 lakh per annum. He is due to retire at 60. If he passes away now his family will be losing Rs.1.05 cr., his future income. The human life value of the person is Rs.1.05 cr.

Age factor

Your age is a crucial factor in deciding the quantum of insurance that you can afford. The rates of premium go up, as you grow older. One can buy more insurance for the same premium at a younger age than at an older age. The need for protection may be quite high, but the present need for disposable income may not permit buying adequate insurance. Premium payment means a regular outflow of disposable income. Not many would like to buy more insurance as it will overstretch the resources. You can then think about buying extra insurance as and when you can afford it.

Some experts say that 8-10 times your annual income will be a good sum to insure. If a person’s annual income is Rs.3 lakh he can take a life insurance policy in the range of Rs.24 lakh to Rs 30 lakh. Another approach is to assess the percentage of income you can spare for paying premium. This can help you to decide on the quantum of life insurance. If you expect to spend a particular amount for the education or wedding of your children, you may like to buy an insurance policy for a specific sum to meet such a need.

One must always remember that life insurance is primarily a protection and is no substitute for investment as returns are negligible. Considering the depletion of value of the rupee due to inflation the actual return at the time of maturity of an insurance policy may well be in the negative. Of course one needs adequate life insurance to safeguard the financial needs of the family members if the unforeseen happens. But it won’t be wise to over-invest. If your family is wealthy you need only a smaller amount of insurance. If the family members are earning independently you can reduce your insurance.