Traditional Plans or ULIPs – Which is a smarter choice?

29-Oct-2011
Source : Capitalmarket.com

The Indian insurance sector saw a proliferation of customer-centric insurance products after it was thrown open to the private sector in 2000. With the entry of numerous insurance companies and increasing competition in the sector, Unit Linked Insurance Plans (ULIPs), which combined insurance with savings, were introduced as an option to traditional insurance plans, which focused on protection with steady savings.
However, before making the decision whether to opt for a traditional insurance policy or a ULIP, an investor has to understand the principles and the way both these financial instruments operate.
ULIPs
ULIPs provide both protection and savings combined with flexibility to investors. These products are market-linked, and have the potential to deliver higher returns. A ULIP investor has the flexibility to switch funds, determine the amount of investment and withdraw funds partially or systematically. ULIPs also provide the convenience of pliable insurance coverage, which can be increased or decreased at any time. However, the ULIP policyholder needs to be more involved as the investment risk rests with him.
Traditional insurance plans
Traditional insurance plans, which include term, endowment and whole life policies, offer multiple benefits in terms of risk cover, return and safety. Traditional policies are considered risk-free, as they provide fixed returns in case of death or maturity of the term. Investment guidelines also ensure safety of funds with a cap on equity investment.
Traditional Participating plans are the most popular category of traditional life insurance products. Though it is popular in Indian market for many decades now, there is still lack of understanding about these products. Participating plans provides the policyholder 90% share of surplus whereas 10% is the share of life insurer. This sharing mechanism aligns the intent of both the policyholder and the life insurer as high investment surplus will drive higher returns for both parties. In participating plans as the investments are primarily in debt instruments, the returns do not have the volatility generally witnessed in market linked plans. Traditional participating plans are truly protection oriented financial instrument as it has a strong sum assured orientation along with consistent returns.
In a young economy like India, where a large share of population is in 20s and 30s, traditional plans are seen as slow and opaque. There are some myths around these plans.
It is often said that traditional participating policies give inferior returns. But what is not mentioned is that the investment risk is also lower. Therefore the money is invested in bond instruments, but companies may invest up to 35% of the funds in equities to provide positive real returns to customers over the long term.
Participating plans are also seen as less flexible. Empirical evidence suggests that only a very small percentage of customers use flexibilities like partial withdrawal or switch available within unit-linked products. On the other hand even traditional plans offer flexibilities like policy loans and automatic premium loan for short term cash needs and are much more used by policyholders.
Another myth around traditional participating plans is that these are less transparent as no NAV is declared every day. How many Policyholders check the NAV of their plan daily? The answer is none. What do policyholders want to know? The status of their investment periodically; returns on investment at the end of policy tenure, and safety of their capital. In traditional plans there is guaranteed return through pre-defined sum assured know at the time of buying the policy as well as bonus announced on yearly basis.
The biggest advantage is that the traditional plans are less prone to mis-selling because a large component of returns is guaranteed. Bonus history also gives ample clarity on the possibility of future returns. Unlike market linked products, which goes through cycles of volatility, returns are smoothened and hence mis-selling of these products is a lower possibility.
Which product to choose?
After understanding ULIPs and traditional plans it is important to understand the criteria for choosing between a traditional insurance plan and a ULIP. The choice requires considerable analysis, and largely depends on the profile and goal of the investor. The investor’s risk taking ability, which includes her age, income or return expectation is a crucial factor in determining the right choice for him. For instance, a young investor may be more aggressive and opt for ULIPs, whereas an older person within the same income bracket may choose an endowment policy for stability.
How to choose a product?
The selection of the type of insurance product greatly depends on the risk taking ability of the investor. This ability is ascertained through a number of factors, which include the following:
Income
An investor’s future income expectation determines whether to opt for a market linked product or a safe instrument. For instance, if a person expects her income to increase faster than inflation she would invest in ULIPs, which are market-linked compared to traditional insurance plans which assure guaranteed returns.
Age and number of dependents in the familyThe age of an individual and number of dependents is also directly proportional to her risk taking ability. Younger a person is, more time she has to remain invested to average out market fluctuation, hence her risk appetite increases. Similarly if she is the sole breadwinner in the family and has dependents relying on her income, she may not want to take any risk with her savings.
Investment value
The amount of returns one expects from investment is also one of the determinants of choice of product. In case an investor expects substantial returns, she will be willing to take the risk with ULIPs, whereas for moderate but assured returns, sticking to traditional insurance plans would be better.
Type of investor
ULIPs are ideal for an aggressive investor who wants higher returns and is prepared to withstand market volatilities, whereas a traditional insurance plan would suit the requirements of a conservative investor.
Volatility
The kind of volatility an investor is willing to handle also affects her investment decision. Investment in ULIPs may be more volatile than traditional insurance plans as they are directly linked to the market fluctuation.
In a nut shell
Deciding whether to invest in a traditional insurance plan or a ULIP is not easy and best left to the advice of experts such as agent advisors. Knowing one’s risk profile, financial condition, understanding the nitty-gritties of various financial instruments, planning with an objective in mind, goes a long way in making a wise decision.

LIC makes tax calculation easy for CTS

29-Oct-2011
Source : IBN Live

Life Insurance Corporation of India (LIC) launched a Corporate Portal on their website for technology major Cognizant Technology Solutions (CTS) on Friday. The portal has been customised for the employees of the company so that they can access their premium paid online in real time. This will ensure that the employees need not submit details for the purpose of tax calculation.
The portal was launched at the LIC Zonal Training Centre by B Venugopal, Executive Director (IT/SD) - LIC along with DD Singh, Zonal Manager — South Zone, LIC, and K Thiagarajan, VP-Global Finance, CTS. According to Venugopal, this system is just a beginning and the same e-module can be implemented for any corporate across the country. He, however, added that this was the only such module in operation for a corporate in South India, at present.

Settling life insurance claims issues

07-Oct-2011
Source : Business Line


By Suresh Parthasarathy,
Close to 31.6 lakh policies are sold monthly by life insurance companies and we come across many complaints about the agony faced by the customers in claiming money from insurers.
According to IRDA’s annual report for 2009-10, insurers repudiated 14,693 policies worth Rs 245 crore that year with 2,180 claims pending for more than a year.
Such claims remain pending despite Regulation (8) of the IRDA (Protection of Policyholders’ Interests) Regulations 2002, which says: “An insurance company shall initiate and complete such investigations (relating to claims) at the earliest, not later than six months from the date of lodging a claim.
“The claim shall also be paid or disputed, giving all the relevant reasons, within 30 days from the date of receipt of all relevant papers and clarifications.”
It is in this backdrop that the IRDA has imposed a penalty of Rs 5 lakh on HDFC Life Insurance, that is, for a ‘delay in taking decisions on the settlement of death claim.’
The IRDA further said that during investigations it found few more cases where more than six months had elapsed without deciding the admissibility of the death claims.
HDFC Life, in its communication, has said that company has the philosophy of paying all claims unless and until there is a non-disclosure of material fact or a fraud against the company.
Key issues Two points which merit attention from this case are. One, the IRDA has the authority to impose a penalty of Rs 5 lakh for each such violation on claims. Yet it preferred to “apply logic” to levy a penalty of only Rs 5 lakh, though it could have charged more based on its contention that there were a few more cases pending with HDFC Life. If IRDA is serious it should levy such a penalty on all outstanding cases (put at 2180 last year) across insurers.
The other point is, just to avoid penalty insurers may inform the claimant of their inability to admit the claim.
The IRDA has not ruled on whether the rejection of claim by the insurer is correct, the key bone of contention in this case.
What customers of life insurance require is money by way of sum assured from the life insurer and not just a token penalty. Any order passed by the regulator should be clear and not lead to further arbitration.

Panful experience

09-Oct-2011
Source : Financial Express

By Saikat Neogi,
After banks — which made it mandatory to mention the permanent account number (PAN) for cash deposits above Rs.50,000 — insurance companies will have to ensure that customers furnish their PAN for premium deposits in cash above Rs.50,000 during any one day. This has been made mandatory to eliminate the threat of money laundering and terrorist financing vulnerabilities in the insurance sector.
A recent circular by the insurance regulator, the Insurance Regulatory and Development Authority (Irda), says that, to ensure that the premiums are paid out of clearly identifiable sources of funds, in case of deposit remittances in cash above Rs.50,000 per transaction, the customer will have to quote the PAN number. The insurance company will accept the cash only after verifying the authenticity of the details of the PAN. If a customer doesn’t have a PAN or has only agricultural income, the insurance company will make it mandatory for him or her to fill Form 60/61 prescribed under the provisions of income-tax rules.
Form 60 is a declaration to be filed by a person who does not have a PAN and who enters into any transaction specified in rule 114B, which includes sale or purchase of immovable property valued at Rs.5 lakh or more, sale or purchase of a motor vehicle, time deposit of more than Rs.50,000, opening a bank account and getting a telephone connection, among others.
In Form 60, investors have to fill in details like name, address, transaction details, etc. If the person is assessed to tax, the details of the last return filed will have to be mentioned. A list of documents like proof of residence, which includes ration card, passport, driving licence, electricity bill or telephone bill, document or communication issued by the central government, state government or a local authority or any identity card issued by an institution will have to be attached with the form.
Form 61 is a declaration to be filed by a person who has agricultural income and does not receive any other income chargeable to income tax in respect of transaction specified in clauses (a) to (h) of rule 114B1.
Though Irda does not specify how much penalty will be imposed on the customer if she do not give the PAN for premium payment in cash above R50,000, under the Section 272B of the Income Tax Act, 1961, a penalty of R10,000 could be levied on the individual for failure to comply with the provisions of Section 139A of the Act.
The insurance regulator has also underlined that cash transaction above R10 lakh and integrally connected cash transaction above R10 lakh per month will have to be reported to the Financial Intelligence Unit-India (FIU-IND), the central national agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions to enforcement agencies and foreign FIUs. The report has to be submitted to FIU-IND by the 15th of the succeeding month.
Irda has clearly informed insurers to lay down a proper mechanism to check any kind of attempts to avoid disclosure of PAN details, and if there is any possible attempt to circumvent the requirements, it will be reviewed from the angle of suspicious activities and reported to FIU-IND.
To bring in transparency in the payout stage, the regulator has now made it mandatory that no payments should be allowed to third parties, except in cases like superannuation or gratuity accumulations and payments to legal heirs in the case of death benefits. Payments in all these cases will be made after due verification of the bona fide beneficiary and payments above R10,000 per claim will have to be made through account payee cheque or electronic transfers like Electronic Clearing Services or the National Electronic Fund Transfer.
Both these norms will come into effect from November 1, 2011, and industry experts say they are in the right direction for customer safety and security. The Irda note says that the insurance sector has entered into the sixth year of anti-money laundering (AML) and combating the financing of terrorism (CFT) regime.
“The extant AML/CFT guidelines to the insurance sector are being reviewed to access the need for changes to facilitate a risk-based approach. Due consideration is placed on the threats posed by the money laundering/terrorist financing vulnerabilities in the insurance sector,” says the Irda note.
Globally, new measures are being introduced and existing measures tightened to combat money laundering and the financing of terrorism. In India, the amendments in the Prevention of Money Laundering Act, 2002 (PMLA), enacted in February 2009, were brought into force with effect from June 1, 2009.
To further strengthen the AML/CFT regime, the rules issued under PMLA have been amended three times since then. In financial year 2009-10, FIU-IND witnessed a substantial increase in the number of reports received by it as the number of cash transaction reports increased from 55,11,150 in the previous financial year to 66,94,404 in 2009-10, and the number of suspicious transaction reports received went up from 4,409 to 10,067 in 2009-10.

Be honest, don’t hide facts while taking cover

10-Oct-2011
Source : Indian Express

You often come across high pitch, ‘emotional’ advertisements of various life insurance companies talking about how you can sleep peacefully after buying life cover from them.
While it does make lot of sense in insuring one’s life to take care of the financial requirements of your family, in the case of your unfortunate death, it is equally important to make sure that the claim is not rejected by the insurance company, that too for hiding facts.
Recently, HDFC Life Insurance was fined Rs 5 lakh by insurance regulator IRDA for delaying settlement of claims. The action was taken on complaint by a customer on “non-receipt of death claims.” Following investigations, IRDA noted, “ the time line adhered by the life insurer to decide on the death claim is on a higher side… more than 6 months elapsed in respect of a few more individual death claim cases without deciding the admissibility of the death claims.” In this case, the insured died within 4 months of buying the life insurance policy.
According to the insurer, the investigations revealed that the insured was on kidney dialysis even before buying the policy but kept it hidden at the proposal stage which amounts to hiding “material facts” — the basis of an insurance contract. "HDFC Life has a philosophy of paying all claims (on time) unless and until there is a non-disclosure of material fact or a fraud against the company (claimant). We have a practice of investigating such claims, which involve additional information," said, Amitabh Chaudhary, CEO, HDFC Life Insurance.
Unique contract
Life insurance is a unique contract. The insurer and insured get into a contract based on good faith that what insured has declared is true and a promise that the insurer would pay the claim in the future. However, there are some conditions inherent in this contract. The one critical for ensuring a claim (due to the death of the insured) is honoured by the insurer, is the information provided by the insured at the proposal stage.
“Wrong information or truth withheld by consumers may make the contract void — making the consumer lose the benefits of that policy,” says Harsh Roongta, CEO, Apnapaisa.
This puts the onus, largely, on the insured to ensure a hassle free on-time claim settlement.
“There are instances where even a cancer patient has bought an insurance policy, hiding it from the insurer. This amounts to fraud. Hiding facts like smoking and drinking habits while filling up the proposal form is not uncommon,” adds Roongta.
While filling up the form, make sure to disclose all medical facts, correct occupation, and income. “Correct date of birth along with valid age proof is necessary… for incorrect date of birth may lead to loss of full or partial claim benefits,” says Rajit Mehta, ED and COO, Max New York Life Insurance.
One must never be in a wrong notion that the insurer would not know about a fraud or an information which is kept hidden. “The insurance companies have quite robust system of investigating claims. Professional third party investigators are hired to dig out the truth. Not only will you lose all the premiums paid, you would risk the financial security of the dependents that you leave behind after you are gone,” says Deepak Youhannan, CEO, Myinsuranceclub.
Claim process
According to Life Insurance Council, the following process is critical to make sure that a claim is honoured by a company and settled in minimum time possible.
* Claim intimation/ notification: The claimant must submit the written intimation as soon as possible to enable the insurance company to initiate the claim processing. The claim intimation should consist of basic information such as policy number, name of the insured, date of death, cause of death, place of death, name of the claimant.
The claimant can also get a claim intimation/notification form from the nearest local branch office of the insurance company or their insurance advisor/agent.
* Documents required: The claimant will be required to provide a claimant’s statement, original policy document, death certificate, police FIR and post mortem exam report (for accidental death), certificate and records from the treating doctor/hospital (for death due to illness) and advance discharge form for claim processing. Based on the sum at risk, cause of death and policy duration, insurance companies may also request some additional documents.
* Submission of required documents: A life insurer will not be able to take a decision until all the requirements are complete. Once all relevant documents, records and forms have been submitted, the life insurer can take a decision about the claim.
* Settlement of claim: As per the regulation 8 of the IRDA (policy holder’s interest) Regulations, 2002, the insurer is required to settle a claim within 30 days of receipt of all documents including clarification sought by the insurer. However, the insurance company can set a practice of settling the claim even earlier. If the claim requires further investigation, the insurer has to complete its procedures within six months from receiving the written intimation.
Claim repudiation ratio
The claim repudiation ratio or CRR provides the percentage of claims rejected by an insurer. Before buying life insurance, it may be prudent to check the CRR of the insurer as that gives an insight into the insurer’s probability to reject a claim. However, there are other facts that must be looked at before taking a final call on which insurer one must choose. “CRR is definitely not a foolproof method to choose your insurer. CRR considers all the claims, it can’t tell which cases were legitimate and which were not. Other things like company history, product details, and quote should be considered before buying life insurance policy,” suggests Yashish Dahiya, CEO, Policy Bazaar.
With the increasing competition, stricter regulatory environment, increasing awareness among the customers and online consumer activism, insurance companies are fast realising the fact that poor services and delaying/denying claim without enough evidence can put them in a tight spot. Customers who feel cheated by the insurance companies can file a complaint to the Insurance Ombudsman or/and file a case in a consumer forum. However, honesty would be the best policy for a customer to make sure that the claim is not rejected when it is actually needed