How to make sense out of
insurance noise
By Shiv N. Majumdar
Insurance scene is noisy. Lots of things are happening in
the insurance sector in India today. New companies are opening
shop, new products are being introduced and
marketing and selling of insurance are taking place in most
innovative manner. We are also blasted by ads of insurance,
retirement solutions and child welfare products across all
media.
But, basic things are difficult to change. Even with professional-looking
selling kit.
Have you ever had the privilege of buying insurance in a
transparent manner? Did your insurance agent or "advisor"
ever lay out in front of you a list of options for you to
choose from? In all probability, he made the choice for you
and convinced you that your interests are best served by his
well-meaning judgement, weighed down though it may be on commission
considerations.
Agents or "advisors" do not matter. There is no
transparency in insurance industry. Recently, Insurance Regulatory
& Development Authority had to direct insurance companies
to publish their own premium rates in their own websites.
This was classified information till now.
In this background, understanding the basics of insurance
would be of immense value since the variety today's insurance
offerings provide would largely remain untapped without your
basic understanding.
1.The Basics:
Life Insurance companies provide:
a) life risk cover,
b) pension schemes,
c) investment cum life risk schemes.
Basic insurance risk cover involves a cost. Life Insurance
products are structured in such a way that we pay higher than
this basic insurance cost so that we get maturity benefits
(with or without profits). Whether this is advantageous to
us is another matter, but psychologically we respond well
to paying higher when some maturity benefits are available.
2.Taking Care of Risks While Choosing Your Insurance Company:
Companies offering insurance is not a new concept in India.
Prior to nationalisation of life insurance business in 1956,
a number of complaints used to be common about insurance companies,
some of whom even closed shop or went bust.
Since LIC came into being, the only complaint has been its
monolithic status and lack of variety in insurance offerings.
With the emergence of new private life insurance companies
in India, monopoly and lack of variety can no longer be the
cause of complaint. However, we must keep in mind the
pre-1956 history and remember that in spite of the watchdog,
Insurance Regulatory & Development Authority, we have
to be ever vigilant at our individual level to safeguard our
own interests. The regulator, it appears, keeps on learning
at our expense; SEBI discovers and plugs loopholes only after
some unpleasant event.
You must keep in mind that insurance contracts are very long-term
contracts where the insurance company has to perform its part
of the contract at some point during the very
long term, while we honour our premium payment commitment
continuously.
While it is too early to judge the performance and commitments
of the new private sector insurance players, LIC still has
the backing of a sovereign guarantee of the President of India.
3.Broad Available Choice:
There are 12 companies and 110 products to choose from. Most
new companies allow various add-ons/ riders, so that the choice
is really wide and so is the confusion.
But, broadly, there are 3 types of life insurance policies:
i) term insurance plans: Pure life covers where you pay for
your risk cover and do not expect to receive anything else
in return is now available in India. Opting for such policy
will improve the efficiency of your policy premium and enable
you for a bigger risk cover for the same cost. These are term
insurance plans without maturity benefits. Some term plans
give your premium amounts back without interest. This is a
marketing ploy to suit general psychology and should normally
involve higher premium cost. As an example, on a 20-year term
insurance plan at 30 years of age, the premium is Rs 3.70
per thousand per annum without maturity benefits.
ii) whole life insurance plans: Whole life policies require
you to pay premium throughout your life and cover risk for
your whole life. The policies without profits are cheaper.
For a 30-year old, whole life policy (with profits) will
cost Rs. 23.71 per thousand per annum, while a similar without
profits policy will cost Rs. 12.95 per thousand per
annum.
iii) endowment insurance plans ( with or without 'money
back'):
Endowment policies are costliest and among this group, money
back policies involve paying highest premium. They give you
maturity benefits (normally, sum assured) and additional profits
by way of bonus, guaranteed additions, loyalty bonus, etc.
Money back policies also provide partial payment back to you
at pre-set time periods.
For example, for endowment policies, at 30 years of age and
for a 20-year policy you will need to pay annually Rs 28.54
per thousand for a without profit policy, whereas you need
to cough up Rs 47.96 if you take up a with profit policy.
A money back policy of 20 years will set you back by Rs.62.80
per thousand per annum.
