Review your Insurance portfolio Regularly

A stitch in time saves time and money and heartache

Many of us have insurance policies. Would it surprise you if I told you that 94% of us sign an insurance application form at the “x” mark and depend on our agent to fill up the details? If this is the status at signing-up, would it be any different when the contract is received? Have you been guilty of handing over a cheque to your agent with the amount blank or the name of the company blank? Do not worry: you are in the majority. It is surprising that we will argue with our vegetable vendor for over charging us by a few rupees but will ignore crucial steps with regards to our insurance policy.

India has many million insurance policy holders. I can confidently say that those who have read it from cover to cover number a handful. Hardly any of us have read the documents. Almost none of us know what is in them. We depend on our agents to tell us if any amounts are due. If it were not for automatic credits into our accounts of any survival benefits, we probably would not even track those! We also know that insurance documents are complex pieces of legal jargon, loaded in favour of the insurance company. But this does not mean that we abdicate our rights to know what is in these documents. Insurance companies are expected to do a due diligence when they underwrite a new case, yet in their hurry they may tend to overlook critical documentation: however what most people do not know is that a far greater due diligence is done at claims stage before actual payouts happen. Many are the claims that are stuck because the policyholder did not perform basic actions either due to lack of knowledge or because of carelessness. For example, general insurance claims have to be reported within a defined time-frame, and unnecessary correspondence can be avoided over delayed reporting of claims. Few know that insurance company loans require payment of interest: Insurance maturities amounts can be severely curtailed/forfeited because interest on loans availed on the policy were never repaid. A few of us are not exactly sure when our policies renew and if it not were for those pestering calls we may forget that date as well. Make a resolution today: Review your insurance portfolio.

Check when your policy expires

Check when your policy expires. If it is a health, home or motor policy, this will most probably be annual in nature. Check if your agent/distributor is still around and speak to him. If online options are available, and you are comfortable transacting online, check if online renewals are available. If it is a life insurance policy, check if any premiums are due and on what date they are due. As in general insurance policies, most life companies allow payment of renewal premium online. Your agent or distributor, if he is still around, can also be contacted. If your policy has lapsed, check whether you want to revive it. It is generally wiser to revive, because surrender values are usually low. Contact a professional for help.

Are your policy and its details up to date?

Check the details of your policy. Has your address changed? If so get it updated in the insurer’s records. Most will require proof of address, hence keep documentation ready. Are any survival payments due and/or have you missed any? While in most cases insurers will have records of missed payouts, it is better to be on the safer side and keep track. Check if nomination details are updated. There have been cases where nomination details are left as it were recorded in the original policy (usually in favour of the mother or father) and at the time of claim they may have predeceased the life assured, resulting in complex legal documentation to prove title. Has the policy been assigned, say for a housing loan, and if so have all loans been repaid? Initiate proceedings for reassignment, to bring the policy back in your name.

Read the T&C

Read the policy document and see what is covered and more importantly what is not covered. General insurance policies will have plenty of conditions and clauses that limit your claim payouts. It is better to be aware of them. Some of them may have benefits in your favour: for example road side assistance in case of a vehicle breakdown or ambulance benefits in case of hospitalisation.

While it is not possible to list down all the factors that may impact you, it is critical to know your rights and responsibilities with respect to your insurance policy. It all starts with reviewing your portfolio.

Five facts about Age and Life Insurance Premiums and one Universal Need

Everyone knows that life insurance premiums depend on age. The older you are the higher your premium. This is because the moment you are born you start to die. So how do companies charge the premium and still make money? Lots of people die and lots of them have policies: so how do insurance companies make money (for the record: only smart companies make money)? And why do different companies have different rates for the same age?  Let us reveal some secrets.

Good luck of many pays for the bad luck of few.

Insurance companies can predict how many will die, not who will die. In theory only God can predict who will die. But insurance companies can predict with remarkable accuracy that given a group of individuals with similar profiles, how many will die. No magic here: they have accumulated statistics from the 1700s. Yes, they have been collecting records and data for 400 years, so you can expect them to be fairly accurate. So now it is simple: collect premium from lots of people, set aside some money to pay claims for the chaps who will kick the bucket, spend some on salaries and stuff and retain the rest as profit. Seriously, it is as mundane as that.

Women live longer than Men.

Women are better than men; up to a point that is. Women are better risks than men and insurance is probably the only business where women are treated as better customers and charged less. Women live longer than men provided they have the same opportunities in nutrition and health and education, unless their lives are tragically ended due to cultural shocks like burning them for dowry. Thus for the same age women will pay a lower premium than men.

Accident and Mortality Rates Shoots up in the twenties

Age makes men foolish and insurance companies know that. Women would argue that age has nothing to do with being foolish as far as men are concerned. Neither are we are not talking about the second childhood where some men behave as if they have to make up for the lost years. As far as theory goes, and common sense supports this theory, a man who is older will die earlier.  But Insurance companies are keen observers of human behaviour: their business depends on it. Heard of the accident hump? In an otherwise predictable mortality curve, the accident hump happens between the ages of 18 and 28 when boys discover motorcycles (and girls). Premium rates will reflect the accident hump pretty actively because death rates in these ages due to accident are fairly higher than that of other ages.

Young Subsidize the Old

The younger you subsidises the older you. Insurance companies are pioneers of the welfare system. Most of us are aware that we are charged the same premium throughout our policy duration. This flies in the face of logic that the older we are, the higher the premium we should be paying. This happens because the insurance company levels the premium to prevent your exiting the system in future. At the age of 50 you would be paying 5 times of what you would be paying at the age of 18. The chances of your exit are higher if your premium keeps on rising. The insurance company charges an appropriate discounting factor and levels your premium: till a certain age you are actually paying more than what you should be paying based on your current age and thereafter you will be paying a little less than what you should be paying based on your current age.

Cheaper premiums do not mean better products.

Insurance companies have expenses, so in theory every company’s premiums must reflect money set aside for claims, adding of expenses and settling for a reasonable profit. Premiums vary on the fact that some companies have fatter expenses, or may want a higher profit margin. Some companies may keep aside more money for claims, because they have a worse experience than other companies and are more prudent. None of this is very transparent to an ordinary customer and as a customer we can do our due diligence by logging on to a good Insurance comparison site and doing our research. Check for how soon they pay claims and how many claims are paid as a percentage of total claims. You may also check for customer service levels.

Immutable Need

Nobody can predict death. If you do not have term insurance, buy a term plan now. If you have already bought one, check if the amount of cover is 100 times your current monthly income. If there is a shortfall fill that up. Before your next birthday, that is.

Should you take a Loan against an Insurance Policy

Is it a good idea to raise a loan against your insurance policy? The answer can be a yes or a no, depending on circumstances.

Not all Policies Offer loans

First things first: Not all policies can be used to raise loan. General insurance policies have no provision for loan because by nature these are indemnity policies. This means that these kinds of policies have no current value: only on claim will they acquire a value that is equal to the claim paid out. Life insurance policies can be used to raise a loan. The amount of loan is determined by the current surrender value of the policy. Surrender value is the value one will get from the insurance company if he decides to voluntarily terminate the policy. Because surrender values are the function of the number of premiums paid, generally older policies will have accumulated greater surrender value as compared to newer policies. By extension, this means that the proportion of loan on older policies will be higher than on newer policies. There are other factors like the duration of the policy contract that will impact the amount of surrender value, but for general purposes it may be assumed that under similar policies, the older the policy, the greater the surrender value. Term insurance policies that pay out only on death are policies that have no surrender value. Therefore no loans are possible on term policies.

However, not all life insurance policies can be used for loan. New policies may not have accumulated enough surrender value to generate a loan. Some policies may have generated a surrender value, but the quantum may not be enough to cross company guidelines on minimum value that can be paid out. Some policies by nature of contract may not grant loan. Typical amongst these are policies that offer a survival benefit in terms of periodic payouts.

Insurer may be Less Insistent on regular EMI

Loans can be raised from the insurance company itself or from an external lending agency like a bank. In both cases the quantum of loan will be decided by the current surrender value and in both cases the policy will have to be assigned to the lender. By executing an assignment, one transfers the ownership to the lender, who then has first rights over the proceeds of the policy. In both cases, interest will have to be paid to service the loan. By and large insurers charge a lower rate than commercial lenders; however this may not be true in all cases. While the external commercial lender will insist on payment of interest, the insurer may not be particularly insistent. The reason for this is that since surrender value is consistently rising on payment of every premium, the insurer is confident that his loan is recoverable along with outstanding interest. If premium payment stops, the insurer will calculate the outstanding loan and interest and if it exceeds the surrender value, he will forfeit policy proceeds.

With Insurance loans you take upon yourself a higher quantum of Risk

By now it should be obvious that loans may be availed only if the need is critical enough. Any loan reduces the overall risk cover, because the insurer at claim payout will reduce the claim by the amount of loan. The choice of the lender will be decided by interest rates and other factors, however it is obvious that loans from the insurer are more convenient to process and may have a faster turnaround time. Ensure that interest is regularly paid to prevent accumulation of interest amounts and prevent a possible forfeiture of policy proceeds.

Are you really helping the Little Guy, Mr Modi?

Last few weeks we have seen a cacophony of voices dubbing the Modi government pro corporate and Anti poor. Much of the commentary on this subject is political.  Frankly I find much of it hot air. However there is one new item that caught my Eye. It was Pradhan Mantri Jeevan Jyoti Bima Yojana. It is fact that most people in the country don’t have life Insurance and poor suffer the most. Families are often without any protection and have to face financial ruin in addition to the loss of an earning member. So when I first heard about the initiative I thought what a brilliant idea.

For those of you who don’t know, Pradhan Mantri Jeevan Jyoti Bima Yojana provides for life cover of Rs. 2 Lakhs for anyone between the ages of 18-50. The premium is Rs 330 per annum. In order to be eligible for this you need to have a bank account and your bank must have tied up with a Life Insurer willing to underwrite this cover. Overall it I think the concept is a good one and hasn't come a day late. One wonders why previous governments haven’t thought of it. 

I can also see what “Market driven” analyst must be thinking. Another populist scheme to bleed the tax payer. Is it really? Let’s see what the typical market rate for Life Insurance is.  The table below has the life Insurance premiums for a male aged 30 for 25 year.

Product	Sum Insured	Premium	Rate per Rs ‘000
Reliance Online Term	1,00,00,000	Rs. 7094	0.71
Aviva i-Life	1,00,00,000	Rs. 7292	0.73
ETlife My Life +	1,00,00,000	Rs. 6692	0.67
Max Life Online Term	1,00,00,000	Rs. 7865	0.786
Tata AIA I Raksha	1,00,00,000	Rs. 8314	0.786

If you work out the Math for Pradhan Mantri Jeevan Jyoti Bima Yojana, it comes to a rate per thousand of Rs 1.65 per thousand sum Insured. That is more than double of what a person buying on the open market pays.   The reinsurance rates for life insurance in India is around Rs. 0.67 per thousand. If you add service tax it comes to about 0.76 per thousand. The rate government is charging the poor is a 220 % premium on that.  That is plain language is predatory pricing.

Even if the government were to reinsure the entire amount they will pay no more than 0.76 per thousand rupees of Sum insured.   In all fairness, I should point out that there are no insurer who offer a cover of two lakhs and there are some transactional cost which are fixed and not dependent on sum insured. Even accounting for those a rate of 1.65 per thousand.

If you go by the thumb rule of required cover being 10 times the income. At 2L that is just adequate cover for someone earning less than Rs 2000 pm. That is well below the poverty line figure (going by the infamous Planning commission figures) for a family of 4. Rs. 330 is not a massive amount and for that price the cover would be easily doubled to Rs 4L. Additionally I think the Govt should allow people to top up on this cover. Most people would be happy to pay the market rate. All the government needs to do is to extend the access to this very important financial product to all at market rate. Hope Mr. Modi is listening. 

Four Myths about Critical Illness Policies

Myth 1: Critical illness Policy is same as a health policy:

A Health policy pays for the cost of hospitalization and defrays your expenses within allowed limits.  It doesn’t cover other incidental expenses that you may have as result of the hospitalization, for example unpaid leave, transportation and recuperation expenses etc. A critical illness plan is designed to provide you a lump sum amount in case you suffer from a critical condition irrespective of the amount you spend on treatment. This policy is useful in cases where the medical expense is likely to be large and the nature of expenses extend far beyond hospitalization. An example of this would be cancer which requires extended treatment, days out-of-of work, and travel outside town/country for treatment. Another example may be a stroke that leaves you paralyzed and unable to carry out normal activities.

Myth 2: Number of illnesses covered makes the policy better

One way insurance advisors and companies distinguish critical illness plans is by number of diseases covered.  The idea being more the illness covered the better it is. However the reality is that you are better off with a broad definition of the illness and not having to argue over definition during a claim. As critical illness policy is designed to cover truly catastrophic illness, having illness that don’t have catastrophic impact on your finances don’t make much sense. There are some illness, Cancer, Major Heart surgeries, Stroke, Major Organ Transplant, that should be part of any critical illness plan.

Myth 3: All Critical illness policies pay equally.

Where critical illness policies differ a lot is when they pay. There are some policies that pay upon diagnosis while others require the insured to survive a certain number of days (30-90 days) before paying. Any policy that requires a survival period beyond 30 days is probably worth avoiding.

Myth 4: Creating a corpus for critical illness is better than Insurance

There is an increasing belief and push by financial advisors that you are better off creating a corpus for critical illness rather than buy a policy. This in my opinion is a dangerous advice for most. If you are independently wealthy, and expense of tens of lakhs of rupees will not affect your financial situation, by all means avoid a Critical illness policy. Also beyond a certain age (above 65) you will not get such a policy and there you have no option but to rely on your savings. Critical illness does not wait for you to create a corpus before it strikes. It afflicts people of all ages and at all times. So don’t just rely on a corpus, get protection. 

Four things Senior Citizens should look for in a Health Plan

Co-Pay

Most plans require people aged over 60 to share the cost of treatment with the insurer. This is called Co-Pay. A 20% Co-pay means that the insured will have to bear 20% of all admissible expenses, the insurer will bear the remaining 80%.  It is best to go for a plan that requires no Co-pay. If there is no such plan or if you cannot afford such a plan, try to reduce the amount of co-pay. 

One way to avoid co-pay is to buy a policy before you reach the age of 60. If you enter before 60, several plans will waive off the Co-pay.

Lifelong cover

It is critically important that you chose a policy that provides lifelong cover.  At advanced ages it is difficult to enrol in a new health insurance plan. Even if you were to get one there are issues related to pre-existing illnesses. To avoid all these complications, choose a policy that provides lifelong cover.

No Claims Loading

Make sure that the insurers will not increase the premium if there are claims on the policy. While premiums will increase based on your age you shouldn’t have to pay a loading if you claim. The propensity to claim is high during old age and if you have to pay a loading then it can be a financial burden.

Domiciliary Treatment

In old age, the insured may not be in position to be moved to hospital and may have to undergo care in his/her own home.  It is therefore important that your policy has domiciliary cover. This will allow you to claim expenses for allowed home treatments.

How to insure a New Born Member of your family

Birth of a child is a joyous occasion for the family. It is also a time for lots of changes in your personal life. Life can be frantic in the first few days but you settle down to a new normal. Medical expenses are usually quite high in the first few years, but fret not. This is a guide to how you can add your new born child to your health policy.

Intimate the addition of new Member of your family to the Insurer.

First thing you need to do is to intimate the birth of the child to the Insurer. Do so within 7 days of the child birth. Most insurers will start coverage from 90 days after birth but there are cases where the child is covered from day 1.

Check if your policy already covers New Born:

There are a number of policies that provide new born cover from day 1. Before you do anything check if your policy is one of those. In most cases this cover kicks in after you have had the policy in force for a few years. If that is the case you probably have to do nothing for the first 90 days. Your existing policy will cover the child for the first 90 days. Also check if things like cost of vaccination is covered under your policy.

Check cover starting age:

From day 90, most insurers will cover your child as a member of your family floater plan or Individual plan upon payment of premium. Check with your insurer on what is the additional premium you need to pay. You will also need to submit the birth certificate of the child to the insurer. Ensure that you have all the documentation and submit it to the insurer.

Pay Premium

All that remain now is to pay the additional premium and your child is covered.  For most insurers you can have the child in your plan until the age of 21. This age varies from plan to plan and insurer to insurer. So check with your plan.

Important:

If you have forgotten to insure your child you can always insure him/her at the next renewal. It may also be worthwhile checking if the insurer would take the child on midway through the policy year.

Life insurance Corporation (LIC) New Children’s Money Back (Plan No. 832): Should you Buy This?

A few days back a new plan was launched by LIC of India. This plan is called the New Children’s Money Back (Plan No. 832, UIN 512N296V01)

Plan Details:

Briefly the plan details are as follows:

·         This plan is only meant for children, provided the grand/parent proposes the insurance. The child can be between the ages of 0 to 12.

·         The minimum Sum Assured is 1 lakh and there is no maximum limit.

·         The duration of the policy is calculated as 25 minus Age at Entry.

·         At the policyholder age of 18, 20 and 22, 20% of the Sum Assured is returned as a “money-back” instalment. The balance is returned on Maturity (at policyholder age 25).

·         Simple reversionary bonus and a potential Final Additional Bonus is payable along with the Maturity Sum Assured.

Issues to consider before you buy this policy:

·         There is no risk cover till the child completes 7 years of age. This means that the policy functions as a deposit scheme till that time. Of course if the child is 8 and above risk is covered.

·         Reversionary bonus rates are unknown at this point of time. Rates of bonus have been inconsistent and rates of return are not very high. The Final Additional Bonus is an unknown quantity at this point of time.

·         The annual premium for a Sum Assured of 1 lakh is Rs 5586 at age 5. Premium will be payable for 20 years. The total amount paid will be equal to Rs. 111,720. (5586 X 20 = 111720). If Service tax is added, the total amount paid as premium will be higher.

Our View:

·         On an overall basis, we are not in favour of insuring children unless they are earning an income. It is much better to insure the parent who is paying the premium. It is a poor parent who hopes to profit by the death of his child.

·         If on the other hand the objective is to instill a savings habit in the child, a look at the maturity benefits will reveal why we do not advocate taking insurance for investment returns. In the benefit illustration provided by LIC the final payable amount (All Survival Benefits + Maturity Amount + Bonuses) will range from 104,000 to 158,500. We doubt whether the upper end of the range will be achieved. Remember, you would have already paid a total premium of Rs. 111,720. Would you be better off with other avenues of investments?

We at policylitmus believe that insurance is a critical need. However it is equally important to buy the right policy and not be misled by incorrect advice. Find out the best policy for you, from over 1000+ products without giving away your contact details.