ULIPs: An Introduction

ULIPs are an acronym for Unit Linked Insurance Policies. As the name suggests these are life insurance policies. A life insurance policy covers the risk of death, by paying a pre-decided sum of money to the policyholder who has purchased the policy by paying a premium. This simple transaction is called a term insurance policy. In its simplest version if the policyholder dies, the insurance company pays the claim but if the policy holder survives, he gets nothing back.

Perceiving that this “get-nothing-back” is not appealing to a vast majority of people, insurance companies introduced a savings element, in such a way that while the policyholder’s family would get the claim amount on his death, if he survived he would still get some amount back. There are 3 versions of this theme:

Term Return of Premium Policies:  Varying proportions of the premium are returned to the policyholder on survival. Amounts can range from half of the total premiums paid to twice the total premiums paid.

Endowment Policies: 

A portion of the premiums paid by the policyholder is invested by the company in various interest bearing instruments like government bonds. A minor portion is also invested in stock markets. Investment policies are tightly governed by IRDA (the Regulator). The policyholder has little control over the kind/type of investment made. Since safety is a primary concern, companies sacrifice risk for returns. Thus earnings are fairly low. These earnings (net of company expenses) are returned to policyholders in the form of bonuses. The upshot of this control and rigidity is that while earnings are almost certain, they are quite meagre in comparison to most investment instruments.

ULIPs: 

Here too a portion of the premium is set aside for investment. The difference is that the policyholder has greater control of the type and kind of investment she can make.  Investments are made in the stock market through designated funds by purchasing units at the current price.

Let us say a company has created 2 Funds called Fund A (High Risk) and Fund B (Low Risk). Each Fund’s objective is to purchase shares and stocks and trade in them for a profit. (The technical difference is that High Risk Funds are more Equity oriented and Low Risk Funds are more Debt oriented. The higher the risk the higher are the chances of making a good profit, but you stand an equal chance of making a loss, and vice versa for a low risk proposition – but let us move on). Initially the company seeds both funds by putting in some money. A policyholder can participate in the trading actions of the funds thereby participating in the loss or profit that may occur. He participates by purchasing portions of the fund arbitrarily designated as “units”.

By convention when a fund starts all units are available at a price of Rs 10/unit. This is called the Net Asset Value (NAV) of each unit. After several sessions of trading (over weeks/months/years) the NAV can be higher (say Rs 15.60/unit) or lower (say Rs 9.65/unit) based on whether the fund manager has been wise and made profits or been unlucky/incompetent and made losses. Let us say a policyholder purchases a ULIP and pays a premium of Rs 1000. The insurance company will keep Rs 100 for death risk, which leaves Rs 900 for investment. Say the policyholder divides this equally between Fund A and Fund B. This means he invests 450 in Fund A and 450 in Fund B. If he invests at Rs 10/unit, he will get 45 units of Fund A and 45 units of Fund B.

Total Investment/NAV of 1 unit, i.e. 450/10 =45 units.

Let us say after a year NAV of Fund A is 15.60 and Fund B is 9.65. The value of the units with the policyholder is:

Value of Units in Fund A: No. of Units X NAV, i.e. 45X15.60 = 702

Value of Units in Fund B: No. of Units X NAV, i.e. 45X9.65 = 434.25

Thus:

Original Investment: Rs (450 + 450) = 900

Value after 1 year: Rs (702 + 434.25) = 1136.25

If another policyholder buys a similar policy today and follows a similar investment pattern as the earlier policyholder, this is what will happen.

Premium - Cost of Death Risk = Premium available for Investment.

1000-100 = 900

He wishes to invest half in Fund A and half in Fund B, i.e. 450 in Fund A and 450 in Fund B.

He will now get:

Total Investment/Current NAV of 1 unit, i.e. 450/15.60 =28.846 units of Fund A

Total Investment/Current NAV of 1 unit, i.e. 450/9.65 =46.632 units of Fund B

The new policyholder has to buy units at current cost.

It is important to note that a policyholder can buy either or both funds and in any proportion that she chooses. Thus, for example, she may choose to invest 100% in Fund B and nothing in Fund A, or 20% in Fund A and 80% in Fund B. It is important to read the objectives of the fund and see if they match your risk profile. If you are close to retirement it may make better sense to invest in a debt oriented fund. If you have just embarked on your career, equity oriented funds may be your choice. Companies have anywhere between 2 and 13 funds, each with differing objectives – hence choice is usually not an issue. Companies also allow you to move your money between funds if you perceive an advantage in such movement. We do not recommend active management unless you are proficient to make such movements. Many companies also have options that restrict such active management in the interest of more stable returns. If you have questions talk to our experts at www.policylitmus.com.

As a general rule ULIPS provide a better investment return than endowment policies. But this is not guaranteed. All the rules and caveats that apply to stock market investments in general, apply to ULIPs. Thus, if units were purchased in a rising stock market and if the market goes down for a prolonged period, unit values will drop. There are 2 factors that may be considered.

Maintaining a steady investment pattern by paying regular premiums does help in getting fair returns.

Insurance fund managers are instinctively conservative. While this may depress earnings somewhat, the losses too will not be dramatic.

Note: The insurance company deducts some charges from the policyholder for managing these investments.

All figures are illustrative and not in relation to exact values or proportion.

This is how ULIPs work. In my next post we shall debate on whether one should buy a ULIP and if so what needs to be the basis for such purchase.

Car Insurance: No claims bonus – All you wanted to know

If you are a safe driver do you must be wondering if you deserve a break on your car insurance premium? If you think that way you would be right. Insurers give you a discount if you haven’t made a claim in the preceding years. This is called No Claims Bonus (NCB) in insurance parlance and can lead to substantial savings.

How much do you get?

The table below describes the discount you get on your own Damage (OD) premium.

Number of Preceding years with No Claims	Percentage Discount on own Damage (OD)  Premium
1 Yeas	20%
2 Years	25%
3 Years	35%
4 Years	45%
5  or more Years	50%

The discount is on the own damage premium. There is no discount on the third party portion of the premium. Even then the discounts are quite hefty and rewards for good driving are huge.

Can you carry it to another insurers?

What is more is that you can carry your NCB from one insurer to another should you decide to switch insurers. All you have to do is to ask your current insurer for your no claims bonus (NCB) certificate. Present you certificate to the new insurer and you can get a discount with the new insurer as well. Most insurer will also give you couple of months to present the NCB certificate.

Can I transfer my NCB to my new car?

Here is an even better news that most people don’t know about. While most people know that they can carry their NCB to a new insurers, what most people don’t know is that you transfer your NCB to a new car you buy. As the premiums for new cars tend to be high, this is a lot of saving in premium.  What you need to make sure is that the policyholder on the old car and the new car. NCB follows the fortune of the policyholder.

How can I protect my NCB?

There are generally two ways to protect your NCB. If you a damage that requires only a small amount to rectify then consider if it is worth while paying for it yourself. Compare the amount insurers will pay for the claim with the amount you will save in no claims bonus before taking that decision.  Repair costs can add up very quickly so be very careful before deciding not to file a claim.

Off late some insurers have been providing an option to protect your NCB from one accident a year. You will need to pay an additional premium to avail this benefit. 

Tale of Life Insurance Policy Brochures

A life insurance policy is a simple product. The customer is invited to purchase it, usually in installments called premium. If he dies/suffers a critical illness/is disabled, the insurance company pays him a claim. That’s it.

In contrast, a mobile phone is an amazingly complex product. You can communicate, take photos, browse the internet, play games and do a hundred other things.

Let us look at the sales brochures of the two products. A mobile phone company has a neat leaflet that lists the features in small print, and has glitzy photographs.

Life insurance policy brochures are 6 to 15 pages, legally worded and full of jargon. The impression is that the companies are more interested in protecting themselves than selling their wares. In their endeavour some companies have forgotten to ask one simple question: Does the ordinary prospect understand what is written?

We presume that the brochure exists to educate the prospect who has in his mind to buy insurance. The ordinary prospect has little patience in reading material that cannot be understood at first glance, and he certainly has no desire to decipher the meanings of abbreviations – or double brackets.

If language does not match intention, the result is confusion.

Sometimes regulations force companies to disclose features. The following example reveals what happens when no company bothers to simplify what essentially is a regulatory diktat.

What exactly is a non-negative claw-back addition? Individually the words mean “positive-withdraw-add”. Every life company has this clause in every brochure. I am sure it can be worded in a manner that makes sense to an ordinary human being, without losing the essence of what is actually a powerful customer friendly mandate from IRDA.

When I read the following paragraph, I got lost in the jungle of lock-in periods and calendar days.

This is a sample, and there are hundreds of brochures from 24 life companies. Some are better than these, many are not. Insurance companies must simplify their offerings and their language. Ill-informed customers are a good to no one.

Car Insurance: What you must pay in case of claims.

When it comes to insurance people assume that the insurance company will pay for all the expense that the insured incurs.  This causes lots of consternation and heartache. It is always helpful to know beforehand what will paid by the insurer and what you have to incur on your own. Furthermore what are the ways to minimize your out of pocket expenses?

Mandatory Deductible

In case of Car insurance, there is mandatory deductible that you must pay before Insurers will pay a single paisa. The mandatory deductible depends on the type of car you own.

Cubic Capacity	Mandatory Deductible
<1500 cc	Rs. 1000
1500 cc or higher	Rs. 2000

There is no way you can avoid this cost. Mandatory deductible is there so that insurance company is not burdened with lots of small claims that the owners can afford themselves

Depreciation

This is probably one cost that catches out most people.  Insurers take into account aging of the car while paying for replacement parts. While you will get a new part to replace a damaged part, the insurers will pay only a depreciated value instead of the full cost of the replacement.  The depreciation for car parts is as follows:

Age	Percentage Depreciation
6         to 12 Months	5%
1 – 2 Years	10%
2 – 3 Years	15%
3 – 4 Years	25%
4 – 5 Years	35%
5- 10 Year	45%
More than 10 Years	50%

Some insurers offer the pay full replacement value for the parts in lieu of an additional premium. This additional cover is known as Zero or Nil depreciation cover. This is typically available on selected models and for vehicles which are less than three years old.

Towing Charges

While towing charges are generally not payable, Insurers will often include limited towing charges as part of the insurance policy. The towing is often limited to say 10 kms and Rs 1500. Anything more than that is incurred by the owner.

Loss of Use

When your car is in the garage, you have to arrange for alternate means of transport. Insurers will typically not pay for these expenses under normal course. Some insurers however pay you a daily cash amount while the car is undergoing repair. The amount that you are paid is typically capped. You will need to shell out additional premium to get this facility.

What will never be paid?

In addition to this insurers will never pay for regular wear and tear due to normal operations. Examples of these are replacement of tyres or brake pads. Insurers will also not pay for any existing damages that were there before you took insurance.

Did you know?

There is one aspect of Car insurance that is not widely known. In addition to mandatory deductible, one can opt for a voluntary deductible. Voluntary deductible can significantly reduce your premium. However the insurer will pay only if the claims cost exceed the total of mandatory and voluntary deductible.

Voluntary deductible	Reduction in own Damage  premium
2500	20% subject to a maximum of Rs 750.
5000	25% subject to a maximum of Rs 1500.
7500	30% subject to a maximum of Rs 2000.
1500	35% subject to a maximum of Rs 2500.

You can find the best Car insurance Quotes for your car at Polictlitmus.com.

Three Reason why you should buy Life Insurance Before the Age of 30.

If you are below 30 years of age, you probably feel you are invincible. You have a good job, in a happy relationship and nothing can go wrong. Unless you are God or some invincible vampire, unforeseen events can change all that in a jiffy. While people may call it luck or fate, your loved ones and people who are dependent on you are often left to pick up the pieces.  You need to ensure that your loved ones are taken care of.

1.   Earlier you buy cheaper the premium

Most of us know that it is always better to start saving early. Effect of compounding means that small savings done early and regularly will results in large savings in your older years. Same is true about life insurance. If you buy life insurance at an early age, you will pay lot less for same amount of cover. The following graphs shows you what you will pay for a cover of 1 Crore up to 65 years of age for a non-smoking male.

As you pass the age of 30, premiums tend to shot up dramatically.

2.   Avoid age and lifestyle related issues

Not only does premiums shoot up after the age of 30, but you may also find it difficult to get cover. Let me explain why. Current day sedentary life style means that one is more likely to suffer from age and lifestyle related diseases early and often in the thirties. Insurers see these diseases are major risks and tend to be very careful in providing cover to people with diseases like Diabetes, hypertension etc. You may be altogether refused cover or may have to pay a premium as much as 3 times what the cost of a standard cover.

3.   Financial Planning must include Life Insurance

Insurance is an integral part of a financial planning. There are a number of instruments to enhance your wealth but only one to protect it. You wouldn't think twice before buying a lock for your house or valuables, but we often don’t think about protecting our wealth and sources of our wealth. There is no greater sources of wealth than one’s life. It is imperative that you protect your wealth thru a life insurance early. Life insurance should be an integral part of your financial planning.

Also look at 5 questions to ask before buying life Insurance. 

Reviewing your Car Insurance - 3 simple steps

You probably spend a lot of time picking out your new car, visited a number of Car dealer, asked your friends and experts about their opinion and finally settled on your dream car. When you were just about to get the Car keys your dealer reminded you that you need insurance to drive the car out of the gate. But worry not, the dealer can arrange car insurance for you, complete all the paper work and have you covered in no time. Insurance is last thing on your mind and you go with dealer. What you probably don’t know is that the dealer made a hefty sum on your premium and you ended up with a bad deal on the Insurance. What you negotiated on the car value you lost in insurance.

Past is past, when the time comes to renew your car insurance give the dealer a miss. Here are 3 simple steps that you should follow to get the best insurance deal.

1.   Compare rates and shop around

Car insurance rates vary widely from insurer to insurer. Insurers frequently change their rates. The plan that was cost effective last month may not be same today. Comparing insurance and then choosing the right one can save you up to 50% on your car insurance. Compare car insurance rates to bring out the coverages offered by various plans, the cost effectiveness of each plan and the help you arrive at a right decision.

2.   Evaluate your coverage needs

Every car insurance plan has a number of options. You need to figure out the options that are relevant to you. If you have a car costing over 10 lakhs, you may want to go in for zero depreciation cover. Don’t forget to get personal accident protection for your passengers. Accidents can happen because of no fault of yours. Irrespective of your fault your NCB may go away. You have want a coverage to protect your NCB. Here is a list of coverage that you may want to consider:

a.      Personal accident for passengers

b.      Cover for accessories: Things like A/C and music system are not covered in the normal course. You may need this cover if you want to insure them.

c.       Zero Depreciation: Get your insurer to pay the entire claims with no deduction for depreciation.

3.   Investigate the Insurers

Not all insurers are same when it comes to claims and service. First and foremost check out the cashless garage list of the insurer in your city. Pay special attention to the garages for the manufacturer of your car. Car these garages manufacturer authorized? It is also important that you find out what the claims and service performance of insurers are. How quickly do does the insurer settle the claims. How many complaints does the insurer has? Visit the insurer’s home page to find out or check out the insurer’s performance of policylitmus.com

One last thing. Before renewing the insurance, check out what you must pay from your own pocket in case of claims and if there are ways to minimize the same.

So when it is time to renew your car insurance, don’t just send out the premium check to your existing insurer, compare and evaluate to get the best deal. 

This New Year buy your Parents a Health Insurance Policy

The cost of health care is rising a healthy rate and it show no sign of coming down. The oil prices may have tanked, the inflation may be near zero but as far a medical expenses are concerned they seem to live in a completely different planet. Dependence on private hospitals is near total and even a basic hospitalization would cost you about one lakh in this day and age.

However the taxman provides you some help if you buy your parents health insurance.  This year you can claim a tax deduction of up to Rs. 20000 for health premium paid for your parents above the age of 65 under section 80D. In case your parents are below the age of 65, the deduction applicable is Rs. 15000.

Now that you have decided to buy your parents health insurance, the question in your mind is what to buy? When it comes to health insurance for seniors keep the following few things in mind.

1. Go for policies with lifelong renewability: Check how long the policy can be renewed. In the senior years changing life insurance is not easy. Today there are polices that have lifelong renewability, go for policies that have lifelong renewability.

2. Check the Co-Pay: Lots of health insurance plans require senior citizens to share the cost of treatment with the insurer. Your parents may be required to pay as much as 20-30% of the treatment cost themselves. In insurance parlance this is called Co-Pay. Ideally go for policies that have no Co-Pay. These policies may be bit costly but they are worth it.

3. Check Cashless Hospital Coverage: When your parents fall ill, the focus should be on the best treatment and not on arranging cash for the treatment. Make sure you study the cashless network coverage of the policy in the city where your parents reside. Ensure that the plan you take has in its network, the hospital that your parents prefer.

If your parents already have a health policy, you can enhance their cover thru a Top-UP plan.

So in this New Year take away any worries that your parents may have on their Medical cost and get the taxman to share part of your cost.

Why are Surrender Values for life Insurance So Low

Background: 

If you have ever surrendered a policy, you would have been shocked at the meager amount you received. It would have been much lesser than the amounts paid by you. Let us try and explain why this was so.  

Insurance is a long term contract. Your obligation is to pay the premium on a regular basis. The insurer is obliged to provide cover against the insured event. Contracts can be terminated by either party usually by paying a penalty. Insurers rarely terminate a contract unless the policyholder has committed a breach of his obligations. In rare cases if an insurer goes out of business or winds up his business he may opt to pre-maturely terminate the policy. On the other hand, if you voluntarily terminate the contract before you pay all the premiums, and intimate the company that you are not going to continue, and seek a refund of premium, you have indicated a desire to surrender the policy. The entire premium is almost never refunded. The difference is the penalty for early termination and is called the surrender charge. These charges can be quite steep and is the reason why surrender values are so low.  

Insurance contracts can range from a few days to many years. As a general rule: 

• The shorter the contract the lesser the chances of getting any refund via surrender. 
• Pure risk policies have no surrender values (i.e. entire premiums paid is confiscated). 
• Indemnity policies have little or no surrender value. 
• The longer the duration of the policy, the greater the surrender value the policyholder will get.  

In India long term contracts are usually life insurance contracts and surrender is a provision in most of these provided they are savings policies. Pure Term policies have no surrender value. 

So why is Surrender Value Low? 

Unlike other products and services insurance is bought in installments: however the insurer is fully liable from day 1. Further, insurers spend a lot of money in the initial years for acquiring the policy, pay large distribution expenses and keep aside reserves for claims. These amounts are recovered by them over a period of time from the subsequent premiums paid by the policyholder. Thus if a policyholder breaks the contract by surrendering, the insurer will remain out-of-pocket. These are the amounts recovered by the insurer as surrender charge. 

We are not debating if the charges are justified or can be reduced. The fact is that surrender charges will always exist. Our advice is that one should always aim to continue a contract till the stipulated date. A roundabout way of minimizing loss is by splitting the policy at purchase such that the entire policy need not be surrendered if there is an urgent need for money. Insurers try and restrict this by offering rebates if the premium is large enough. As always, you can count on us to help you solve any questions you have on this issue. 

We at www.policylitmus.com try to offer the best possible advice and options for customers of insurance. Visit our website to find out more.