Priority 1: Personal Insurance - Sumit Khedkar

Priority 1: Personal Insurance

What will happen to your family, wife, and kids if you are not there? Have you ever thought? In most of the families, man is a bread earner. The entire family depends on you. Hence the first step is to get insured.

There are a lot of personal insurance schemes in the market and there are a lot of insurance players too. One can get confused while choosing a personal insurance scheme. One thing you    should remember while choosing a personal insurance scheme is the claim settlement ratio. It is all right if a company is offering you less policy maturity benefits but the important thing is you should get the claimed amount if in case you claim for it. And hence LIC stood first in this aspect. I personally recommend a personal insurance policy from LIC as they have the highest claim settlement ratio. Having said that let’s see what are personal insurance scheme types.

a.       ULIP: Unit-linked insurance plan: 

 

A ULIP is basically a combination of insurance as well as investment. A part of the premium paid is utilized to provide insurance cover to the policy holder while the remaining portion is invested in various equity and debt schemes. The money collected by the insurance provider is utilized to form a pool of fund that is used to invest in various markets instruments (debt and equity) in varying proportions just the way it is done for mutual funds. Policy holders have the option of selecting the type of funds (debt or equity) or a mix of both based on their investment need and appetite. Just the way it is for mutual funds, ULIP policy holders are also allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.

 

The returns in ULIP totally depend on the market condition. ULIP has been a disaster in last five years 2008-13. But the basic question is, has it solved your real worry? Will the ULIP policy provide your family enough support in your absence? 

 

Let’s analyze ULIP using sample illustration. I got following illustration from the website of a leading insurance provider company.

 

Here, the calculation is simple. You are paying 15,000 Rs per annum and the assurance is of only 1,50,000Rs in case of your demise. The fund value at the maturity is not guaranteed. Fund value at the maturity totally depends on the market conditions and the ULIP fund manager’s performance. ULIP can give you negative returns also. Hence insuring yourself by ULIP is dangerous and a strictly no-no option.

b.      Traditional / conventional LIC Insurance Policy: 

This is a better option than ULIP. As I told you earlier, in insurance what matters is the claim settlement ratio and LIC indeed has a better claim settlement ratio. Claim settlement ratio of LIC is 96.21%.

 

There could be a better option than LIC too, but before that let’s see what LIC is offering us.

I got following illustration from the LIC website.

 

The takeaway from this illustration is, If you are paying 25,186 Rs per annum for the first fifteen years of the policy. The sum assured/ guaranteed return is maximum 6,25,000 Rs.  Average case return is 8,78,000 Rs i.e. near about 5.5% year on year returns, and best case return is 15,98,000 Rs i.e. near about 9.5% year on year returns.

I think whatever is offered is fairly good. One should go with this option. You are getting good maturity benefits as well as good benefits in case of your demise. People who do not want to put more efforts in personal financial planning should go with this approach, for those who are ready to put extra efforts, there is something more for you.

You can buy LIC policy online here http://www.licindia.in/index.htm

 

c.       Design your own insurance policy:

 

There is a third type of insurance called term assurance. Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is the least expensive way to purchase a substantial death benefit on a coverage amount per premium basis over a specific period of time. You won’t get any returns from a term insurance policy at the maturity.

Let’s see how we can design our own insurance policy with the help of term assurance and a PPF (public provident fund) account. PPF account is the safest way of investment. PPF account gives 8.7% returns annually.

Following is the term policy illustration I got from LIC website.

             To compare our own insurance policy with the LIC policy illustrated above I keep the total premium                         amount same as that of LIC policy i.e. 4,02,976 Rs.

In the LIC policy you were assured of 15,98,000 Rs and that too in the best case scenario which is a distant possibility.

If you buy a term insurance policy for 25 years and for the total coverage of 15,98,000 Rs then according to the chart above you will have to pay 4,700 Rs annually for 25 years. So the total premium amount will be   1,17,500Rs.

Now you are left with 4,02,976- 1,17,500 = 2,85,476 Rs. This money you can put in a PPF account.

You can put 2,85,476 / 15 = 19,031 Rs annually in a PPF account. If you put 19,031 Rs annually in a PPF account for 15 years then after 15 years you will get total 6,09,057Rs !!!. And if you keep that money invested in the PPF account itself for the next 10 years then you will get total 14, 41,859Rs!!!

Following table explains the calculations.

Year	Investment for term insurance	Insurance cover	Investment in PPF	Maturity benefits
1 To 15	4,700 Rs Annually	15,98,000 Rs	19,031 Rs Annually	6,09,057 Rs
16 To 25	4,700 Rs Annually	15,98,000 Rs	Reinvest the maturity 6,09,057 Rs	14, 41,859 Rs
Total	1,17,500 Rs	15,98,000 Rs	2,85,476 Rs	14, 41,859 Rs

 

The total benefits you are getting from this customized policy are term insurance of 15,98,000 Rs from the day one for the next 25 years plus total return of 14,41,859 Rs from the PPF account. Everything is guaranteed here!! There are no ifs and buts. Isn’t it the best policy as compare to other options? JAGO INVESTORS JAGO.

Here, you can maximize your returns by investing in bank fix deposits or debt base mutual funds. However, I will still recommend investment in PPF rather than any other alternative as the goal here is to assure your family in case of your absence.