LIC's Jeevan Varsha

After the success of the close ended guarantee returns product Jeevan Astha, the life insurance behemoth comes with  another guarantee return, conventional money back policy - Jeevan Varsha.   The unique differentiators of the product from the other money back policies of LIC are as follows:

• its a close ended offer.  i.e. the policy is open for sale for a limited period
• unlike the conventional money back tenure of 20 + years,  the offered terms are 9 and 12 yrs
• the short duration coupled with money back at 3 years interval make your capital free regularly.   
• first time LIC coming with  a money back starting at 3 years rather than 4 years convention.
• for 9 year tenure, the guarantee return is 65 per 1000 SA and for 12 years tenure, it is 70.
  
• for 9 years policy, money is back at 3,6,9 years @ 15%,25%,60% and bonus in the 9th year.

However, the premium is slightly on the upper side as the term is less.  Average annual premium per 1 lac SA is 16000/-.   The product does not offer single premium, as the same is taken care by Jeevan Astha perhaps.  

Another contrast is that, Jeevan Astha has a guarantee tag of 90/100 of the maturity SA which is in fact 1/6th of the SA.  Many investers would have missed the fine line from LIC.  Some agents have canvassed it as 90 per 1000 on SA which makes the return very high.  

In that backdrop of truth and misnomer, the 65/70  per 1000 return offered by Jeevan varsha may seem to be less.  

Keeping in mind the successful money back plans of LIC having guarantee component, such as Jeevan samridhi, which offered 55 per 1000 as a guarantee return,  this offering is very good.  

Tough times.. wise moves

Its been a long time since I wrote.. may be 3 months or so. Should I worry for this? is 3 months a long time? i realise the feeling is due to the global meltdown that is sweeping the financial sector perse. Life insurance is not an exception infact it is one of the member to the party. Its big brother, the banking sector has taken a big hit in the meltdown... is your insurance comapny safe?

The safety of the insurance company can only be measured by the exposure it has to the various investment avenues. world over regulatary practices for insurers mandate a definite risk minimization, though not below a level. Prudence lies with the insurers in self regulation. The affairs at the insurance behemoth AIG is a saga that reveals the otherside of the company. The government has to come for its rescue by infusing funds.

your insurance problems can stem from two ends in this scenario. first is the above situation where the asset or life fund management problems by the insurer. For want of higher returns the insurer would have taken higher exposure to say a madoff hedge fund or a much cursed mortgage funds. This is going to imapact not only the company and the policyholders but also other associates. The wrong decisions of a group of people can give you a sleep less night.

the other side of the problem is your unit linked policies. ULIPs have become increasingly popular during the bullish markets. For example in India, some of the insurers do not have the traditional products and only offer ULIPs. with the stock markets falling across the world (ex: tokyo nikkie 42%, Dow 36%; sensex more than 50%) the NAV of most of the ULIPs are hovering below the par price. A random check of all the indian life insurance companies NAVs reveal the drastic fall in the values.

Do you need to worry?

As I mentioned in earlier articles, if you are putting all your pension in ULIPs, think twice. The present problems may only be short lived. May be after a year or two things may be bright, up and running. your NAV may again go up bringing cheer to you.. but, what if your funds mature during this period and you are forced to have your benefit, which would have fallen more than 50% than what you expect. some of the companies do offer a spread period. i.e. say your policy is maturing in 2010. if the market is not good and the NAV is too low then you have an option to choose a spread period. You will have option to encash it in next 5 years. You may have to check if this provision exists in your policy or not.

The global slowdown has made our indian life insurers to go back to the old school.. the guaranteed return policies are back. LIC's Jeevan Astha has some good features. Also IDBI fortis, AEGON Religere have come with guranteed returns on a 7 and 10 years horizon.

If you observe, the bank FD returns are peaking at 9-11%. The stock market returns are now very poor and mutual funds are having their worst phase. If you are getting your life insurance at a return around 9% taking the tax benefits into consideration, this can prove to be a wise investment in these guraranteed return products.

ULIPs II... why ULIPs and what you need to know

as discribed in the part I, Unit Linked Insurance policies are the new variants now available in India. since the opening of the life insurance market in the year 2000, the flow of unit linked policies have increased. Parallelly the dynamics of Indian stock market have helped the growth of the unit linked policies.

Do you know, in the year 2007-08, the biggest investors in Indian stock market are not the FIIs, not the mutural funds.. but its the life insurance companies. Before investing your money in ULIPs, keep the following in mind:

• The aim of life insurance products is not profit generation but protection. You have to be clear how much is your need for protection and how much is your need for investment returns.
• Primarily your profile configuration is more important. many people, do not configure what they are looking for and based on the agents words will subscribe to a product. Though no company sells bad products, a wrong selection has always opportunity cost. By opportunity cost what I mean is that, when you choose to put your hard earned money in a wrong investment avenue say A, which gives you a return of 5%. By investing in avenue A, you have chosen not to invest in other avenues. If avenue B gives a retun of 10%, then you incur an opportunity cost of 5%.
• You are directly exposed to the vagaries of the domestic as well as international markets. At this point, Indian economy is not fully integrated with the global markets at the same time not isolated also. Due to this the stock market returns are more volatile than before. By investing in stocks your ULIPs also expose you to the volatality.
• If you are investing for your pension purpose, then think twice before choosing the product. Most of the companies provide you the choice of level of risk you would like to take. In general you will find, risk, income, secured, balanced fund options.
• Secured funds are mostly invested in government bond market and this is by far the most secured avenue. Where there is less risk, less return is the maxim. In India, the bond market is not a matured market still and is mostly limited to the institutional investors. Direct involvement of the public is not much.
• Income funds aim at a moderately higher return which is stable. The invesment avenues are mostly Fixed income securities and government bonds and some equity. Fixed income securities can be corporate bonds and other bonds issued by financial institutions.
• balanced funds balance between equity and bonds. The percentage varies from company to comapny.
• By Risk option, 80-100% investment is done in equity where the return is highest and equally risk is also high.

your agent may say.......

In the 4 years of its existence many ULIP products such as LIC's Bima plus, Future plus, and other company products have given even 30-40% during some point of time or the other. your agent may project that this is the constant return you are going to get on your investment. When you compare a traditional insurance product which gives you a maximum of 8% including your tax benefit with the 30-40% return on ULIPs, naturally there is no second thought for you.

but... please keep in mind that... these returns cannot be guranteed. In the long run over the life of your policy say 10 years or 20 years, the returns get averaged out and you may not be getting the socalled 30% or even 60% as some comapny agents canvas.

as a remedy to this, some companies started cavanssing, pay only for 3 years period. It looks very simple... invest 10000 for 3 years and at a rate of 33% at the end of 3 years you will have another 10000 which can become your 4th year premium and so on. Keep in mind, this is designed based on one year return in the high days of stock market. In the dynamic market, this is like a water in the fist.

some other canvanssing .... is that exist at the end of 3 years. Do you know why this 3 years period? For any insurance company the biggest problem is the business acquisiton costs. The first year commission paid to the agent at times ranges upto 40-60% of the premium. Insurance companies spread the acquisition costs in to first 3 years and that is why its mandated be it tradtional or ULIPs that the customer has to make premium payment atleast for first 3 years.

The ULIPs....Part I

Unit Linked Insurance policies (ULIP) are the insurance policies that have a linkage with the stock market.  There has been an increased activity on this count and lets see the fundamental concepts of ULIPs and how they differ from the normal insurance products that have been offered till now called as conventional insurance policies.

In Indian financial world, the word unit was more popularized by Unit trust of India.  Units are the constituent elements of a mutual fund.  At a basic level, mutual fund is the collection (portfolio) of different securities that have differing risk characteristics aimed at maximising returns and minimizing the risk.  This is done by way of portfolio management carried out by specialized companies called as Asset Management Companies (AMCs).  The same unit is what we use in ULIPs.

In advanced countries, these are called as Variable life products and Universal Variable Life products ( VL & UVL), though at times ULIPs is also used.  

The primary difference between the conservative products and the unit link products is the transfer of risk. Other than the term insurance policies, the premium you pay consists of two elements. 1.  risk premium   2.  savings premium.   For term insurance policies, there is no savings component in general and only risk  premium will be there.  The insurance company by investing the savings premium in eligible investment avenues, generates a return on the funds. This is paid as bonus on policies after deducting the operating costs of the company.   Traditionally the insurance companies try to maintain a average return on compounding which gives a better return.  Here the missing element is, the customer does not know where his premiums are being invested.  In ULIPs, the savings premium is invested as decided by the customer. The customer has a choice of  different funds which differ in their risk character along with an option to switch the funds.    The other area of transparency is the costs.  Various charges such as administrative charges, fund management charges and all are pre declared and customer can know how much is the cost deducted.  This transparency is missing in the traditional products.    Read part II of ULIPs for why ULIPs and What you need to know about your ULIPs. 

insurance news

• After equity and MF fall investors seek relief in insurance-...
  
• India's share of world life insurance rises- Analysis-Insuran..
  
• LIC to take refuge in more conventional policies- Insurance...
  

lets take a journey... Part II

While you fill the proposal forms - you will be furnishing , your legal name, legal heirs details, communication address, (now IRDA seeks identity also), your qualification, occupation, annual income, previous insurance details, familay members details, if any member died then cause of death, your health record such as smoking habits, hospitalization information etc. also you will be mentioning the sum assured ,the term and mode of premium payment.

Pleae note: the inforation you provide here forms the basis for test of law in case of any disputes!!

Based on the information provided by you, the insurance company scrutinizes your suitability for insurance. This is the job of an Underwriting department. There are international standards for underwriting. Each underwriter will have some upper limt upto which if sum assured lies, he can underwrite the risk. The higher the sum assured, the more scientific the underwriting becomes. The insurance company can call for specific medical reports if need there be. In general, the cost of these reports is born by the insurance company only.

Upon underwriting, the insurance company may reject your proposal, accept it with some conditions or accept unconditioanlly. You may have choice to pay the first premium as a deposit along with your proposal or pay it after the confirmation. This may vary from company to company.

Once your insurance is accepted, on making required payments, you will be given a policy bond or a policy certificate. Please keep this safe. There exists a provision for issue of duplicate in case of loss of this certificate. But, the procedure may be irritating as you have to establish the cuase of loss and all. check if all the details are correctly recorded in the bond. Else, you may face problem at the end of the day.

lets take a journey... part I

In many sites you will find insurance glossary and definitions about policies and other related matters. when you read each and every term separately, the full picture may not be clear.... lets take a journey from your intention to take a policy to maturity of your policy... this shall give you a good understanding about the insurance company operations as well.

In life insurance business, the primary channel for business procurement is 'tied agents'. Not only in India, across the world, tied agents paly an important role in procuring insurance business. They are the agents whom you come across when you want to take a policy. Atleast in Indian scenario, each agent is supposed to canvas products of only one company. Apart from the tied agents, now there are alternate channels of business procurement i.e through banks (popularly know as bankassurance) , insurance brokers. Details about insurance business procurment can be found in a separate article with title " The nitty grities of life insurance agent system"

when ur agent approaches, you start listening many new words and things may seem to be complex. In the ideal situation, you should be clear about the following:

• your insurance need - safety? investment? children? pension? all of the above etc
• your ability to pay - insurance is a long term contract, how much you can pay in future?
• Your human life value - please see a description of this term give here below.

human life value is a concept which says that we should know how much we should put in life insurance, so that, the family can live the same standard of life, even after demise of the earning member, or after the earning member retires. You may not be able make provision immediately to meet this, but, one can keep this as a target and start your insurance portfolio.

When you decide to take an insurance, the agent may inform you to sign the proposal forms. Its a common practice that the agent takes down the details like date of birth, approximate salary, family details and then takes a signature in the proposal form and he fills your details later. Please remember, insurance is a contract and its worth you fill the proposal form on your own. These forms have a legal basis and whatever your signing in the form will come into picture in case of any claim. It takes only 5 mins to fill the form. Next time when your agent comes with proposal form, insist that the same be filled by you or atleast before you. Infact, IRDA insists that the agent should give a copy of the proposal form which he has submitted in the company to the customer.. which is now under a court case. continued in Part II