TERM INSURANCE

The purpose of taking life insurance is to provide life cover to the policyholder and financial security to his/her family. Planning is very important to meet the demands and obligation because future is vague and uncertain.

There are two ways the individual can take a life insurance:

1. Term Insurance → By opting for a pure life cover
2. Endowment Insurance → By taking life cover with a savings component built-in

Term Insurance – Provide coverage for a certain period of time and sum assured is paid only in the situation of the death of insurer as the benefit to their nominees.

Endowment Policy – Life insurance contract designed to pay a lump sum after a specific term (on its ‘maturity’) or on death. Typical maturities are 10,15 or 20 years up to a certain age limit.

Eligibility: An individual having a minimum age 16 years – maximum age 65 years.

Maturity: Lifetime. But some insurance plans cover 65-70 years.

Note: The specifications and obligation may change the plan to plan depends on the company.

Which is better, term insurance or endowment plan?

• The choice between Term insurance and Endowment plan cannot be made as each of them has its own significance.
• Term plan offers only the death benefit. Where an endowment plan offers both the death and the maturity benefits.
• Term insurance acts as an insurance. However, endowment plan is a combination of an investment and insurance.
• Both term plans and endowment plans promise to provide the sum assured to your beneficiaries in case of your death during the policy tenure.
• Tax benefits under Section 80C of the Income Tax Act are available under both the cases.
• Policyholder to opt for a larger life cover at a lower premium when compared to a similar endowment plan.
• Term plans cannot be overlooked as they are the purest form of insurance, providing you protection against the biggest threat/reality of life-death and opt for endowment plans for the sole purpose of investment and you are going to financially secured for the whole of your retired life.

Key features

• Term life insurance plans are more affordable because it is possible for an individual to opt for a higher life cover for the same premium as an endowment plan.
• The policyholder should be based on one’s specific needs and can attach riders like critical illness plan to the term plan to enhancing the utility of the policy. i.e., loss of employment cover, disability cover, waiver of premium cover, income benefit, women-specific, hospital cash benefit, etc.,
• In other words, entitled to receive the sum assured of being diagnosed with the critical illness in addition to the death benefit of the policy.
• Some insurance companies offer the flexibility to enhance the life cover during critical stages of the policyholder’s life. For instance, the policyholder may be permitted to enhance life cover by 50% at the time of marriage and by 25% at the time of turning a parent.
• This makes it possible for him to start with a modest cover and then enhance it as responsibilities increase as also the ability to pay the higher premium.

How to choose a term plan?

• Analysis of past history or previous settlement percentage.
• Riders covered by the company in the plan.
• Accessibility and comfort with procedures.
• Low premium expenditure.
• The genuineness of the company and reliability.
• The credibility of the company.

Is a pregnant lady covers?

• May not cover, if claims fall under exclusion of pregnancy clause imposed by the insurer at the time of policy. Also, not covered in case of any non-disclosures like miscarriage, abortion, ectopic pregnancy.
• If a pregnant lady wishes to cover on this, insurer asks her to apply for it 3 months after delivery. However, if a pregnant lady is already covered – not applicable.

MONEY BACK POLICY/PLAN

Money back policy is very popular from LIC (Life insurance Corporation) in India

Under this plan, the insured person gets a fixed percentage of sum assured at regular intervals which is predetermined while one entering into the contract instead of getting the lump sum amount at the end of the term. It is an endowment plan with the benefit of liquidity.

How does it work?

• The policy is suitable for risk-averse (dislike or not ready to take the risk) individuals who wish to save through an insurance plan and also maintain liquidity throughout.
• In case of death of the insured person, the nominee gets the entire sum assured and the survival benefits are not deducted.
• Provides life coverage during the term of the policy and the maturity benefits are paid in installments by way of survival benefits in every 5 years. The plan is available for 20 years and 25 years term.
• The bonus is also calculated on the full sum assured.

Features and specifications:

Age: Min. 13 – Max. 50 years

Sum assured: INR. 50,000 – No limit

Term in years: 15, 20, 25

Mode of payment: Monthly, quarterly, half yearly and yearly

Maximum age at maturity: 70 years

Policy loan available: No

The above conditions are not specific and mentioned in order to provide a generalized idea. Conditions may vary with policies and policy providers.

Simple Reversionary Bonus:

It is declared per thousand Sum Assured at the end of each a year, following which, they form part of the guaranteed benefits. Simple Reversionary Bonus, therefore, accrues during the premium paying term but is paid at the end of the term or death in addition to the final additional bonus. Simple Reversionary Bonuses is declared as per the performance of the Life Insurance Corporation.

Final Addition Bonus:

Paid if the policy has run for a minimum period. Final Additional Bonus may be declared when a claim is made either as a result of death or maturity, provided the policy has been in effect for a minimum term.

Benefits:

Survival Benefits:

• In case of Life Assured surviving to the end of the specified duration 20% of the Basic Sum Assured at the end of each of 5th, 10th & 15th policy year.

Maturity Benefit:

• In case of Life Assured surviving the stipulated date of maturity, 40% of the Basic Sum Assured along with vested Simple Reversionary Bonuses and Final Additional Bonus, if any, shall be payable.

Death benefit:

• Sum Assured on Death is defined as higher of 125% of the Basic Sum Assured or 10 times of annualized premium. This death benefit shall not be less than 105% of the total premiums paid as on date of death and also payable of Simple Reversionary Bonuses and Final Additional Bonus if any.
• The premiums mentioned above exclude tax, extra premium and rider premium if any.

Participation in Profits:

• The policy shall participate in profits of the Corporation and shall be entitled to receive Simple Reversionary Bonuses declared as per the experience of the Corporation, provided the policy is in full force.
• Final Additional Bonus may also be declared under the policy in the year when the policy results in a claim either by death or maturity, provided the policy has run for certain minimum term.

Optional Benefit:

Accidental Death and Disability Benefit Rider:

• Accidental Death and Disability Benefit Rider can be opted at any time under the policy in force within the premium paying term by payment of additional premium.
• The cover will be available throughout the policy term provided the Policy is in force for the full Sum Assured as on date of the accident.
• In case of accidental death, the Accident Benefit Sum Assured will be payable as lump sum along with the death benefit under the basic plan.
• In case of accidental permanent disability arising due to the accident (within 180 days from the date of accident), an amount equal to the Accident Benefit Sum Assured will be paid in equal monthly installments spread over 10 years
• Future premiums for Accident Benefit Sum Assured as well as premiums for the portion of Basic Sum Assured which is equal to Accident Benefit Sum Assured under the policy, shall be waived.
• On surrender of an in force basic policy (which has acquired Surrender Value) to which this rider is attached, a proportion of additional premium charged in respect of cover after premium paying term shall be refunded.

PENSION PLAN

A pension plan is a retirement plan – An employer to make contributions into a pool of funds set aside for a worker’s welfare as the future benefit and invested on the employee’s behalf. Earnings on the investments generate income to the worker upon retirement as the benefit.

Some pension plans have a voluntary investment component.

Pension plan allows a worker to contribute part of his current income from wages into an investment plan to help fund retirement. The employer may also match a portion of the worker’s annual contributions, up to a specific percentage. In other words, employer and employee contribute equally to the plan in maximum scenarios.

How does it work?

The structure of any pension plan has 2 parts:

1. Accumulation
2. Distribution

You have pay premium every year depends on the plan selected which gets invested in the fund/asset of your choice after deduction of charges and at the time of vesting you have two choices:

1. Ask the insurance company to start your pension/annuity (as per the available annuity options)
2. You can withdraw the money and purchase immediate annuity plan from the same insurer.

Compulsory features in Pension Plans in India:

Guaranteed Maturity Benefit:

• It would be fund value or 101% of Premium paid, whichever is higher in all the pension plan applicable in India because to provide safety to the policyholder.

Guaranteed Death Benefit:

• If the premium payment is in continuous status which is equal to 105% of the total premiums paid plus all top ups if any.
• The amount will be paid to the nominee of the policyholder in case of unfortunate death of the policyholder.
• If the policy is in discontinued status then the nominee will get the funds lying in the policy discontinued fund.
• The nominee will also have 3 options to utilize the funds:
       1.Withdraw the entire death benefit.
       2. Utilise the entire proceeds to buy immediate annuity plan.
  3.Withdraw part of the proceeds and use the other part of buying annuity plan.

Surrender/Discontinuation:

• Discontinue or surrender the plan within first 5 years of the start of policy then your fund value on the date of surrender will be shifted to Policy discontinuation plan after deduction of specified charges.
• The discontinued fund will also earn around 4% P.A on the funds lying depends on a plan.
• One may withdraw the fund after completion of 5 years as per the specifications mentioned in the plan while entering into the contract.
• The surrender proceeds have to be utilized either to purchase an immediate annuity plan or single premium deferred pension product. Standard discontinuation charges may apply depends on terms and conditions.

Advantages:

Merged with insurance and pension policy
Pension plans that will offer the lump sum pay-out upon the retirement or death of the individual, whichever occurs earlier i.e., pension policy can be used to support life insurance coverage as well.

No effect of Inflation
Pension plans are designed to negate (null or no effect) the disastrous (damage) effect of inflation.

The plan will offer a lump sum payment at retirement amounting to the maximum of 1/3 of the corpus accumulated and the balance 2/3 value of the corpus will be utilized to generate steady cash flow for recurring expenses.

Corpus in hand at the end
Pension plans that will invest your funds in ultra-safe government securities as an equity investment. This will ensure you have a huge corpus in your hand at your retirement age and help you maintain your lifestyle without any complications or loss of independence.

Different plans for the different class of people

• One has numerous options depending on one’s retirement age and retirement plans.
• One can pay a huge lump sum amount of INR. 5 lakhs and start receiving the annuity payments immediately.
• One can go in for a Deferred Annuity plan thereby allowing the corpus to earn more interest before the payout begins.

Long-term savings
Assured of long-term savings irrespective of whether you choose the one-time lump sum payment or multiple small payments approach which can be further invested to generate a steady cash flow after you retire.

Enhancing nature of protection using riders
Pension policy can be tweaked to receive lump-sum payouts in the event of critical illnesses or disabilities due to accidents. The policy can be used to bolster one’s long-term health care related cover as well.

Disadvantages:

Late joining – lost a lot
There will be a huge gap in the returns earned by an individual obtaining this policy at the age of 21 years as compared to 30 years or 35 years.

Risk and return
The pension policyholder may have no option but to adopt a high-risk high return approach to ensure the pay-out is adequate at the retirement age.

Traditional and safe investment options may not be adequate to negate the effects of inflation.

Future requirements are uncertain
Annual payout offered by the retirement policy is not enough to take care of your post-retirement expenses which are real and unavoidable. Regular analysis of the market conditions and performance of the policy will help minimize this risk.

Tax liability
The annuity received post-retirement is taxable and also can significantly dent the cash ultimately available for your personal utilization.

Limited tax deductions on Pension plan premiums
The maximum deduction allowed on life insurance premiums, pension plan premiums and other long-term savings under the Income Tax Act is Rs. 1.5 lac. This means planning for one’s retirement will not bring down one’s tax liability in the present.

Despite the disadvantages, there is no denying that buying a pension policy is a sensible decision as far as planning for retirement is concerned.

What will happen to my pension plan if the company I work for goes bankrupt?
Pension plans of private sector employees are protected under the Employee Retirement Income Security Act (ERISA). ERISA requires that pension assets be held in a trust separate and apart from other corporate assets. If the plan is underfunded, meaning that the obligations are larger than the assets, the regulatory authority insures a portion of each employee’s benefits.

What is the penalty for cashing out state pension contributions?
If you are under age 59 ½, the distribution will be taxed as ordinary income tax rates and will also be subject to a 10% penalty.

What is the difference between a pension and an annuity?
A pension is generally considered to be a retirement plan that is at least partially funded by an employer. An annuity is a contract between an individual and an insurance company. In exchange for the premium that is paid by the individual, the insurance company agrees to make guaranteed payments according to the terms of the contact. Because they can be used for retirement income, annuities are sometimes referred to as “personal pensions”.

Is a retirement pension taxable?
Yes. Distributions are fully taxable at the federal level and in states with personal income tax.

ULIP (UNIT LINKED INSURANCE PLAN)

A Unit Linked Insurance Plan (ULIP) is a plan offered by insurance companies that, unlike a pure insurance policy, give investors both insurance and investment under a single integrated plan.

The first ULIP is launched by Unit Trust of India (UTI). Subsequently, the government of India, IRDA (Insurance Regulatory and Development Authority of India) and many insurance companies issued.

ULIP – Types:

ULIP are two types depends on death benefit:

• Nominee of the policyholder gets the Sum of Sum Assured and Fund Value in the event of the demise of the policyholder.

How does it work?

• A Unit-Linked Insurance Plan is essentially a combination of insurance and an investment vehicle.
• The remaining portion is invested in equity and debt instruments of the premium paid by the policyholder apart from which is utilized to provide insurance coverage to the policyholder.
• The aggregate premiums collected by the insurance company providing such plans are pooled and invested in varying proportions of debt and equity securities in a similar manner to mutual funds.
• Each policyholder has the option to select a personalized investment mix based on his/her investment needs and risk appetite.
• Like mutual funds, each policyholder’s Unit-Linked Insurance Plan holds a certain number of fund units, each of which has a net asset value (NAV) that is declared on a daily basis.
• The NAV is the value upon which net rates of return on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and fund performance.

Advantages:

• Offer you superior returns depending on the fund. For example, if the fund you have chosen has heavily invested in the capital markets, chances are that if the stock markets do well, your fund may also do well.
• Provides insurance cover as well. The insurance cover may not be as great as a term plan, but, it should be good enough.

Disadvantages:

• Returns cannot be guaranteed because market conditions are quite vague (not clear) and uncertain. For example, if you have chosen a ULIP that invests the bulk of the money in equities and the shares are not doing well, chances of losing money cannot be ruled out.
• Returns are very poor because there are a host of charges that are associated with the scheme, including administrative charges, mortality charges etc.
• Brings down your returns substantially in the first year itself of almost 5% of your money is lost paying these charges.

Features:

• A portion of the premium goes towards mortality charges i.e. providing life cover.
• Remaining portion gets invested funds of policyholder’s choice.
• Invested funds continue to earn market linked returns.
• Features such as top-up facilities, switching between various funds during the tenure of the policy.
• Reduce or increase the level of protection.
• Options to surrender.
• Additional riders to enhance coverage.
• Returns as well as tax benefits.

RISK:

• ULIP (Unit Linked Insurance Plan) returns are directly linked to market performance and the investment risk in investment portfolio is borne entirely by the policyholder, one needs to thoroughly understand the risks involved and one’s own risk absorption capacity before deciding to invest in ULIPs.

Tax benefits

• Maturity proceeds are also exempt from income tax based on caveat (conditions). The Sum Assured or the minimum death benefit must be at least 10 times the annual premium. If this condition is not met, the benefit under Section 80C shall be capped (covered under) at 10% of Sum Assured while the maturity proceeds will not be exempt from income tax. Investment in ULIPs is eligible for tax benefit up to a maximum of INR. 1.5 lakh under Section 80C of the Income Tax Act.

Which one is better ULIP or SIP?

Investments in ULIP attract the benefit under Section 80 C. However, don’t mix the two – insurance and mutual funds – just to save some taxes. If you are looking for a tax-efficient and lower cost investment option, a SIP in an Equity Linked Saving Scheme will do better.

CHILD PLAN

Every parent naturally takes care of their children with more love and affection and also meanwhile has to make a plan on their children career to meet the future needs, obligations, and demands in a smooth way. Planning is at most important because future is uncertain and it is like a blown bubble, don’t build up a thought in the air. A child plan offers comprehensive benefits of life cover along with maturity benefit.

Prime-a-facie (means at the very first level which is acceptable) kind of insurance plan are the type of corpus fund which covers both investment and insurance for children and serves two purposes:

1. Financially secure your child’s future and
2. Finance the career for them in life such as higher education and marriage.

There are two types of maturity benefits to choose from in child plans.

• Money back option which offers guaranteed pay-outs every year after a few years
• Lump sum payout at the end of the maturity date.

The lump sum payout which can be utilized towards higher education, marriage or buying a house for the child.

What is a child plan?

• A Child Education plan offers the combined benefits of savings and protection for future which is designed to provide financial security to your child so that career never gets hindered due to any unfortunate events in the future.

Why education plan needed?

The cost of living keeps growing with respect to inflation day by day. Today rupee definitely will not be the same after one year. Today’s worth of education will definitely not the same in future. One should plan for the children education to hedge the risk because future is uncertain.

Advantages:

Corpus for Child’s Education

• Child plans are able to provide as much as 10 times the amount paid in the child education plan with minimum premium.
• Child plans can be foremost utilized towards education expenditure with a lump sum and are often enough to pay for higher education or even higher education in a foreign country.

A Kitty for Medical Treatment of the Child

• Withdrawing money during the tenure of the child investment plans also facilitate by some plans when he or she falls ill for the purpose of medical treatment.
• It is a participating plan with limited premium payment mode. Simple reversionary bonus and terminal bonuses (if any) are paid out along with maturity benefit as well as the death benefit.
• Allows you to enjoy income tax benefits.

Income Protection

• Protects the income of those children who start earning at a young age and provides capital appreciation over the long term for the child.

Acts as a Collateral for Loans

• To secure a loan for higher education as these are allowed to be used as collateral for other child-related borrowings. For example Bank loans.

Generally, the education plans equipped with the features like

1. Entry age
2. Premium payment term
3. Sum assured
4. Policy term
5. Premium payment
6. Surrender
7. Settlement option
8. Grace period

• Flexibility and reliability to make Partial Withdrawals to meet planned and unplanned expenses.
  Allows creating wealth for future through market investments.
• No liability to pay the future premium, in case of death of a parent.
• May choose from seven varied funds with different risk profiles based on your market strategies.
• Both death benefits and maturity benefits are guaranteed under this child education plan.
• Non-participating unit-linked child education plan.
• Option to choose Policy Term to let you decide your key milestone.
• Systematic Transfer Plan and Automatic Asset Allocation mechanism to protect your investments against market volatility.
• Loyalty additions are also paid out at different stages of the policy term.