Insurance Policies

2. How much of Insurance cover does one need: The cover should be such that the family of the Insurer should be able to maintain the same life style with the help of Insurance money received. An earning individual up to the age of 40 should have a term plan with a life cover of atleast 10-20 times the annual income. A person in his  50s should opt for a life cover of 5-10 times the annual income. The insurance plan should continue till retirement age. This is a basic guideline. It could differ based on requirements. For example if a business man has taken 5 crores worth of loan to invest in his business and if the family cannot run the business after him then he should have a cover enough to pay this loan with adequate left to take care of the family.

3. Do we need any additional insurance in Armed Forces? Now you may say we in Armed Forces aren’t insured for 20 times our annual income right? . But we also have the family pension that the dependents will get in case of any eventuality. That together with the Insurance amount is sufficient for the family to maintain a similar lifestyle. Also the house loan or car loan that we take from service are insured. So in case anything happens to us the family need not pay anymore for that house or car. So that is a additional cover( off course you pay a one time insurance fee for that)

4. Insurance policies: Before taking a Insurance policy you need to understand that do you need insurance cover or is it a investment that you are looking for?. In armed forces we are well insured. For example for an IAF officer the cover is appx 1 crore as on 2022. In case anything happens to you, the dependents will get full family pension for first 7 years( about half of the pay), thereafter they will receive family pension( 30% of the pay). So we do not actually need any more insurance. If you have a house loan then you must take insurance for it ideally. After you leave service you may take Term Insurance till the time you are working or have dependents( This is the best insurance . We will discuss this later)

5. Traditionally Insurance has been a very common investment option for many Indians. LIC policies were very common and continue to be for some people. There are two types of Insurance policies: traditional insurance policy and ULIP’s( unit linked insurance plans). Traditional insurance plans mostly include endowment plans. An endowment plan is the worst Insurance that you could buy. You can expect a return of 4-6% in Endowment policies of LIC and other private companies. Why is it like this? LIC had monopoly till late 1990 when private insurance companies were not allowed. IRDA(The Insurance Regulatory and Development Authority of India ) governs Insurance companies. They are supposed to govern how of much of fees/commissions an Insurer can take. Since LIC had monopoly and it being a government company all rules which were made favoured LIC. LIC was allowed huge margins on the investments of clients. It passes on a huge commission to the agents who distribute these policies. LIC does reciprocate to the govt by bailing out PSU’s in grief by buying their stocks when nobody else does. Yes so they are doing a huge service to the nation, but at the cost of depriving the policy holders of their hard earned money. After private insurance came in  late 1990 similar rules applied to them and they all make huge margin on the policies. Also for traditional insurance policies a insurance company does not need to declare where it has invested the client’s money and how much returns it has earned and how much of fees is taken by the company. What you simply see is a bonus declared every year. You never come to know how much of your hard earned money was taken as fees/commissions by the company. The life cover provided by Endowment plans is meagre. It could be say 5-10 times of premium paid in a year. Say you pay 1 lakh a year then you get a cover of 5 to 10 lakh which does not suffice. If you want to calculate the returns then  use any compound interest calculator to calculate. All you will get out these policies is 4-6%. Back in those when interest rates were 12-13%, one could get up to 8% returns from these but that is not the case now. One draw back of these policies is, if you decide to discontinue the policy in first 3 years you do not get back any thing. If you discontinue after say like 8 years you just about get 80% of the amount paid, which is -20% returns. So actually these policies trap you. Even if you find out a year later that the policy is not good and you want to discontinue it, you will not get back anything. So people continue it not realising they would get more returns in PF. The endowment policies of private insurance companies have similar returns. If you go to a bank and say i want to invest the first thing they usually offer is a Endowment Policy(try it) and then may be ULIP, because it gives the seller maximum commissions. Commissions to the agent  could be 30-45%( in Endowment Plans) of the amount paid in the first year. Say like you paid 1 lakh in first year for a LIC/endowment policy of pvt company then the seller could get up to 25 to 45 k of your money. 4^th year onwards it usually 5% that goes to the agent. Don’t believe me.

Read more here:-

https://www.onlinelic.co.in/lic-agent-commission-chart-2015/
https://www.quora.com/Is-investing-in-LIC-policy-a-good-decision

6. So you are giving a major portion of your invested amount to the LIC agent and the company in first 3 years hence the low returns. If inflation is 7% then at 4-6% returns you are actually loosing money in a endowment policy. So why is that people still buy LIC policies. Many people are not aware about these facts. They think that LIC is a govt company so the policy will be good. Another reason is the marketing strategy used. Some of them give false verbal facts and figures to miss-sell. There is one Colonel, who was told that one such HDFC endowment  policy has given 19% returns. He subscribed to 4 lakh per year of the insurance only to be guided by me  later about the poor returns. Now he had two options either to continue in it or take the loss and get out. He opted out of paying further and lost the 4 lakhs. When someone gives you such facts and figures please ask them to show it in the company brochures and data from internet. Another reason why people buy such policies is because there is always some LIC agent in our families and we come under pressure to buy. You can read more on the internet. Google – are Endowment policies good.

This video from youtube will some up the poor returns of traditional investment policies:

7. PLI( postal Life Insurance)– Is PLI any better. PLI also offers endowment plans. The returns of PLI are slightly better but still not as much as PF. The returns on their short term policy( 7 years) is better than long term policy. This is because the bonus declared was same whatever the term be. You can expect upto 6-7.5% returns from PLI.

8. Next time someone tries to sell you a Endowment plan ask him/her how much of the Endowment policy they have for themselves? If it is really good then they may be investing quite a bit themselves right? Ask them to show their investment statements. You will be surprised they may have none themselves.

9. ULIP(Unit Linked Insurance Policies): These are insurance policies which are associated with a Fund. The Fund invests in stocks just like a mutual fund. After private insurances were allowed in India they started coming up this new form of Insurance. So you have a ULIP where you invest some amount, of this there are certain fees that the company takes. After taking out the fee the leftover amount is invested in the Fund.

10. Unlike a Endowment policy in a ULIP, the Fee structure and the investment details etc are supposed to be declared to the investor. So it far better than a Endowment Policy. The charges of a ULIP are far lesser compared to a Endowment policy. LIC did not have ULIP initially and since there were all private players in this field the rules were set tight for ULIPs by IRDA unlike a endowment policy where the rules made were such that LIC could make huge margins out of investor’s money. LIC subsequently came up with a ULIP however they did not find it profitable and went out. Now they have introduced ULIP once again.

11. The insurance cover of a ULIP is usually 5-10 times of the premium paid in a year. Which actually is not sufficient.

12. The investment in ULIP is used to buy various stocks( a mix of a number of stocks) . As the value of stock appreciates the Fund value goes up. From that various charges are taken out and the remainder is what is due to the investor. Say you invest in a ULIP for 10 years. The fund associated with ULIP gives 14% returns. If sum of all charges are 4% then you would get about 10% returns. If you take short term of like 5 years you may not get great returns as the various fees are higher during initial years. In long term say 15 years if fund gives 15% then you may expect 12% returns. To check on this you can ask someone who has a ULIP. I checked on the ULIP performance of a friend after 3 years when equities had given more than 15%, his ULIP gave 9.5%. The returns are subject the performance of the Fund. If the stock prices go down then your investment value may reduce. ULIPs offer tax rebate under 80 C. Also the returns of ULIP are exempted from tax.

13. One way used to miss-sell ULIP is they tell you that this ULIP has given say 17% returns in last 5 years. One agent told me that. I checked online and the fund did give that much return. But they do not tell you- that is not what you will get after taking out various fees.( fee could be different with age).

14. ULIP s usually have a lock in period of 3-5 years. That means you cannot withdraw your money in those 3 or 5 years of starting the ULIP.

15. One advantage of ULIP is that you can discontinue a ULIP any time. If you do it before the lock in period then after taking out the various charges the rest of the amount goes into a short term fund( which may get you say 7%) which you can get after the lock in period is over.

16. The returns of a ULIP with a good equity fund in long run say 10 years or more are likely to be more than PF( you can expect 10% or so ) . The fund may give more returns but the charges in ULIP tend to be slightly higher which tend to reduce the total returns. But in the longer run say like 20 years or so the various charges come down even further and the returns are better.

17. So should one go for ULIPs? Once again i will ask the same question. Do you need insurance cover or are you looking purely from Investment point of view. I wont say that ULIP s are bad. A good ULIP will give more returns than PF or a average house in long run . But if what you need is an Investment avenue then why would you like to pay the various charges of an Insurance which will reduce your overall  returns.