Do homemakers require life insurance policies?

Anju Grewal, a housewife in her mid-30s, agreed to buy life insurance after been chased by her cousin. Though she gave in to social obligations, she was not sure whether she should buy the investment- oriented insurance policy pitched to her. Many people, including Anju, believe that insurance is a forced form of savings. Hence the key message thrust on them is that insurance will not only provide some cover to your family, but can also give you some amount on maturity.
“Do I need life insurance?” was Anju’s question. To find an answer, we must understand what life insurance exactly is. Life insurance is primarily a tool by which an individual can transfer the financial risk (to his/her family) of his/her early or untimely demise to the insurance company. So what exactly is the financial risk in case of loss of life? The first question Anju should ask herself is : “Will my family have sufficient financial resources to maintain their lifestyle and achieve financial goals such as children’s education, marriage, if something were to happen to me today?”. The answer to this question needs introspection as well as thorough analysis. Besides the emotional loss, there is also a financial loss that occurs to a family , when the breadwinner or earning member of a family dies. Families are devastated; have to go through a lot of hardships and turmoil to make ends meet. Even if you have plenty of money, poor planning (too many claimants, legal issues, and litigation) can ensure that your family sees tough days ahead. Generally people buy insurance to demonstrate caring and to feel comfortable that they have indeed done something to secure their family’s future. Whether they need insurance or not is considered irrelevant. For example, there is this celebrity who has been sold an insurance policy where he is paying premiums in crores. This celebrity does not even need life insurance as he is single, no dependents, and no liabilities, has lot of assets but yet has fallen prey to some life insurance product. Life insurance is generally a very personal decision and should be bought only if there is some significant economic impact of your untimely death on your family. Therefore, a housewife needs to ask herself the following questions 1. Is my husband’s income sufficient to take care of my children, liabilities and family goals? 2. Are there any immediate expenses or recurring expenses that would come up should something happen to me today? 3. Does my husband have adequate cover? If so, how much and what kind of expenses, liabilities and goals would I have to address in case of his untimely death? Ensuring that your husband has sufficient cover is far more important for a housewife than ensuring that she has sufficient cover. Considering that the husband has sufficient life cover, there is no pressing need for a woman to buy life insurance. However if one must buy life insurance , then you can opt for a simple term plan that will give a very good cover for a low premium. Most insurance companies will either refuse a pure term plan in the name of financial justification , moral hazard or give a low cover of around Rs. 5 lakh. A term cover of Rs 5 lakh for a 35 year old woman will cost Rs. 1,700 per year. Premiums might vary from company to company but in general there is no need to pay anything significantly more than this number. This means that you can comfortably stay away from investment-oriented policies Folks from insurance companies generally are of the opinion that since housewives are not earning, there is no question of replacing income in case of their death. On the other hand they readily agree to give you insurance if you opt for a investment oriented insurance policy. The right approach to buying life cover is to consider whether the risk has the potential to jeopardise the family’s future. Anju did some introspection on whether her death besides an emotional loss could cause any financial damage. She listed down all the expenses that would come up in case of her absence under the following broad heads: 2 Tuition Teacher for kids 2 Care taker for kids 2 Help for cooking She figured out that her husband’s income was sufficient to take care of all the above expenses and leave aside a tidy figure for investments per annum. She also figured out that should something happen to the couple (Anju and her husband), her husband had sufficient life insurance to provide for their dependents. This thought process and a few calculations made the decision easy and Anju decided to simply invest most of her savings and see if an insurance company can issue her a low cost term plan. There is no doubt that duties and responsibilities of housewives are selfless and incomparable. However, when it comes to life insurance, one must make a thorough assessment of individual situation and then take a prudent call.

(The author is a certified financial planner and the director of My Financial Advisor)
Source: The Economic Times

Save up some cover for that rainy day

Come June and the monsoon will knock at our door. Weather officials have already signalled that the rains will hit Kerala in the next three to four days. Not long ago, many cities and towns were hit by floods brought in by the torrential rains. Maybe it’s time for you to protect your house and belongings. Home insurance policies, offered by general insurance companies, cover your home against risks from natural calamities such as fire, floods, earthquakes, or land slides. Apart from this, there are various sections of the policy that broadly covers the structure of the house alone, or your belongings such as jewellery, furniture, electronic appliances etc, or even both. Some policies even cover your rent expenses if you have to move out to another house because of the damage to your own house. Why home insurance? First and foremost, the possibility of your house getting damaged by floods may not seem like an incident of rarity if you recall the deluge that hit Mumbai on July 26, 2005. “If you say that it was a one-time deluge, such once in a blue moon incident can cost you a fortune,” says a relationship manager with Cholamandalam MS General Insurance. According to official statistics, the 2005 flood damaged over 1,87,000 houses across Maharashtra, affecting eight lakh families. Secondly, the premiums are reasonable for home insurance when you compare it with the single largest investment of your life. It works out to approximately Rs 60 per lakh to protect the house structure. Even for furniture, the premium is Rs 60 per lakh. For electronic appliances, the premium amount will be 1% of the value of electronic goods. “The premium depends on a variety of factors related to the size of the home, geographical location, type of construction etc. Home insurance is not applicable to kutcha (under constructed) dwellings,” says ICICI General Insurance director, retail, Neelesh Garg. Discounts for opting for multiple sections within the policy are built into the plans. You can get discounts of 15-25% on premium if you sign up for more than four to six sections of the home insurance policy. Calculating the sum insured? While insuring your home, the insurer always looks at reconstruction value. Reconstruction value is the cost you incur for redeveloping your damaged house. This value is different from the market value. Sum insured is calculated by multiplying the built up area of your home with the construction rate per sq. feet. For example if the built up area of your house is 800 sq. feet and the construction rate is Rs 800 per sq. feet then the sum insured for your home structure would work out Rs 6.4 lakh. Most insurers give details on construction costs in their websites. According to industry estimates, the reconstruction value is Rs 800 in big cities like Delhi, Mumbai, Bangalore etc. In tier II and ties III towns, the reconstruction value is Rs 600 and Rs 400, respectively. Insurers deduct depreciation on furniture, durables, clothes, utensils etc. while calculating the value of your home. However, most insurers do not apply depreciation to jewellery. How to file a claim? In case of any loss or damage to the home, you have to immediately inform the insurance company or your agent. “Submit a written claim document to the insurance company within the stipulated period. This claim document should contain a detailed account of the articles lost/damaged and the actual value of each article,” says Mr Garg. The claim request will be sent to the company’s claims department. Insurer’s surveyor will submit the final survey report (FSR) along with the documents submitted by you. On receipt of the documents, the claims department processes the claim. On approval of the claim, a letter is sent to the insured giving the approved amount of settlement along with the discharge voucher. Payment cheque is released on the receipt of the signed discharge voucher. The documents the insured have to submit will vary from reason to reason. However, they broadly include the filled claim form, photocopy of the policy, final police report and copy of all invoices, repair estimates etc. Since it’s a structured product and the premium is economical, this policy may be worth a look. Better safe than sorry.

Source: The Economic Times

PAN for all investments a panned idea

A THRESHOLD FOR INSURANCE PRODUCTS MAY AS WELL SERVE THE PURPOSE WITHOUT HITTING PENETRATION
AHEAD of this year's budget, insurance regulator IRDA's views were sought by the government on a proposal to make permanent account number (PAN) mandatory for investments in insurance products. One of the mandates of financial regulators in the country is to develop the market, besides of course oversight of the industry. The insurance regulator seemed to have taken that mandate seriously for it didn’t quite favour the move to quote PAN for insurance products. IRDA's rationale was that this would dampen the enthusiasm of distributors of insurance products, mainly individual agents, on whom the inusurance industry leans heavily. The obvious worry was that given the low level of insurance penetration in the country, a diktat on PAN could put off potential investors. Indeed, insurance penetration in the country is low. Measured in terms of premium collections, the penetration is close to 4.1% of GDP in life and 0.6% of the GDP in the non-life segment. This is way below the figures for insurance penetration in developed countries such as the UK and Japan. According to the insurance industry, distributors, who are a key link in the chain of activities in the insurance sector, are already complying with rigorous documentation norms. The insurance industry is apprehensive about getting bogged down in more paperwork if PAN is made mandatory for policy holders buying insurance products. There are further arguments. The insurance regulator also made out a case that insurance companies were obtaining PAN from clients whenever the premiums paid or sum assured breached a certain threshold. The limits are basically internal benchmarks set by insurers who carry out a due diligence on their clients. The aim is to assess if a policy-holder has the financial ability to pay his premium. Insurers do these checks, although it is not mandated by IRDA. Insurers in India are eyeing huge opportunities in rural areas and argue that compulsory quoting of PAN could dampen their sales in these markets. Getting farmers, for instance, to buy insurance policies could be a challenge as many of them may not possess a PAN card. Perhaps, the case built up by IRDA was not strong enough. The government went ahead and announced in the budget that PAN would be made mandatory for all transactions in the financial market, subject to a certain threshold. The limits will now be imposed by the finance ministry in consultation with IRDA. Like the insurance industry, the mutual fund industry too, raised a hue and cry over the government's move to make PAN mandatory for investments in mutual funds. Fund houses had then raised the bogey that it could impact investments in mutual funds, and instead money may be diverted to Unit Linked Insurance Plans (ULIPs) offered by insurance companies. But the government did not budge and made PAN mandatory for investments in mutual funds. No threshold was set for mutual funds. Similarly, transactions in the securities market are also covered. An investor needs to have a PAN to open a demat account even if he trades only in one share. Over the last few few years, PAN has evolved from being just an identification number of income tax purposes. It has virtually become a citizen's identification number, though the last word on this is not out yet. Besides an individual, banks, credit card companies and other agencies are now required to quote PAN of their clients in select financial transactions. The data is then matched with the tax-returns of the individual to see if he is short-paying or evading taxes. In short, PAN is handy to establish an audit trail in financial transactions. So, there is no case for excluding investors buying ULIPs from quoting PAN. Ulips are popular savings instruments as they offer protection in terms of life cover and flexibility in investments to the policyholder. The investments are similar to a mutual fund, though insurers say that a oneto-one comparison may not be correct. A threshold if at all may be justified for insurance products other than ULIPs- mainly pure life cover. But the bulk of the products being peddled by the industry are ULIPs and firms here say that they are no different from other markets. So, if at all a threshold is justified, what ought to be the threshold for other insurance products? Perhaps a good benchmark could be the limit set for insurance companies reporting transactions under the anti-money laundering legislation. Here, micro insurance policies with an aggregate annual premium of up to Rs 10,000 (from all policies) are exempt. The limits could be reviewed periodically when with rising incomes the ceiling could be raised.

Source: The Economic Times

HealthSprint plans tie-up with microinsurers for rural services

HEALTHCARE IT services company Health-Sprint plans to expand its reach a hundred-fold in two years to five lakh patients a month and take e-health services to rural areas in tie-ups with microinsurance providers. By then, it expects to be connected through its internet portal to 1,000 hospitals, 2,000 pharmacies and 2,500 diagnostic centres, Brahmesh D Jain, one of the three co-founders, said. Among the 150 hospitals it currently has tieups with are the Manipal Group of Hospitals, the Wockhardt Group and St Johns Medical College Hospital. Through its portal, HealthSprint provides services such as the exchange of healthcare data, including health insurance procedures, searches for a specialists, scheduling appointments with doctors, securing medical reports and getting prescriptions online directly from hospitals. It also helps connect customers with labs and pharmacies in the neighbourhood. Its e-health services for rural areas will be launched in Gujarat and Andhra Pradesh by connecting rural hospitals to those in metropolitan cities and rural customers with microinsurance companies. It is in the process of tying up SKS Microfinance and the SEWA women’s cooperative federation in Gujarat for the venture. “The idea is to provide a laptop, a scanner and a printer to rural hospitals, which will help to communicate the healthcare data to microinsurance companies and tertiary hospitals,” Dr Jain said. HealthSprint also has a tie-up with Yos Technologies to collaborate for creation and maintenance of personal health records. The company’s health insurance information exchange platform is for patients whose hospitalisation expenses are settled directly by the insurance company. Its corporate healthcare platform allows firms to manage pre-employment and annual health checkups for employees online. For pre-policy health checkups, insurance companies can schedule appointments online for potential customers with networked labs and secure reports for underwriting policies speedily.

Source: The Economic Times

Bajaj’s insurance arm betters parent

BAJAJ Auto’s seven-year-old insurance business has overtaken the 60-year-old parent company in market value. The higher valuation fetched by Bajaj Finserve is an indication that despite the March’08 slowdown, insurance is still seen as a high-growth area. On Friday, Bajaj Auto ended the day with a market capitalisation of Rs 8,311 crore. In comparison, the market value of Bajaj Finserve was Rs 9,340 crore. Bajaj Finserve owns 52% in Bajaj Auto Finance and 74% each in Bajaj Allianz Life and Bajaj Allianz General Insurance. In addition, Bajaj Finserve has around Rs 800 crore in cash and investments. If the value of Bajaj Finserve’s holdings in Bajaj Auto Finance (Rs 502 crore) and its investments were to be taken out, the residual value would be around Rs 8,000 crore—the value assigned by the market to the Bajaj holding in the insurance business. Although Bajaj holds 74% in both the ventures, a deal with Allianz allowing the German insurer to hike its stake to 74% in life and 49% in the non-life business gives Bajaj a limited upside in both. Since it is known that Bajaj is likely to hold only 24% in the long term, the value assigned by the market would be for only the 26% stake in life and 51% stake in the non-life business. Analysts have valued Bajaj Allianz Life at over $5 billion. Going by this estimate, the value of the insurance company would be more than the value of all the Bajaj group businesses put together. Insurance still sunrise sector THERE have been instances where the value of a new division or a subsidiary has overtaken the market value of mature companies in a business group. For instance, TCS has turned out to be more valuable than all the other companies in the Tata group. Similarly, Aditya Birla’s telecom business is worth more than the rayon business, which was the promoter company. Although insurance is considered a mature industry in the West, it is seen as a sunrise sector in India since the sector has been opened up recently. Since insurance penetration is less than 5% of the gross domestic product, there is a scope for it to grow faster than the economy. Though several listed companies have insurance subsidiaries, Bajaj is the only one to have derived the market value of its insurance business. In the case of ICICI Bank, there is an indicative value—the value at which investors were willing to buy a 5% stake in a proposed holding company. However, the deal did not materialise as RBI refused permission. While the market is bullish about the prospects of private insurers, the foreign partners feel differently. According to them, the valuation reports have incomplete data. For instance, the level of lapsation (of policies where customers stop paying the premia) for each company and the long-term impact of these is not known. The foreign partners claim the market would get a true idea of the valuation when the FDI limit is raised to 49% and deals are struck for selling the additional 23% stake to the foreign partner. Most valuation reports came in the wake of 100% growth recorded by the industry in 2006-07. Though the industry has been recording doubledigit growth, the trend has changed in the past quarter—particularly in March’08—which saw a slowdown in the sales of new products. Conservative insurers say growth is getting skewed by sales of unit-linked plans, which bring in chunky investments when the stock market does well. However, a crash results in premium income drying up.

Source: The Economic Times

Selling Life Insurance in Rural India

Rural India is the next frontier for life insurance companies. Cost-effective distribution channels and client awareness will be critical to success in this market.

India's life insurance market is booming. From a single company a decade ago to 18 active players today, the market has grown at a healthy CAGR of 24% over the past five years. Most of this growth is coming from the urban areas. The increase in competition is forcing insurance providers to look beyond urban centers and take their trade to the more challenging rural hinterlands of the country, where only 3% of the population of more than 720 million people have any form of life insurance coverage.

Rural India is witnessing a surge of income growth, and the propensity to consume financial products has increased considerably in recent years. With increased urbanization, the rural centers' contribution to the national GDP has come down in percentage but increased significantly in value. Insurance providers are working overtime to ensure that this additional wealth is effectively channeled.

This newfound capacity to tap the rural life insurance industry is expected to grow rural revenues from the current US$487 million to US$1.95 billion by 2015. Providers will have to explore ways of creating a granular reach model to tap the market in over 600,000 villages across the country.

"The clincher in the rural life market will be the footprint set up by private insurance players," says Ravi Nawal, analyst in Celent's banking practice and author of the report. "State-owned entities have a formidable footprint that has been established over the past 30 years and is not easily replicable today. Thus, it becomes imperative for private providers to innovate to ensure distribution effectiveness in a very challenging but lucrative market."