Articles

Whats in it for you

Life insurance is among the growing sectors in the country’s financial services space. Today, after bank deposits, the highest proportion of annual incremental household savings are channeled into life insurance and the share of life insurance in the total financial saving of a household has grown steadily – in 2010-11 it stood at 24.2 per cent, up from 22.6 per cent in 2009-10 and 21 per cent in 2008-09. Over the last decade, life insurance sector has clocked gains and made several contributions that have gone relatively unnoticed in the miasma of numerous other business related newsmakers.

It is estimated that roughly about 20 per cent of the population are covered by some degree of life insurance. In the financial year 2010-11, the estimated life insurance premium in India grew by 4.2 per cent (inflation adjusted), against the global average of 3.2 per cent taking the insurance penetration to about 4.4 per cent from about 1.77 per cent in 2000.

There is no denying the proactive regulatory intervention and legislative support coupled with the players themselves that has played a key role in this. The robust macro economy, of course, provided the perfect backdrop. Depending on your investment objectives and risk appetite, you could select from traditional products, unit-linked insurance policies (Ulips) or tem plans. Each of these product categories fulfills different customer needs and requirements.

How to buy insurance:

Insurance encourages regular long-term savings habit. There are two distinct approaches to buying insurance.

The first is to guarantee one’s family a corpus that mirrors how much one is likely to earn and save over a lifetime to mitigate loss of income arising from premature death to ensure that one’s family is able to maintain the same standard of living in the event of an individual’s demise. In this instance, adequate cover can be determined using the human life value (HLV) method described as the net present value of his potential future earning over the rest of his life span.

The second is to ensure the flexibility to meet anticipated needs over the long term, that requires significant investment, such as children’s education and marriage, purchase of a new home and retirement — events that span the entire life cycle. In this instance, the quantum of cover could be determined by identifying events that would require capital over one’s life time, their time frames and estimated cost by factoring in the inflation incremental and number of years to the event, to the current cost of a similar event. If the motive is the former, then one could opt for a term plan, whereas, if the motive is the latter, than one could go for savings products of the Ulip or traditional variety depending on one’s risk appetite.

How to choose the right insurance company:

There are over 20 insurance companies offering a wide range of products to choose from. However, product differentiation has narrowed and customers could get confused in the face of near similar products from competing companies. So, the question that confronts the investor is ‘Where should I buy from?’ While making their decision, investors are advised to consider factors such as the pedigree of the management, company track record, the parent group’s experience and demonstrated ability in the broader financial services sector since logic suggests that organizations that have a track record of managing monies successfully may be able to replicate that success in their insurance business too. At the product level, compare and contrast product and service features, historical performance if available and reduction in yield over policy term while taking the decision.

Conclusion:

Insurance has to be purchased to secure oneself and one’s family against unforeseen eventualities, such as death, permanent disability, financial emergency or loss of income, and to build a corpus for planned events with high financial implication, such as child’s education, marriage and retirement. Purchase of life insurance does offer tax concessions and in most cases good returns, but these need to be viewed as bonus rather than primary consideration.

Globally, insurance premiums occupy a significant chunk of household income even when there are no tax concessions. Insurance products are designed to maximise benefit over the long term and investors are advised to buy insurance with a long-term investment time horizon. They are an extremely attractive long-term saving vehicle that if properly planned can help address major expenditures one incurs during a lifetime.

It removes the uncertainty of death and ensures that one’s dreams for one’s family stay on course irrespective of whether one is around or not. Irrespective of how insurance products may be marketed or positioned in a given instance, the fact is they do deliver over the longer time horizon. Premature withdrawals or surrenders significantly alter the benefits that can be gained by staying invested for the entire policy duration. Customers are advised to ride out the policy term to derive the most benefit from their insurance investments. In a country like India, the safety net insurance provides helps in reducing strain on individuals given the absence of a defined universal social security mechanism.

(The writer is the executive vice-president of Kotak Life Insurance)