I
would like to discuss two cases of our clients for whom we did insurance review
and planning. Since term plan is a recent phenomenon a lots of people have
purchased traditional as well as ULIP.
While carrying out review and planning for life insurance we really had
to go study the insurance plan very deeply in order to understand the benefits
and charges attached with those plans. The two cases which we are discussing
here are of two persons of different age group and from different occupation so
that you can also assess your situations. This will also help you reworking and
planning your insurance. Before giving our final advice we had collected all
the current relevant data relating to their assets, liabilities, income,
expenditure and also finalised their realistic future goals after a thorough
interaction with them.
Mr. Pratik Shah (name changed) aged 31 years is
working as arbitrager in stock market and having annual income of around Rs. 10
lakhs. He has recently married and has no kids and has parents who are
dependent on him financially. As he has just started his career his financial
asset are worth only Rs. 4.60 lakhs. He
has one traditional plan with total life cover of 25 lakhs which he had
purchased in the year 2004. He is paying an annual premium of Rs. 1.20 lakhs.
The plan was mainly purchased to avail the tax benefit and to get decent life
cover. He bought another ULIP plan with total life cover of 2.50 lakhs which
was bought in 2008. He is paying annual premium of Rs. 50,000 for this. The plan
was bought to get the maximum return with 100% equity exposure. While reviewing
his insurance need we observed that he is not adequately covered as he
requires a life cover of at least 1 crore. The additional cover of Rs. 75 lacs
in the same type of traditional plan or ULIP will cost him around Rs. Rs. 3.75
lakhs annually in addition to what he is paying today, which is not possible
looking at his present surplus. We
reviewed both his existing insurance plans. The IRR of his traditional plan was
coming to less than 5% p.a. His ULIP plan has ongoing charges like allocation
and policy admin charges. Fund performance was also below the bench mark
index. So his existing plans were
neither insurance plans nor investment plans. We advised him to surrender both
the plans even though there would be some loss. We also have to ensure that he
is covered for 1 cr. and also gets decent returns as his goals are long term.
So in order to ensure the twin objects we suggested him to buy an online term
plan of 1 crore which costs in the range of Rs. 12,000 to Rs. 15,000. We also
advised him to surrender the existing plans once he is able to get this online
term plan. In order to meet his investment objective we advised him to invest
the money thus saved in P.P.F. and Mutual Fund equity schemes. By paying the
same amount not only he is adequately covered but will also get higher amount
at the time of retirement.
The
other case is of Mr. Ramesh Singh (name changed) who is 39 years of age working
with Technology Company. He is married
and has two sons aged 9 years and 4 years. His parents are also financially
dependent on him. His take home salary is also around 10 lakhs annually. As his
expenses are relatively high looking at 6 members of the family. He has not
been able to generate any substantial assets due to high expenses. He has asset
worth Rs. 2.30 lakhs only. He started buying insurance since 2000 and by now he
has bought 10 life insurance plans. He
has bought 9 traditional plans in his name one in the name of his wife which is
a ULIP plan. He is paying an aggregate premium of Rs. 84,000 p.a. The sum
assured for these plans is Rs. 23 lakhs.
The plans were again mainly purchased to avail the tax benefit and
generate safe and secured return. While reviewing his insurance need we
observed that that he is not adequately covered and requires a life cover of at
least 1.15 crore. Now if he has to buy additional life cover of 1 cr., he has
no option but to buy term plan as there were no surplus to buy traditional
plans. We have also worked out the return on traditional plans and 5 plans out
of 9 plans were giving good returns compared to debt returns available at
present and hence advised to continue. We advised him to surrender the other
four plans, as the average return expected is less than 6%. His wife’s ULIP
plan does not have any allocation charges but has heavy policy admin charges
which were not known to him. Since she
is a home maker and does not require any insurance cover. Performance of the
fund was in line with bench mark index but much lesser than performing MF
schemes. We advised him to surrender the plan after completion of five years as
surrender charges was nil after that.
The
insurance need in both the case is calculated on the basis of need based theory
looking at present household expenses, future goals and also considering
present assets and liabilities. IRR in traditional plans are calculated after
taking into account the current surrender value of the traditional insurance
plans, the balance premium payable and the projected maturity value based on
the current bonus.
One
needs to review his/her insurance plans if you are paying insurance premium
just for the tax benefit and also insurance plans are taken in the name of
house wife and children’s. This review will definitely add to surplus and can
be invested in other avenues according to your financial goals.
Article first published at myiris.com on 4th July'2012.
