Tag: Practice of Life Insurance Osmania University B.com Notes

A life insurance plan is an effective financial tool to secure your loved ones’ future financial interests. It helps you safeguard your family at a time when you are not physically present to do so yourself. You can choose a sum assured and premium as per your income and expenditure and add suitable riders to enjoy an enhanced cover.

The surrender value is the actual sum of money a policyholder will receive if they try to access the cash value of a policy. Other names include the surrender cash value or, in the case of annuities, annuity surrender value. Often there will be a penalty assessed for early withdrawal of cash from a policy.

The process through which you access your cash surrender value varies based on the policy you have, but many require that you cancel the policy before accessing the funds. Even if this is the case, it may be possible to take a loan out against the cash value in your policy.

Cash surrender value is defined as the internal value of an insurance policy at any point that is equal to the value of the accumulation account minus a surrender charge. Surrender charges gradually reduce to zero after a specified time, such as after the first 10 years of the policy’s life. Cash surrender value is the sum of money an insurance company pays to a policyholder or an annuity contract owner if their policy is voluntarily terminated before its maturity or an insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. It is also known as “cash value” or “policyholder’s equity.”

Types:

Special surrender value: The special surrender value largely depends on the paid-up value and the surrender value factor of an insurance plan. The paid value refers to the reduced sum assured of your plan. This happens if you stop paying your premiums after 2 years, and you can continue the policy with a sum assured that is reduced. This reduced value is paid value. The paid-up value is calculated with the following formula:

Paid-up value = Sum assured x (Total number of premiums paid/Total number of premiums payable)

Guaranteed surrender value: As the name suggests, this is the guaranteed amount of money that the insurance company pays you when you surrender your plan. The guaranteed surrender value is specified on the policy document signed by you and the insurer at the time of purchasing the policy. The guaranteed surrender value can increase with the number of years you stay invested in the plan. So, the closer you surrender towards the maturity date, the more money you can get back.

Surrendering your policy can have consequences in both the short and long term, such as:

You lose your invested money: Although you are paid the cash surrender value, the money that you invested is lost. The surrender value is calculated depending on the premiums you have paid to the insurer and the bonus accrued till the time of surrender. This is less than the sum assured or maturity benefit that you would have received at the time of maturity.

You lose the death benefit: If you choose to surrender your insurance plan, the death benefit will be removed. This means that in the unfortunate event of your demise, your family will not be able to claim a settlement from the insurance provider.

You lose out on tax benefits: A life insurance plan does not only support your loved ones in their hour of need but also helps you save money by offering you tax benefits. If you surrender your policy, you can no longer enjoy these tax benefits.

You pay discontinuation charges in ULIPs: In the case of a ULIP, if you surrender your plan before the lock-in period is over, you will also have to pay a discontinuation charge to the insurance provider. However, if you surrender the plan after the lock-in period, the surrender value will be the same as the fund value at the time of surrender.

Paid up value

Paid-up value is the reduced sum assured paid by the insurance company if a policyholder fails to pay premiums after a certain period. Paidup value is the reduced amount of sum assured paid by the insurer in case of discontinuation of the payment of premiums after paying the full premiums for the first three years. Typically, endowment plans acquire paid-up value if the premiums are paid for three years. The paid-up value increases if the policyholder continues to pay the premiums. If for some reason the policyholder fails to pay the premium after the first three years, the paid-up value will remain the same. If the premiums are not paid, no further bonus would be added to the policy. If the policyholder dies, the insurer will pay only the paid-up value of the policy as death claim. If the policyholder continues to hold the policy, he will get the paid-up value at the end of the term. The policyholder also have the option of surrendering the policy before that. If you do not want to continue the policy, it is always better to surrender the policy.

Paid-Up Value = [ (No. of paid premium X Sum Assured) / Total No. of premium]

Consumer evaluation, also called consumer testing or consumer research, is the process of assessing the properties or performance of existing or new products or services as perceived by the consumers. Many methods have been developed over the past decades with the growth of the consumer goods’ industry. Each section of this chapter describes the methodology (small-scale qualitative, large-scale quantitative and in-depth ethnographic approaches) as well as the important points to consider and pitfalls to avoid for each. It includes concrete and pragmatic case examples (tables, graphs) with types of deliverables covering different types of product categories.

Customer insight (consumer insight)

Customer insight, also known as consumer insight, is the understanding and interpretation of customer data, behaviors and feedback into conclusions that can be used to improve product development and customer support.

Agile marketing

Agile marketing is an iterative approach to marketing strategies that models methodologies used in agile software development. With agile marketing, teams identify and focus their collective efforts on high value projects, complete those projects cooperatively, measure their impact, and then continuously and incrementally improve results over time.

360-degree customer view

The 360-degree customer view is the idea that companies can get a complete view of customers by aggregating data from the various touch points in which consumers interact with companies.

Actionable intelligence

Actionable intelligence is information that can be followed up on, with the further implication that a strategic plan should be undertaken to make positive use of the information gathered.

Age of the customer

Age of the customer is the concept that consumers are more empowered than ever because they can access information about products and services over the Internet in real time.

Policy Evaluation in insurance

Ease of service

Customer is the everything and it is this age-old business mantra that still doesn’t fail to dictate the shots, even in the realm of insurance. Private insurance companies have a lot to offer to their customers, vis-à-vis their erstwhile counterparts.

It is normal for you to want a website that’s rich in information, a toll-free helpline number that’s truly round-the-clock operational, assistance with claims support and a company interface that’s resourceful and effective. If your insurance company ticks all the relevant boxes, you can be rest assured that your insurance is in the right hands.

Online purchase and Renewal of policy

In present times, most experts would swear against visiting an insurer’s brick and mortar outlet in order to purchase an insurance policy. Online policy purchase, besides being a no-hassle approach, offers you extra in terms of comparing various policies, being thorough with the fine print, paying the premiums and submitting documents at ease.

It is this sheer ease that should also take precedence once you decide to move ahead with policy evaluation.

Claim settlement ratio

One of the better indicators of an insurance provider’s efficacy (in terms of settling claims), probing into your insurer’s claim settlement record will give you an idea about your own chances, if and when the need arises to file a claim. A claim settlement ratio, in simple terms, is the number of claims settled out of the total pile of claims filed.

Make sure your preferred insurance company boasts of a good claim settlement ratio so that it doesn’t drag its feet when it is your time to get the proceeds from a claim.

Premium outgoes

Here, you will have to strike a delicate balance between the cost of the policy and the sum insured you would be eligible to. Putting it in perspective, on-boarding the most expensive insurance policy might not make sense, particularly if you aren’t sure about your finances.

On the other hand, landing the cheapest insurance policy around might not be all that helpful, considering you may have to compromise on the coverage.

Coverage

Probably the most commonly heard buzz word whenever someone talks about an insurance policy, checking the coverage is certainly of utmost importance once you start evaluating insurance policies. Check whether the sum insured is adequate so that you don’t have to press the panic button in case of damages and losses caused to your home, vehicle or health, for that matter.

Evaluating life insurance policies consideration:

Cost: Being cost effective is good, however, the cheapest does not mean the best.

Convenience: The ease of buying is very important. The facility to learn, compare and pay online is an added advantage.

Company Credentials: The insurer’s ability to honour a claim is based on its financial position. Do your research about the fundamentals of the insurance provider before buying a policy. The IRDAI has enough safeguards to ensure that the insurers are adequately funded. Rating agencies like ICRA and CRISIL also rate insurance companies on factors like claim-settlement ratio, financials, etc.

Claim Settlement Record:

This is a key indicator of the insurance company’s efficiency while processing claims. The Insurance Regulatory and Development Authority of India(IRDAI) has stipulated that for cases where an investigation is not required, insurers are expected to settle a claim within 30 days of submission of complete documents. However, with increasing instances of frauds, insurance companies have become extra cautious while examining each claim.

Customer Service: This is the key differentiator between erstwhile life insurance companies and some of the private insurance providers in India. A highly resourceful website, a 24×7 helpline, a relationship manager and comprehensive email support are the key touch points you should look for.

Coverage: A healthy base sum assured and the availability of popular riders is desirable.

Review Existing Policies

• Analyze alternative scenarios. Determine what the policy premium will be and the time over which it must be paid using scenarios of falling interest rates and rising mortality rates. Make sure clients can afford the higher premiums and continue to pay them for longer periods.
• Compare “re-projected” policies. When the agent prepares a new projection for one of the client’s existing policies, be sure the policy terms are identical to the policy as originally written. Otherwise, you’re comparing apples and oranges.
• Compare illustrations. Check the assumptions the insurance company uses in its policy illustration such as interest rates, mortality rates and expected longevity. Compare results such as premiums, length of time they must be paid and benefits the policy provides. Make sure to look at carrier ratings and financial stability.
• Make sure the client gets the best deal. Some companies offer better policies for new buyers. Find out if the client’s carrier or another carrier offers lower premiums, higher cash values or larger death benefits to new buyers than the current policy offers. If so, cancel the old policy and buy a new one.
• Continue to assess carrier ratings and financial stability. Like any business, insurance carriers’ fortunes change. Be certain the carrier’s situation has not exceeded your client’s risk tolerance. If it has, change carriers.

Gratuity is a compulsory benefit to be provided to employees as per the Gratuity Act, 1972. It is a lump sum amount paid out to employees, once they are no longer a part of the company. An employee is eligible for payment of gratuity only if he or she fulfills the conditions specified under the Gratuity Act.

Every growing organization has some financial and legal responsibilities towards its employees. Gratuity is one such significant liability paid to employees after successful 5 years completion in the company. In a way, it is a retention tool encouraging employees to stay in the organization for a longer duration. Every company has to have sufficient funds to fulfill the gratuity needs of their employees at the right time. As employee strength increases, managing gratuity payments become more expensive and unmanageable. Getting an effective gratuity plan is imperative to retain employees.

For managing your group Gratuity, you can choose from the following products:

Group Suraksha Plus: This is a Non-participating Endowment plan which provides a minimum floor rate and additional interest rate every quarter

Group Unit Linked Employee Benefit Plan: This is a Unit Linked investment plan that offers various fund options of equity and debt

Tax benefits

As an employer, annual contribution is allowed as expenditure/deduction in computing taxable income. However, maximum contribution cannot exceed 8.33% of an employee’s salary each year.

Gratuity received by the employee is tax-free up to the limit specified and subject to conditions under Section 10(10) *

The tax benefits are as per Income Tax Act, 1961 and Income Tax Rules, 1962. Please consult your Legal/ Tax expert for details. ICICI Prudential Life Insurance Company Limited shall not be held responsible in any manner in case you do not get the above stated tax benefits. Please note that the prevailing and applicable tax laws shall be final, conclusive and binding on both the parties.

Planning for retirement is a crucial aspect of everybody’s lives. Considering the rising inflation level and limited social security initiatives for senior citizens, it is vital that you start planning your retirement early.

A pension plan is a retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker’s future benefit. The pool of funds is invested on the employee’s behalf, and the earnings on the investments generate income to the worker upon retirement.

An employer’s required contributions, some pension plans have a voluntary investment component. A pension plan may allow a worker to contribute part of their 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 or dollar amount.

Public Provident Fund is one of the most popular retirement planning schemes in India. When you start contributing to your retirement early, the funds build a secure golden year money-wise over the years. A well-chosen retirement plan can help you rise above inflation, thanks to the power of compounding.

Several Key Terms to Consider:

Premium: The amount you invest in a policy

In pension plans, as with all insurance policies, the premium is the amount invested towards a policy purchased from an insurance company. The premium is income for the insurance company, but it also represents a liability, in that the insurer must provide coverage for claims being made against the policy.

Pension Plan: An investment option for an income after retirement

A pension plan is any investment planning scheme that provides you with an income after retirement. At its most basic level, a pension is a tax-efficient savings plan that you cannot receive any benefits from until a minimum age of 50. Depending upon the type of policy you have, you could receive pension payments for a defined period of time, or for the length of your natural life.

Beneficiary (or Nominee): The person/persons who benefit from the policy you take

This refers to the person or persons who receive the Death Benefit in case of the demise of the policyholder. If the nominee is a minor at the time when the policy began, a guardian can be appointed until such time the nominee reaches maturity. You can also have multiple nominees and specify the share (%) each one of the nominees receives.

Vesting Age: The age at which you start receiving a pension

The age at which you start receiving a pension in an insurance-cum-pension plan is known as the ‘Vesting Age’. For most pension plans, the vesting age does not come into force until the annuitant is 55 years of age.

Accumulation Period: The time period of your pension plan

This is the length of time for which one invests in a pension plan of their choice. For example, if you purchase a plan that requires a monthly investment of Rs.10,000 over 30 years, the ‘term’ of 30 years is known as the ‘Investing Period’.

Maturity Benefit: The amount you receive at the end of your investing period

The total amount you are eligible to receive following the end of the investing period is referred to as the ‘Maturity Benefit’. An alternative term for this is ‘Annuity Benefit’. In equity-linked pension plans, the higher value between the Fund Value and Guaranteed Maturity Benefit at the end of the investing period is the Maturity Benefit.

Features & Benefits of Pension Plans

Surrender Value

Surrendering one’s pension plan before maturity is not a smart move even after paying the required minimum premium. This results in the investor losing every benefit of the plan, including the assured sum and life insurance cover.

Accumulation Duration

An investor can either choose to pay the premium in periodic intervals or at once as a lump sum investment. The wealth will simultaneously accumulate over time to build up a sizable corpus (investment+gains). For instance, if you start investing at the age of 30 and continues investing until you turn 60, the accumulation period will be 30 years. Your pension for the chosen period primarily comes from this corpus.

Liquidity

Retirement plans are essentially a product of low liquidity. However, some plans allow withdrawal even during the accumulation stage. This will ensure funds to fall back on during emergencies without having to rely on bank loans or others for financial requirements.

Guaranteed Pension/Income

You can get a fixed and steady income after retiring (deferred plan) or immediately after investing (immediate plan), based on how you invest. This ensures a financially independent life after retiring. You can use a retirement calculator to have a rough estimate of how much you might require after retiring.

Payment Period

Investors often confuse this with the accumulation period. This is the period in which you receive the pension post-retirement. For example, if one receives a pension from the age of 60 years to 75 years, then the payment period will be 15 years. Most plans keep this separate from accumulation period, though some plans allow partial/full withdrawals during accumulation periods too.

Vesting Age

This is the age when you begin to receive the monthly pension. For instance, most pension plans keep their minimum vesting age at 45 years or 50 years. It is flexible up to the age of 70 years, though some companies allow the vesting age to be up to 90 years.

Tax-Efficiency

Some pension plans provide tax exemption specified under Section 80C. If you wish to invest in a pension plan, then the Income Tax Act, 1961, offers significant tax respite under Chapter VI-A. Section 80C, 80CCC and 80CCD specify them in detail. For instance, Atal Pension Yojana (APY) and National Pension Scheme (NPS) are subject to tax deductions under Section 80CCD.

Premium Loading

The percentage of insurance premium deducted from the premium payments for universal life insurance policies to cover policy expenses, including the agent’s sales commissions. Depending on the universal policy design, the premium load may be a front-end load, back-end load, or a combination of the two.

The maximum coverage available under the insurance policy depends on the basic sum assured and the different types of riders included with your plan. However, it is important to remember that the total premium on various riders is not more than 30% of the premium paid for your basic policy.

Loading affects both life and health insurance. In a life insurance, the main factors that would determine your premium to be paid are the term of the insurance, type of policy and most importantly your age. This is because the possibility of mortality is higher for an older person, so a 50-year-old will be charged higher than a 20-year-old for the same policy. But you need not worry about the increase in insurance premium for the first 3 years, as the company cannot change it during that period, irrespective of the number of claims made. Sometimes the premium could be higher irrespective of your age. If a person is a habitual smoker, obese, diabetic or has an occupation that is life-threatening, the insurance loading will be higher than that of a healthy individual with an office job. This is because they hold a higher risk of dying younger or falling sick. Also, if an individual lives in a country with political unrest, he/she will be burdened with residential insurance. The basic idea behind loading is that

Factors:

• Age
• Smoking
• Medical State

Rider Premiums

A rider is an insurance policy provision that adds benefits to or amends the terms of a basic insurance policy. Riders provide insured parties with additional coverage options, or they may even restrict or limit coverage. There is an additional cost if a party decides to purchase a rider. Most are low in cost because they involve minimal underwriting. A rider is also referred to as an insurance endorsement. It can be added to policies that cover life, homes, autos, and rental units.

The maximum coverage available under the insurance policy depends on the basic sum assured and the different types of riders included with your plan. However, it is important to remember that the total premium on various riders is not more than 30% of the premium paid for your basic policy.

Some policyholders have specific needs not covered by standard insurance policies, so riders help them create insurance products that meet those needs. Insurance companies offer supplemental insurance riders to customize policies by adding varying types of additional coverage. The benefits of insurance riders include increased savings from not purchasing a separate policy and the option to buy different coverage at a later date.

Types

Waiver of premium rider: If you are unable to pay the premiums due to an accidental disability or loss of income, these future payments are waived by the insurer. Your inability to pay the premium does not result in the loss of coverage ensuring all benefits under the policy are available. If you do not include this rider and are unable to pay the premium on time, all the benefits offered by the insurance policy are lost.

Permanent disability rider: If you are permanently disabled in an accident, this rider is available. When you include permanent disability rider with your basic plan, the insurance company may pay a periodic amount to you for a certain period of time. You may combine this cover with the accidental death benefit rider. This rider provides you with an assurance of an income when you are unable to work due to an accidental disability.

Accidental death benefit rider: You may pay a single, limited, or regular premium for procuring coverage under this coverage. With the help of this rider, your beneficiaries receive the additional benefits, in case of an unfortunate incident due to an accident. There may be an upper limit on the maximum sum assured under the accidental death benefit rider, which varies from one insurer to another.

Income benefit rider: This rider is recommended if you are the primary earning member in your family. In case of an untoward event during the policy term, your beneficiaries receive additional income every year for a pre-specified period. This is available over and above the regular benefits available under your basic insurance plan.

Critical illness rider: When you include critical illness rider with your basic insurance, the policy pays a lump sum amount in case you are diagnosed with any of the illnesses covered under the plan. Some of the critical illnesses covered in this rider include heart attack, renal failure, cancer, coronary artery bypass, major organ transplant, paralysis, stroke, and several more. On a diagnosis of the covered condition, the insurance may either continue or end depending on the terms and conditions. Some insurers may provide lower coverage after reducing the amount paid to you as a lump sum on diagnosis.

A rebate, broadly, refers to a sum of money that is credited or returned to a customer in the context of a transaction. A rebate may offer cashback on the purchase of a consumer good or service, either as a flat-rate rebate, which is automatically subtracted from the purchase price, or conditional rebates, which are only valid under certain conditions, such as “buy one, get one free.” Some conditional rebates require the purchaser to submit a form along with proof of payment to the company offering the cashback.

In life insurance policies, especially in endowment and money back plans; insurance companies provide mode rebate on insurance premium to policy holders. This rebate is not claimed separately; rather it is subtracted from the final premium to be paid.

For example, LIC provides premium payment mode rebate of 2% on yearly & 1% on half yearly, and 0% on Quarterly & monthly premium payment to its policy holders.

This rebate is available on various LIC’s plans like Jeevan Anand, Jeevan Labh, Endowment Plan, Jeevan Lakshya Plans etc.

To put it simply, for premium calculation, insurance companies fix monthly premium for an individual according to his age and policy term for a particular sum assured. Following table indicates monthly premiums of Jeevan Anand policy for 100000 Sum assured.

Mode rebate is the rebate on premium applied when you select half yearly or yearly premium options over the others. Similarly for high sum assured you enjoy rebates. Both as said earlier reduces premium.

Mode rebate is the rebate given on the premium amount if you pay the premium yearly or half yearly. The logic behind this rebate is to encourage the customer to pay in yearly mode as LIC prints only one receipt in a year and there are less administrative expenses.

A superannuation scheme ensures that an employee continue to receive a regular stream of income even after his/her retirement. By investing in a Superannuation scheme, you can ensure that you’ve a pool of funds ready to pay this benefit to your employees.

Most employers provide various retirement benefits to their employees either due to a statutory mandate or voluntarily to retain employees for a longer period. Such retirement benefits include provident fund, gratuity, National Pension System etc. Superannuation benefit is one such retirement benefit offered to employees by their employers.

• Helps in creating a separate pool of funds for employees
• Safeguards your working capital against bulk retirement pay-outs
• Provides tax benefits to employees as well as employers

Many times, employees ignore this retirement benefit. In fact, many, may not even know that they have been provided with superannuation benefit as the contribution to the benefit does not go out of their pocket. Some may also be unaware of the superannuation amount they are entitled to at retirement. Given this, it becomes imperative to understand what the superannuation benefit is in order to help individuals have better financial planning and plan retirement efficiently.

Types of Superannuation benefit

Superannuation benefit is classified into the following in India based on the investment and benefit it offers: 

Defined contribution plans: This superannuation benefit is opposite to defined benefit plan. While in case of a defined benefit plan, the benefit is fixed and pre-determined, defined contribution plan has a fixed contribution and benefit is directly correlated with the contribution and market forces. This type of benefit is better to manage and the risk is with the employee as he does not know how much he will receive at retirement.

Defined benefit plans: The benefit derived is already fixed irrespective of contribution to the plan. The pre-determined benefit is based on various factors such as a number of years of service in the organisation, salary, age at which employee starts reaping the benefit. This is comparatively complex and risk of generating such benefit lies on employer. Upon retirement, an eligible employee receives a fixed amount which is determined by the pre-existing formula, at regular intervals.