What’s In It For You?

Insurance policies are not much about insurance anymore. Aspects like tax savings and investment have crept in and expectations run high. Know exactly what to watch out for, says Najaf Ishrati

Published Jan 10,2006,
ET Personal Finance page, Mumbai.


EVERY one knows insurance policies are being marketed more as an instrument of investment and tax saving, than for the sake of insurance per se. Go to any agent and before he starts to tell you about the nitty gritty of the policy, he will first discuss the tax
implications.
Then, he would proceed to tell you what returns you would get, over time, with your policy. Finally, he may mention a word or two on the insurance aspects, but only as ‘good to know’ information. So, if people are really taking these policies as investment vehicles, then an important issue they must address is the return generated by the insurer.
Insurance companies collect regular premiums and invest them in a common pool of funds. Every year, they use these contributions and the returns generated on them to set off claims arising from death and maturity benefit liabilities. Most companies share a part of the difference between these two cash flows, which is the profit of the company, with their contributors.
This sharing of the profit is done by means of accruing some extra returns of “bonus” to participating policies (policies where payment of bonus option was chosen), at the end of each financial year. If the person whose life was insured were to die during the term, his nominee would get the sum assured plus bonuses accrued till the date of death. If he were to complete the term, the policyholder himself would receive the maturity benefit with all the accrued bonuses. These bonuses can be paid yearly (reversionary), on termination of policy (final), or interim. It must be noted here that for unit-linked insurance policies, ULIPs there is no concept of a bonus.
Investors look forward with great expectation towards the
bonus declared by insurance companies on their various policies. However, actual bonuses declared have not been sending policyholders laughing anywhere, least of all to the bank.
The point is that, with insurance companies having to compulsorily wed a bulk of their disposable funds to gilts, the profits earned by them cannot be in the margin of 15% or 20%. Thus, as expected, even rallying bulls in financial markets see mediocre bonuses being given out.
This year, the market leader, LIC (Life Insurance Corporation of India) has declared bonus on its various policies in the range of 3.1% – 5% on the sum assured. For policies maturing in its fiftieth year, that is, September 1, ‘05 to August 31, ‘06, it plans to pay an additional bonus.
Max New York Life has a proportionate basis for doling out bonuses. Say, if your policy matures after 30 years, then every year, it will give you bonuses at a lesser rate, than if the term of your policy were 10 years. With a shorter policy, you would get higher rates of bonus so that effectively, both such policyholders in the company stand to benefit equally. Then, there are companies which have a coupon rate of bonuses that are guaranteed throughout the life of the policy, irrespective of portfolio ups and downs. ICICI Pru pays a flat 3.5% of your sum assured as bonus. It has maintained this rate for quite a while now. Kotak has paid 6.75% on premium paid, net of all policy charges this year.
Similarly, SBI too, has a rate of 4% on net contribution, but some SBI Life policies have been given extra remuneration, up to a further 4%. Aviva has no fixed rate and declares bonuses every year. This year saw policyholders getting between 4.25 to 4.5% reversionary, with a final bonus of 14%.
When it comes to selecting the insurer, people must look at how the company is allocating its portfolio. Secondly, since the base, the sum assured, net contribution or others- on which your return was percentaged- will make a huge difference to your pocket, it makes sense to be aware of it before signing the contract.