Nothing Sentimental About This

Insurance policies for children are another variation of money-back policies. So, how do you go about zeroing in on a policy that would suit your and your child’s requirements, without getting too emotional in the process? Najaf Ishrati shows the way

Published December 21, 2006,
ET Personal Finance, Mumbai.


MONEY back insurance is another tool for providing protection along with the saving or investment function. Once the policy has been made out, the insured continues paying a periodical premium to the insurer and gets a specified life cover in return. The insurer also pledges to return the premiums, along with bonuses or investment returns that may accrue, to the policyholder on prespecified dates or periods before or after the maturity of the policy scheme. Thus, the insured gets risk cover in case of death, and a regular source of funds upon survival.
A variation of the money back policy is the children’s policy, the difference being that the policy would mature not on the retirement of the parent, but on the coming of age of the child. The policyholder can decide when he wants his monies back, and could tie it to the educational, entrepreneurial, marriage needs etc., of the child. Death of the parent during the tenure would entitle the child to the sum assured, and in a few cases, also to the maturity benefits.
It is within the children’s plans that some variations can be seen. While most companies insure the life of either of the parents, three companies insure the child’s life. Although insuring the non-earning member and making the bread-winner the beneficiary defies logic, it makes no difference to the future of the child. If the child lives, he/she is assured of the maturity value, if not, then, the question of education or marriage does not arise. Such schemes have waiver of premium riders inbuilt into them, and if the parents get incapacitated, the scheme is treated as being paid as normal until the maturity benefits accrue.
So, if it makes no difference, why are such schemes on offer? There is, however, one major beneficiary under this type of policy, namely the insurance company. For roughly the same amount of premium, it has cut its risk of the death of an adult, to that of the death of a minor. Or, in other words, it is charging the premium rate of an adult, on the life of a child.
Insurance policies for children have a lot in common. In fact, when it comes to premium, there is very little to differentiate between schemes. The premium for a father aged 35, for a term of 20 years on a sum assured of Rs 5 lakh ranges between Rs 22,820 to Rs 33,410. Most of the premiums hover around the Rs 27,500-mark. The difference between the premiums could indicate the little bit extra that the scheme offers. For instance, HDFC Standard Life has three schemes, maturity benefit, accelerated benefit and double benefit plans. Most companies offer this by one name or the other, whereby on the death of the insured in the first case, the remaining premiums are waived and cover is provided on maturity.
In the second case, maturity is payable immediately upon death and the policy would lapse. In the double-benefit case, the sum assured would be paid immediately upon the death of the insured, premiums would be waived off and maturity benefits originally promised would also accrue when the time comes.
Sums can be assured from a minimum of Rs 25,000 to a maximum based on the insured’s underwriting. The minimum entry age for parents is 18 years while the maximum is 60. There is quite a range available in terms of the tenure of the policy. The least required period is five years for of AMP Sanmar while Max NY offers the maximum term of 26 years. The minimum annual premiums required start at Rs 1,800 with HDFC Standard Life for inuring a parent and Rs 1,500 for covering a child.
You should also look out for special deals. For instance, the Max NY Stepping Stones plan offers an extra guaranteed 30% of the sum assured on the last maturity payment. Met Life offers guaranteed additions of Rs 50 on every Rs 1,000 and then a certain percentage on these guaranteed additions.
Of the companies that cover the lives of children, the inbuilt premium waiver rider for the parent comes bundled with the policy, except in the case of Tata AIG, where it has to be purchased separately.
It may appear that children’s plans may not have much between them, but investment, if need be, must made in them after careful consideration and not goaded into it by either by the agent, or the sentimentality of the issue.

Enjoy The Ride

Your insurance policy may come with options for additional covers, which could make a big difference. Don’t let the incremental cost put you off, says Najaf Ishrati

Nov 29, 2005,
ET Personal Finance, Mumbai

EVER put together a jigsaw puzzle with painstaking care, only to realise that the last piece was missing? Insurance products available today are designed to suit almost all insurance or investment needs, but there could still be that one crucial piece missing.
In insurance terminology, that piece would be called the ‘rider’. Riders are economical purchasable add-ons to the basic policy, which customise it to a high degree. Suppose you’ve taken a life policy, but due to some unfortunate incident are incapacitated from earning. This earning loss could easily nullify a thus-far paid-up policy, if the premium payments aren’t made on time. Wouldn’t it be nicer if your policy provided for such an eventuality, exempted all premium-paying requirements and yet promised death or maturity benefits? Or say a rider, which would pay a specified sum to the insured, if he were terminally ill with less than six months to live?
Although initially, riders can seem like an added and unnecessary expense, they must be given some thought nevertheless. Its just that the saying, “who knows what can happen?” sounds a whole lot better than “who knew that this would happen?”
Quite a few riders are available in the market. The accidental death rider assures an extra amount payable, over and above the base amount, in case of death in this manner. Under a permanent disability rider, premium for the basic plan may be waived to the extent of the rider sum assured. With an income benefit rider, the death of the life assured during the policy would assure an annual percentage of the rider sum to the beneficiary, on each policy anniversary till the maturity of the rider.
The waiver of premium rider is another name for the permanent disability rider, although here, all future premiums are waived. Another useful rider is always the one for critical illnesses, where protection is provided against 8-12 critical illnesses, such as major organ transplants, renal failure, stroke, paralysis, heart attack, valve replacement surgery, cancer, etc. Benefits are paid on contracting the said illness, up to the amount specified.
Then there is something called the guaranteed insurability rider, where ironically, it insures your insurability. It guarantees the buyer the right to purchase additional insurance at different stages in his life, without any further medical examination. If incremental responsibilities are expected ahead, this one might be a good option. A simple option is the term rider, which allows you to manage your changing needs and buy additional life insurance for a limited period. The dread disease rider improves your financial position as and when medical expenses rise in the event of specified diseases.
So, whether you’re planning on riding it alone or not, it always makes sense to critically examine these insurance companions before brushing them aside due to slightly incremental costs.

Covered For Life?

Whole life insurance policies may not give you much benefits while you’re alive, but there are several kinds on offer. Sift through them,and you could find the perfect one for you. But you’ve got to understand the nuances in order to choose the right one, says Najaf Ishrati

Sep 13, 2005,
ET Personal Finance

INSURANCE products come in various shapes and sizes. One common category is the whole life scheme, which grants protection for the entire duration of life. Traditionally, participating in this scheme meant paying regular annual premiums until death, after which the sum assured would be paid out.
The policyholder would not receive any benefit as there is no payment on `maturity’ or survival’. I n a c apsule, t he whole life product was a very basic policy, easy to swallow, granting extended cover at reasonable rates of premium throughout life. If only the insurance companies also believed in keeping things simple, investors would not be sweating it out with their calculators right now.
The mutations and combinations of the whole life policy that exist in the market today make it difficult for consumers to compare and decide on which one suits them. Some come with profits, some without, most have a maturity age; some with incalculable GSVs, or what the company’s call guaranteed surrender values; and yet others are either unit or equity-linked. Options to take up limited payment schemes are also on offer. However, for the smart and the alert, this chaos presents a fine opportunity to select the scheme that is tailor-made for them.
Whole life policies offer more variety than term policies, when it comes to the age of the insured. Even a newborn is eligible for this policy, with three companies offering insurance to toddlers. Entry ages for others range between 12 and 20 years. The maximum entry age sees a range of between 50 and 70 years across companies. About half the companies that offer this product, maintain an entry cut-off age of 60.
When one looks at whole life policies, one assumes risk cover until death, whenever it may be. However, there are only four companies today that provide this cover. The others either do not provide this extended cover at all, or have in place a compulsory maturity option, at ages ranging from 80 to 85.
Of these, it is possible to find a company or two, which would stop providing risk cover after the age of 70 and would just return the policy fund after that. All this changes the nature of the whole life policy to a “cum endowment” policy, including the element of savings, to that of pure risk. However, the amount of savings that is guaranteed is something policyholders must look out for, as the rate offered may be lesser than a banks savings account.
A policyholder may choose the premium paying term here, where he could either sign up for a single premium whole life, (HDFC, Birla), pay premium for a limited term and yet enjoy lifelong protection (Sanmar, Birla, Metlife) or continue paying premiums until death, (Max NY, Birla)
The point at which these schemes start to differ is when it comes to calculating their premiums, with other variables remaining constant. An example of a healthy 35-yearold male is taken, with a sum assured of Rs 5 lakh and a premium paying term of 20 years, wherever applicable.
Otherwise, the maximum term was used to calculate the premiums. The difference in the premium amount between various policies is mind blowing, and could give rise to a lot of confusion. Exploring what exactly they make your money do, can solve the mystery behind these differences.
While the average premium for a 20-year term was Rs 21,905, the minimum recorded was Rs 8,205 (MetLife) and a maximum of Rs 47,364 (Birla). There is a reason for this vast difference. In the case of MetLife, the sum assured of Rs 5 lakh was the maximum possible death or maturity benefit, which was guaranteed.
Now, in the case of the Birla fund, the largest guaranteed death benefit is of Rs 20,07,996 at age 75. Of course, by then, the investor would have paid Rs 18,94,560, but that is another matter. The non-guaranteed portion is left to the imagination, with the company investing its proceeds in the market.
However, taking the example further, Rs 9,03,51,899 would be the death benefit at age 99, if the fund grew at an annual rate of 10%. It’s now up to the investor, as to whether he sees Rs 20 lakh or Rs 9 crore.
This is the reason insurance companies have a problem comparing schemes on the basis of the sum assured, and would much rather use the assumed maturity value instead. It is the investor who has to ask the question: what if the fund ends up with a 10% negative return in year 3 and then another 6% in year 7? What happens then, to his maturity value?
In the premiums to end of term, or till death category, three companies prominently display their wares. LIC, with a maximum premium paying term of 40 years or till age 80, whichever is earlier, has a premium of Rs 14,083 for the 35-year-old male. Max New York Life accepts premiums till death and offers the sum assured only on death or surrender value benefits on quitting, maintaining the cheapest annual premium rate of Rs 5,985.
Aviva has a twist in its scheme. At any time, during the tenure, you could stop paying your premiums and convert your scheme into a fully paid up one, and the cover would remain at the cost of the units held in balance. This balance would be periodically reduced, and on attaining zero value, the policy would lapse. Choose carefully.

Choosing the right term insurance policy

How Do You Know Which Policy Is Best For You? Najaf Ishrati Gives You The Lowdown On The Term Policies Available In The Market

September 7, 2005,
ET Personal Finance

THE concept of life insurance and its coverage through various policies has been around for some time now. With 14 registered companies offering a multitude of schemes and policies, singling out a policy can be quite an uphill task.
Insurance products geared towards granting various amounts of financial relief on the loss of a human life, are variations of four basic types of insurance requirements — pure risk, savings, investment, and retirement. Typically, a pure risk cover promises to pay a predetermined sum to the beneficiary, in case the person insured dies within the time period that the policy was taken out for.
On survival of the insured through the term, the insurance company would not pay anything. Premiums, payable at intervals decided by the policyholder, come at the lowest rates for these types of schemes. In the other varieties, the insurer guarantees some payment even on survival.
ET zooms in on the pure risk or ‘term’ policies. These are available to people who have attained a certain minimum age, mostly 18. The age up to which term insurance can be availed, or the maximum entry age, is generally between 50-60 years, depending on the insurer. Six companies offer protection even to those aged 60.
In addition, companies maintain minimum and maximum term periods, over which policies can be underwritten. It is seen that companies mostly prefer a minimum term of five years, with two companies — ING Vysya and Kotak Mahindra OM — reserving a minimum
cover period of 10 years. On the maximum duration front, term periods of 25, 30, 40 and 42 (up to age 60 plans) are seen.
The insurance business is nothing without variables. These days, a policyholder can insure himself with amounts (sum assured) large enough to send his family to the moon and back, provided he can pay the premiums. Normal sums assured, however, are decided depending on the financial requirements or obligations of family or oneself. It is in this area, that most companies differ. While seven companies offer a ‘no upper limit’ policy, others provide a ceiling, the lowest being the Rs 10 lakh offered by Bajaj Allianz.
All the policies converge is in the area of the minimum sum assured, or the minimum face value that the company is willing to underwrite a policy for. Companies have minimum premium receivable guidelines also, below which policies are not undertaken. While the minimum sum assured range from Rs 25,000 (HDFC Std Life) to Rs 500,000 (LIC, Aviva), the minimum annual premiums are pegged from Rs 1,000 (Sanmar) to Rs 2,500 (Vysya).
What makes these schemes all so attractive, are the rate of premiums. A healthy 35-year-old male, insured for an amount of Rs 500,000 for a term of 20 years, would pay annual premiums in the range of Rs 1,865 (HDFC Std life) to Rs 3,747 (Allianz Bajaj), depending on the company he partners with, although the mean for this classification stands at Rs 2,524 per year. ICICI’s minimum premium requirement of Rs 2,400 excludes it from this comparison, as the rate at which it calculates its premiums pegs the amount at below this level.
A few companies have plans with reduced premium rates, but require a minimum sum assured of a significantly higher amount. For instance, using the above illustration, while altering only the sum assured to Rs 10 lakh, Kotak’s Preferred Term Plan requires a yearly contribution of only Rs 3,400. These low premiums start to look far more attractive when compared with premiums of policies where you get your money back — which would be around 24,000 per year for the same conditions.
Then there are riders on these policies. Most policies come with add-on benefits for a small increase in the premium price. These could be accidental death or disability covers, premium waivers in case of earning incapacity, or plain-vanilla hospitalisation expenses.
For instance, Vysya’s ‘Conquering Life’ comes with an inbuilt critical illness plan, which covers expenses incurred on 10 pre-specified illnesses, apart from the regular life insurance, thereby explaining its higher premium price.
Term policies work for those who feel the need to insure themselves up to a certain age, but don’t want too much bother with high premiums. Most policies promise to have that little bit extra on offer, which the potential policyholder must scrutinise before approval.

Mutual funds in a tizzy on realty investment norms

Najaf Ishrati

June 17, 2006
ET Mumbai

WITH guidelines for investment in real estate by mutual funds (MFs) expected in a week, there is a considerable speculation as to what exactly these guidelines may contain. MF players say that investing in real estate is a different ball game altogether, with a few similarities to investment in equity.
The major difference that there is no exchange’ where real estate can be traded is obvious enough. However, the absence of an exchange throws up many issues. Speaking recently in Mumbai, Milind Barve, managing director, HDFC Mutual Fund, explained, “Without an exchange, suppliers are not regulated. There is no regulator who looks at the buyers interest. Also, what will be the time taken for settlement? Will it be T+2, or T+12 months?”. According to him, without the exchange, the issues of price discovery, settlement and liquidity become paramount. Real estate being an illiquid asset, the funds may have to be close-ended in nature.
The next issue is that with real estate, there are no `securities’. It becomes a physical asset, it can’t be safely left at the hands of a custodian. The pertinent question in this case is, ‘who is the custodian?’. Further, as against taking shares in the demat form, here the MF will have to take delivery of the title deed and other documents. This leads to a further issue, which is how good is the ‘quality of title?’.
With MF investment going into real estate, even valuation poses a new problem. With equity funds, AMCs have to supply NAVs of each of their schemes by 8pm everyday. Such valuations will not be possible with realty investments. Analysts say that there are some overseas funds, which publish their valuations just once in a year. In this case, it is learnt that AMFI has suggested a valuation of once every three months. But even this quarterly valuation will pose challenges. Here, there are no shares whose numbers have to be multiplied by their closing price to derive the NAV. Mr Barve, also the chairman on AMFI’s committee on valuation, has suggested that funds be allowed to have a panel of pre-approved valuers, who will do the valuation for them, and that disclosures are made on the method that has been chosen for the valuation.
The last issue that Mr Barve highlighted was that of risk management.
The risk of loss through concentration in one area had to be mitigated by diversification. He suggested diversification on three parameters, namely by location, project and developer or supplier. Further issues that crop up here are those of related party transactions.

Investors get savvy, shun blind faith in IPOs

Najaf Ishrati

May 29, 2006,
ET Markets, Mumbai

WARY investors are unwilling to be beguiled by fancy projections and tall statements of companies making IPOs and are instead indicating their circumspection by submitting bids at the lower end of the price band.
An analysis of the just-concluded four IPOs shows that the dramatic change in investor sentiments in the last few weeks has revealed itself in the defensive and conservative response to the offerings. Book managers were finding it difficult to get full subscription and most of the bids were coming in at the lower end of the band.
The situation has changed dramatically from the time when investors were hungry for new issues, almost all of which ended up getting subscribed a number of times over. Further, before the crash happened, most of the bids were coming in at the top end of the price band. On May 18, when the markets tanked 826 points, two companies, Deccan Aviation and Gangotri Textiles opened for subscription. Two more companies, Unity Infraprojects and Rathi Udyog, accessed the capital markets on May 19, the day the markets fell another 452 points.
The worst affected was Deccan Aviation, which saw a demand for only 0.76 times of the total issue at the top end, and 1.22 times the lower end. Gangotri Textiles, which drew a demand of 0.85 times at the top end, and just about filled its quota at the lower end. Rathi Udyog with demand for 92% at the top end, and 127% at the bottom. In comparison, Unity Infraprojects did relatively well drawing bids 2.05 times the number of shares offered at the top end of the price range and 2.36 times the lower.
Patel Engineering, which was the last issue to close (May 9) before the crash, saw 2,641% or 26.4 times shares offered at the top end. DS Kulkarni’s follow on offer (May3) attracted bids 33.7 times the shares offered at the top end. The jinx might be drawing to a close as Prime Focus, which currently has its IPO open, hardly sees any difference in the demand for shares between the two ends of the price bands.

Bumpy road ahead for D Street as institutions plan to exit on rally

Najaf Ishrati

June 05, 2006
ET Economy, Mumbai

ALTHOUGH Friday’s rally, helped by some heavy covering of short positions after consistent FII outflows, may liven up hopes for investors, the outlook remains extremely cautious in the short term.
Analysts say the liquidity issue cannot be swept under the carpet. From a stage when the system was flush with liquidity from domestic and foreign funds, the correction has caused a flight of capital to safer grounds. The expectations of a possible 50bps rise in interest rate in the US have fuelled the outflow.
Many institutions have adjusted their strategy to a ‘sell-on-rally’ environment, expecting markets to weaken further. The main factors cited for the shift in outlook were increased global risk aversion and rising interest rates in India & abroad.
Jyotivardhan Jaipuria and other strategists at DSP Merrill Lynch chorus: “Given the large FII flows over the last three years, India may be vulnerable to a fall in global risk appetite.” Many of the top foreign funds are expecting the sensex levels of 9000 or below in the near future. DSP ML has a figure of 9000; UK-based Rathbones Investment Management expects markets to trade between the 9000 and 7700 levels, while Nomura sees a fair value at 7000.
In a recent India research report, Hong Kong-based Nomura International stated: “While the macro problems of running both a deteriorating current account deficit and a fiscal deficit have yet to be adequately addressed, private sector credit has become increasingly dependent on fund flows. With a negative basic balance of payments, the credit system appears much more susceptible to an external shock. We feel that investors are being betrayed by high earnings growth projections and macro risks are being ignored. We believe Indian equities have further ground to correct compared to regional peers, and thus remain bearish.”
Other players say it’s a good time to take a long-term stance. “If you thought that the markets looked attractive for the long term at 22 PE, there is no reason why you should not buy at PEs of 16-17,” reasons Pankaj Razdan, chief executive officer, Prudential ICICI AMC. The sensex currently has a PE of 18.5, a price to book ratio of 4.6, and a yield of 1.43. Mr Razdan says a weekly outlook will be very difficult to make, adding that he did not see a major downside from here on. “Small investors and high net worth individuals can look at deploying their money in dips over the next two three weeks, looking at a long term time frame of 3-5 years,” he predicts.
“Different people have many different views at this time. For instance, an AMC may have one view on the sensex levels, while strategists may have a completely different view. However, we maintain that the correction has been a healthy one. While the long-term outlook continues to be good, a lot needs to be done to justify the levels of optimism which were present before the correction,” says an official with a top foreign brokerage.