Category Archives: Insurance

Buy Right Annuity, Retire Rich

Annuity plans available to help you choose the right option that fits your needs best and ensures a happy retired life:

When Rahul Dravid called time on his legendary career last week, it served as a poignant reminder of the inevitability of what is a dreaded word for many — retirement. Indeed, the growing life expectancy in the country poses a challenge — of managing the risk of living long, particularly in a society that is increasingly moving away from the financially secure confines of the joint family system.

However, coming-to-terms can be relatively easy when you have planned for it meticulously during your earning years. In fact, a well-charted retirement process can even act as a springboard for a brighter future, besides ensuring peace of mind. All you need to do is to save and invest wisely to build a handy sunset-years kitty. Be it creating a corpus through equity, mutual funds and fixed deposits or buying a pension plan. In case of the latter, you will have to undertake the vital task of buying annuities, when the accumulated amount is handed over to you.

Annuity-buying process gains significance particularly in light of new Irda guidelines on pension plans which have heralded several changes. Under the new regime, among other things, policyholders will not have the choice of approaching the insurer which offers the best annuity rates at the time of vesting. This has been done to reduce the burden on PSU behemoth LIC, which rules the space at present.

This makes it imperative for them to choose wisely while buying a pension plan itself, factoring in the insurer’s capabilities. “A full provider evaluation does become an important factor to be considered upfront when buying a pension plan. In addition, track record in managing the corpus, charges and fees, transaction convenience, payout history, etc, become important to evaluate,” says Vishal Kapoor, head of wealth management, Standard Chartered Bank. While rates are important, your decision cannot be based solely on the ones being offered at present. “Do note that the annuity rate at the time of buying a pension plan need not be an indicator of what you would get when you need to buy annuities in future,” cautions Sanjeev Pujari, appointed actuary, SBI Life. So far, nearly 21 products have been filed with the insurance regulator for approval since the new norms became effective from January 1, 2012. Last week saw the launch of MetLife’sdeferred annuity, or pension, plan. Also, SBI Life launched an immediate annuity scheme.

Annuities refer to the stream of income an insurer pays at regular intervals until your death or the end of tenure you may have opted for. The corpus at the end of the accumulation phase will be paid out in two parts — 1/3rd in the form of lumpsum, with the remaining being converted into annuities. Now, you need to ‘buy’ annuities using the amount accumulated by your pension plan or any cash lump-sum. And the annuity option you choose would depend on your requirements and expectations from the plans. This would be applicable primarily to those who may have built the corpus through pension plans until January this year and others with a fund pool. As mentioned earlier, those buying pension plans henceforth will have to settle for the annuities offered by their insurer. Within the basket of annuity plans offered by your insurer, though, you still have to use your discretion. This would be applicable to everyone looking to buy annuities — irrespective of the date of purchase.

“While zeroing in on the right option, you need to ponder upon three questions — what kind of income you would require, whether your annuity requirement would go up or remain the same throughout your life-time and whether you would like to redirect the proceeds to your spouse upon your death,” says Pujari of SBI Life. Adds Kapoor of StanChart: “Customers should look at the expected rate of return (annuity rate) net of charges, the period of annuity desired (whether for life, or for a fixed period), flexibility in joint ownership and payout while buying annuities.”

After an evaluation of your requirements, you can get down to the business of choosing an annuity option that fits your need best. Broadly, annuity plans are categorised into five segments although the range of options could vary as per the insurer.

ANNUITY PAYABLE FOR LIFE: The annuitant is paid a fixed annuity at regular intervals throughout his life. The insurer stops paying pension after the annuitant’s death. This is suitable for those who do not have any obligation post death. This option offers the highest amount of pension for an individual compared to any other options available.

ANNUITY PAYABLE FOR LIFE WITH A GUARANTEED PERIOD: Here, annuity is paid for certain number years, (say the chosen term of 10 years) and thereafter as long as the annuitant is alive. Shorter the guarantee period, higher is the pension. Annuity stops upon either the death of the annuitant or completion of the guaranteed period, whichever is later. This is a simpler tool to ensure income for the family for a stipulated period of time. For example, say the annuitant retires at a time when s/he is still the sole earning member in the family, but expects the kids to take over after five years; such individuals can look at annuity that is guaranteed for five years.

This option could work for those who want to leave alegacy for their nominees to inherit. Here, the annuitant enjoys the pension till s/he dies. After the death of the annuitant, the purchase price of the annuity (that is, the premium paid by the buyer of the annuity) is handed over to the nominee. This is a popular option as both the annuitant and the nominee stand benefited. Some new variants also offer to get the purchase price back in parts.

LIFE ANNUITY INCREASING AT A FIXED RATE: Under this option, there is an increase in the annuity amount payable per year at a certain rate, say of 3-5%. “While it is not linked to the actual inflation rate, the rationale is that it would take care of the increase in expenses to an extent,” says Pujari.

JOINT LIFE AND LAST SURVIVOR ANNUITY: As the name denotes, annuitant is entitled to receive the pension throughout his lifetime. If the spouse survives the annuitant, the former is also entitled for the pension, ensuring ‘life-style maintenance’ of the spouse. The buyer can further choose the quantum of pension (50% or 100% of the annuity payable to annuitant) payable to the spouse.

The advantages notwithstanding, you would do well to refrain from putting all your eggs in the annuity nest. “Annuity income is taxable. Therefore, while buying one, you should ensure that your annual income from annuity is within the ‘no-tax’ limits,” says Lovaii Navlakhi, managing director and chief financial planner, International Money Matters. Besides, you can also consider other tax-efficient avenues such as shortterm debt mutual funds or tax-free bonds. “Annuity income is fixed, and if the interest rates move up, you may not get to participate in it. That makes it all the more important to ensure that you portfolio gets some exposure to instruments that are liquid,” adds Navlakhi. In other words, you would be in a secure position if you have allocated your savings amongst a mix of products that complement each other. Remember, while retirement is seldom thought to spell happiness, a carefully planned one will ensure you close your professional innings with your head held high.

Revive your lapsed policies, the easy way

Policies may get lapsed for a number of reasons. But you can revive them without too much of a hassle.

Lapse Policy

Policy Management

MANY of us are often unable to continue paying premiums towards our life insurance policy, causing the policy to lapse. Policy lapsation can be dangerous as you or your financial dependants/beneficiaries may not get any benefit, which was the reason for buying the insurance cover.

One needs to know the reasons behind the policy lapsation and how one can revive it, if need be, at a later date. An insurance policy may cease to exist due to various reasons. It could be because of carelessness or because one doesn’t see value in continuing with the policy, or because of a financial crisis and can’t afford it any longer. Here are some basics on policy lapsation and revival that all policyholders must know.

How does a life insurance policy lapse?
As long as
you pay your premiums regularly, your policy will remain alive. If something happens to you during this period, the insurance company will honour its commitment and pay you or your beneficiaries, depending upon the type of policy you hold. However, if you stop paying your premium, then the insurance company will no longer be obliged to continue providing an insurance cover on your life. In this situation, your policy is said to have lapsed. The insurer might not provide any monetary benefits (the sum assured under the policy) to you or your beneficiaries if something were to happen to you.

Before your policy lapses, you still have a limited time period during which you can make good on a delayed premium payment. If you are late on your premium payment, the insurer will send you a reminder and give you a grace period within which to pay your premium. This is usually 15 days when you pay your premium monthly and 30 days in all other cases. If you fail to pay the premium even after this grace period, your policy will lapse. The insurer will send you a letter informing you about the same.

Can I revive a lapsed policy? Will the benefits be the same after
Most traditional policies (like term, whole-life and endowment plans) can be revived, subject to certain criteria that your insurer might impose on you.
Revival can happen at any time, but the conditions for revival might depend upon how long the policy has been lapsed for. Under the insurance laws, if the policy has been in force for at least three years, the insured gets up to two years to revive the policy. Some insurers like LIC have special schemes under which policies can be revived for up to five years from being lapsed.
If you revive the policy within six months from the date of lapsation, the process might be as simple as paying the overdue premium (and interest) to catch up on the delay on your part.

If you revive the policy after six months from the date of lapsation, you might be required to pay the overdue premium, penalty fees, as well as interest payment that could be up to 12-18% of the premium payment, depending upon the type of policy and the date of purchase.

At the time of revival, the insurer might impose a lot of conditions or even decline your request for a policy revival if the company is not convinced about the integrity of your application on grounds of suspected fraud or the like. It can be very likely that the insurer will ask you to appear for a medical test before the policy can be revived to ascertain whether you have developed a new medical condition during policy lapse that might expose the insurance company to a high risk in insuring your life.

At the time of revival, usually, full benefits that you or your beneficiaries are eligible for will be reinstated. However, if after revival, the insured commits suicide within one year, the insurer can deny the claim. Similarly, if the insured passes away within two years of the revival, the insurer has the option of conducting an inquiry before they decide to pay the claims to the beneficiaries.

Can one still file a claim on a lapsed policy?
If a policy is less than three years old but lapses, and if something happens to you after the policy lapses, and a claim is filed, the insurer will not pay you anything. At best, the insurer might be willing to give you or your dependants the premium payments that you have made. But, this is also totally at the insurer’s discretion.

If a policy is more than three years old, but lapses, and if something were to happen to you, under the existing insurance rules, your dependants can still get some benefit. However, the insurer will pay only a reduced sum assured based on a pre-set formula (for those who are technically inclined, it’s the number of premiums paid to the total number of premiums payable).

What if I am facing a cash crunch and can’t pay my premium?
One choice you have is to review your insurance contract and change the terms. For instance, you can reduce your sum assured and your premiums will go down accordingly, perhaps making it more affordable for you to keep the policy in force.

Life insurance is a necessary financial instrument that every person with financial dependants must have. Don’t let your policy lapse, otherwise your financial dependants might end up facing financial hardship when you are not around to provide for them.

Health insurance needs PROPER DIAGNOSIS

IN ORDER TO ENSURE UNIVERSAL access to quality healthcare, the government has been making efforts for increasing health insurance penetration. The Insurance Regulatory and Development Authority (IRDA) recently relaxed norms for health insurance companies and reduced the reserve requirements. The IRDA has already licensed many third party administrators (TPAs) for faster and easier claim settlements and for providing cashless hospitalisation facility. Further, the FDI cap in the insurance sector is also set to be increased from 26% to 49% through the second insurance bill.

Insurers are looking forward to tap the vast and fast-growing Indian healthcare market. In fact, many insurance companies have begun to offer health insurance. However, the path ahead is not so smooth for health insurers in a country like India. The health insurance industry in India at present is a loss-making one. Though the private sector health insurance is growing at 40% annually, the level of coverage is still very low and has not penetrated rural and semi-urban areas significantly.

One of the biggest challenges — and an opportunity too — for insurance companies is to convert the huge out-of-pocket health spending (72% of the total health expenditure and 98% of the total private health expenditure) into a formal risk pooling mechanism which people have never been exposed to before. Such a conversion process is constrained due to several factors, among them the absence of reliable morbidity and health expenditure data. Also important, from a demand-side perspective, is the low level of insurance awareness, poor trust in insurance companies over reimbursement, and absence of regular and adequate income to make regular premium payment.

The process also involves tackling two important forms of market failures that are making insurers reluctant to sell health insurance — overutilisation of healthcare due to insurance coverage, and mostly the relatively unhealthy people buying insurance. One may wonder if these are not the common problems faced by insurers all over the world. However, the magnitude of these problems may be severe in India.

Perhaps, both the insured clients and healthcare providers have an incentive for over-utilisation and overprovision of healthcare, adding to the bill of insurance company. Further, at present, the healthcare insurance schemes in India are mainly limited to hospitalisation, forcing the insured persons to be admitted to hospitals even for those illness requiring only out-patient care. One solution can be including the out-patient treatment as well in the insurance package, but the resulting premium will not be affordable for majority of the Indians.

On the supply side, there are hardly any pricing criteria for healthcare services and no benchmark as to how much care is required by patients for each category of illness. Further, healthcare cost inflation is sure to rise further, All these will force insurance company to increase the premium, thus making health insurance a costlier proposition.

One possible way of controlling the over-utilisation of healthcare due to insurance coverage could be the use of co-insurance and deductibles so that insured clients also have to bear a part of his total incurred health expenditure. But this will be very hard to introduce as already the present insurance schemes cover only a part of the health expenditure and, therefore, any attempt to increase the out-of-pocket healthcare burden of insured clients would make health insurance a less attractive health-financing strategy.

In India, a majority of those buying insurance do it for investment purposes and not as an insurance product. But the health insurance schemes are without the saving component (being purely of risk pooling). This could dissuade many from getting insured. In such a situation, it is obvious that only those likely to require healthcare are interested in buying health insurance.

It is time insurance companies applied appropriate and innovative marketing strategies to overcome all these hurdles by taking the Indian reality into account.

SUKUMAR VELLAKKAL, is fellow at ICRIER, New Delhi