LIFE INSURANCE IN INDIA - IV

Contents :
1. Additional Information about Life Insurance
2. Need for Insurance
3. New Trends in Insurance

NEED FOR INSURANCE

Introduction
Why is insurance necessary? The question contains the answer within itself. After all, life
is fraught with tensions and apprehensions regarding the future and what it holds for the
individual. Despite all the planning and preparation one might make, no one can
accurately guarantee or predict how or when death might result and the circumstances
that might ensue in its aftermath.
Nobody can say that life and existence are constantly fraught with danger and
uncertainty. But then it is essential that you plan for the future. The chances for a fatality
or an injury to occur to the average individual may not be particularly high but then no
one can really afford to completely disregard his or her future and what it holds.
People generally regard insurance as a scheme where you have to lose a lot to gain a
little. Nevertheless, insurance is still the most reliable tool an individual can use to plan
for his future.

What is your life insurance need?

A good life insurance policy can protect you from financial difficulties and provide
assurances that your loved ones will be taken care of in the event of any mishap. Many a
time people find it difficult to estimate the appropriate value of insurance they need.
Your life insurance needs change as your life changes. When you are young, you may not
have much need for life insurance. However, as you take on more responsibility and your
family grows, your life insurance needs increase. You should periodically review your
needs in order to ensure that your life insurance coverage is adequate.
There are several simple methods that can be used to estimate the life insurance need of
any person. These are rules of thumb and give you a broad idea of the amount of life
insurance you should buy.
1. Income rule: The most basic rule of thumb is the income rule, which states that your
insurance need should be around six to eight times of your gross annual income. For
example, a person earning a gross annual income of Rs. 1 Lakh should have between
Rs. 6 to Rs. 8 Lakh in life insurance coverage.
2. Income plus expenses: This rule considers your insurance need to be equal to five
times your gross annual income plus the total of any housing or car loans, personal
debt, mandatory recurring expenses such as house rent etc, and special funding
needs such as child's education etc. For example, assume that you earn a gross
annual income of Rs. 1 Lakh and have expenses that total Rs. 2.5 Lakh. Your
insurance need would be equal to Rs. 7.5 Lakh (Rs. 1 Lakh x 5 + Rs. 2.5 Lakh).
3. Premiums as percentage of income: Payment of insurance premium results in outflow
of disposable income. You may, therefore, not like to buy too much insurance. One

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 should decide the quantum of insurance keeping in mind the cash-flow problems that
will be created as a result of the obligation of regular outgo from salary.
4. In income and income plus expenses rule you ascertain the minimum insurance you
should have. Under premiums as percentage of income rule you can plan your cash
flow by committing an appropriate percentage of your income for paying life
insurance premium.
5. Conventionally, a minimum of six percent of your gross income (as the primary
income earner) should be spent on life insurance premiums. Add an additional one
percent for each dependent. Once you determine the percentage of your income
which should be spent on life insurance premiums, you should purchase as much life
insurance as you can get for that premium amount.
There are several more comprehensive methods used to calculate life insurance need.
Overall, these methods are more detailed than the rules of thumb and provide a more
complete view of your insurance needs.
1. Family needs approach: The family needs approach requires you to purchase enough
life insurance to allow your family to meet its various expenses in the event of your
death. Under the family-needs approach, you divide your family's needs into two
main categories:
a. Immediate needs at death (cash needs), and
b. Ongoing need (net income needs).
Once you determine the total amount of your family's needs, you purchase enough
life insurance to cover that amount.
2. Income replacement: The income replacement calculation is based on the theory that
the purpose of life insurance is to replace the loss of your income in case of your
premature death. Under this approach, the amount of life insurance you should
purchase is based on the value of the income that you can expect to earn during
your lifetime, taking into account such factors as inflation and anticipated salary
increases.
3. Estate preservation and liquidity needs : It is a sensible choice to reassess your
insurance cover if you avail a big-ticket-loan against your assets such as a housing
loan or business loans. It provides the much needed economic hedge against risk and
protects your family and/or your business. The estate preservation and liquidity
needs approach attempts to calculate the amount of life insurance needed upon your
death for items such as debt, expenses and taxes, while preserving the value of your
estate. This method takes into consideration the amount of life insurance needed to
maintain the current value of your estate for your family.
You may also like to keep in mind that if your family members have independent earning
capacity, you may reduce your insurance. Insurance is a protection and not really an
investment.
So, you may not get a decent rate of real return at the time of maturity of your insurance
policies. It is very important to calculate the amount of insurance one needs.
This is not a one off calculation, it should be reviewed periodically and amount of
insurance should be increased or decreased accordingly. The point is that you should be
adequately insured at all times.

Now, life cover gets personal

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The investment scenario in the country is changing and insurance has been in the
forefront of the changes. Several relevant factors are described below :

What way the life insurance business is changing?

Life insurance is sold, not bought all over the world. Buying life insurance is a complex
decision-making process. Products are evolving fast and now the customer has the
choice of buying a customised product rather than a pre-packaged one. The product can
be structured in a number of different ways to deliver optimum value to the customer.
The change that has come about in products actually helps deliver the true value of life
insurance to customers. If a customer is looking for a pure investment vehicle, life
insurance may not be the answer.

What are the points to remember while choosing a specific policy?

A customer should do an analysis of his life insurance needs. Good quality agent advisors
are well equipped to guide customers through this complex process. Then the customer
needs to analyse how much insurance he can actually afford to buy and whether the plan
meets a significant part of his insurance needs. Also, the customer should look for
opportunities to upgrade his insurance contract in future, which is why it is good to keep
options open with affordability at different stages of life.

Why does the premium for a similar policy vary from insurer to insurer?
Premium rates are based on several things. Firstly they are based on the benefits that
the insurers guarantee in the product — for example, guaranteed insurability bonus after
third year, money back at intervals, etc. Even if the benefits are the same, they are
influenced by the risk involved and the exclusions and inclusions contained in the policy
document. Hence, the cheapest policy may not be the best for the customer. Premium
rates are, of course, also a function of the age of the life insured and the underwriting
standards, which in turn are dependent on the risk that the life insurance company takes
in terms of mortality and medical disclosures, etc.

What are the basis of bonus declaration ?

Bonus is a function of surplus funds available in the policyholder fund after adjusting for
the present value of future obligations. Bonuses are declared product-wise and cost of
the bonus comes eventually from the company’s profit and loss. Bonuses are influenced
by the earnings on the company’s investment portfolio, its claims experience,
persistency and operating expenses.
Some insurance companies pay cash bonus to policyholders while most other Indian life
insurance companies follow a reversionary bonus policy. Cash bonus is a superior option
because it is money here and now. You take your money when it becomes due and use it
the way you choose — rather than wait a lifetime to receive that benefit.

Are Indian markets ready for exposure to equities by insurance companies ?

The equity market in India is small. Only some 200 of the 7,000 scrips are liquid. Only a
limited exposure to the equity market makes sense. For unit-linked products, IRDA allows
100% equity exposure. I believe it is sensible only when companies are certain that their
selling processes are ethical and the customer understands the products and their risk
implications.

Insurance companies competing with MFs?

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The unit-linked products offered by insurance companies are superior to mutual funds
because of the tax advantage they enjoy. But the expense factor is critical. As compared
to 2.25% for MFs, the ULIPs have between 5 to 20 %. Also some categories of MFs, like
ELSS (equity linked saving schemes) & pension plans have tax advantage.

Should people have more than one insurance product? Is it advisable to spread the
investment across insurers ?
Depending on the circumstances of the customer, it may be prudent to buy more than
one insurance product at different points of life. Insurance is a relationship, not
transaction, business. Therefore, it may make sense to build an enduring relationship
with one quality life insurer. Patronising more than one insurer, however, is a purely
individual decision.

Why should an investor choose a private insurance company?

Private life insurers are offering better and more modern products accompanied by
better quality of service. They also have better governance models in place, whether in
terms of complying with the solvency norms set by the regulator or maintaining an
adequate capital base.

More for old age

Planning for retirement is essential. Sooner one starts the better it is, as the money can
be compounded for a longer period. Pension is one area that has seen a lot of action
lately.
Under Lifelong Pensions, policyholders have to specify the targeted amount that they
wish to accumulate till retirement age. Based on the same, a periodical contribution
amount is calculated.
Lifelong guarantees a minimum return of 4% p.a. compounded annually during the first
seven years of opening the pension account. Besides, policyholders will also be entitled
to any bonus that might be declared.
The policy also offers the flexibility whereby a policyholder can increase the contributions
at any time to reach the target sum sooner or to qualify for higher annuity amounts later
based on the higher balance available in the personal pension account. The additional
amount qualifies for the minimum guaranteed rate.
The scheme fully guarantees the principal corpus. If the policyholder is unable to make
the contribution amount, he can pay less to the retirement account subject to a
minimum contribution of Rs. 3000 every year. Policyholders are also given the option to
make a one-time lump-sum payment.
The scheme also offers optional life cover till the policyholder's reaches the vesting age,
on payment of an additional nominal premium. In case the policyholder dies before
reaching retirement age, the life cover sum assured would be paid to the nominee as
lump sum.
In addition, the balance available in the personal pension account would be refunded to
the nominee. The nominee has the option to let the lump sum be with the company and
instead opt for Lifelong Pensions.
Life insurance cover is offered up to a maximum of Rs. 3 Lakh to those under 45 and up
to Rs. 1 Lakh for those older than 45. The cover is available until the age of 65 and no
medical examination is required.

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On reaching the vesting age, the policyholder can convert the accumulated balance in
the retirement savings account and start drawing pension. The policyholder can
withdraw up to 25% of the accumulated sum as cash.
The balance accumulation amount can either be transferred to any other insurance
company or can be used to buy annuity from SBI Life. SBI Life will offer five annuity
options to policyholders. The amount of annuity would vary depending on the option the
policyholder chooses with the annuity payment either monthly, quarterly or any
periodicity as per choice.
Let's say, a 30-year-old male takes the plan and chooses to contribute Rs. 10,000 every
year with the retirement age being 60 years. Let's suppose, that based on a projected
return of 6% the personal pension account of the policyholder accumulates Rs. 781,130.
Now, if the entire balance in the personal pension account is utilised to purchase
annuities for the remaining lifetime of the person, the annual pension amount would
work out to be Rs. 60,084.

Pension pinch: Old age catches up with LICI

Business segments in individual life insurance have thrown up some interesting trends in
the past two years. Of the three main business segments in individual life insurance —
individual regular business, single premium business and individual pension business,
the pension business witnessed the most notable ups and downs.
But it’s not competition alone that has caused this but several other factors as well.
According to data from IRDA, the pension market on the whole has seen a decline. LICI’s
new business premium fell from close to Rs. 2,600 Crore in ‘01-02 to only about a
meagre Rs. 300 Crore in ‘02-03. Officials from LICI say that this was not unexpected. In
June ‘01, the high and assured return offered by Jeevan Suraksha, was lowered and later
that year, rate of return was still further reduced. In the wake of this, there was windfall
business in ‘01-02 as people sought to take advantage of higher return policies. In ‘02-
03, as LICI took corrective action, lowering returns and withdrawing assured return
policies, it resulted in lower business.
Private insurance companies, in turn, managed to rake in about Rs. 810 Crore of pension
business in ‘02-03 as compared with around Rs. 30 Crore in ‘01-02. This has largely been
due to the change in the way pension and retirement products are being marketed.
“Since the entry of the private players, there has been a concerted effort towards
retirement planning. Private companies are in an endeavour to create more awareness
among the people to plan for their retirement than just to use these products as a tax
saving device”. And now with the government having introduced a pension plan in the
last budget, the emphasis on retirement planning has received further impetus. There is
likely to be a sharper segmentation in the types of pension products. Little wonder then,
that since January ‘03, four more private insurers have launched retirement solutions.
Another very obvious trend has been the sharp fall in the single premium business of
LICI, thanks to the tax sops being withdrawn in the budget as also the withdrawal of
assured returns on the product. New business premiums dropped from about Rs. 5,400
Crore in ‘01-02 to Rs. 3,000 Crore in ‘02-03. As far as the individual life business was
concerned, again, LICI lost a little bit of ground while private insurers almost touched Rs.
500 Crore in terms of new-business premium.
The first few years after privatisation are showing up trends like such. A few more years
and there will be a clearer picture as to where the sector is headed

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NEW TRENDS IN INSURANCE
The obvious changes in the insurance market are there for all to see - new brands, new
products, fresh advertising, smart agents - all adding up to the excitement, a sense of
urgency, and a great show of style and bravado. The question asked often enough is how
is all this going to make a difference? This shifting paradigm, I believe, can actually be
summarised in three underlying principles - simplicity, transparency and flexibility.
There is clearly a conscious effort to simplify things either through the printed or spoken
word. Most insurance companies have today simplified everything from the application
forms to claim forms, from product brochures to policy wording, from payment
procedures to claim settlement - the 'Mantra' is applied to everything. Thus, the
consumer, that is you and me in our stripped down versions, actually finds it easy to
make sense out of the pages that we read.
Awareness levels, while going up substantially, are enhanced by this trend, significantly
improving conversion rates from cold call to conversion. How else could one explain the
productivity levels of the insurers, which in a shot span are more than double the past
trends, and continue to move north? Transparency is another significant gain. Billboards
screaming prices, quotations focusing on rates of return and comparative evaluation,
upfront declaration of realistic guaranteed returns, each cover and exclusion discussed
and explained in detail, are all efforts made by us in this direction.
The proof of this is the growing response to Direct Mail, even in categories in what was
considered complex life insurance products. The education of the consumer is on -
building the necessary trust and credibility for the players. We have found that this has
been a key factor enabling acceptance of us private players. The focus on service as a
value, apart from price, as a transparent and upfront communication to the consumer,
has enabled us to acquire and keep satisfied customers, at price points not necessarily in
dose proximity.
This heartening trend is seen across segments, ranging from individuals to corporates,
and across product categories. A strong consumer focus has also resulted in a high
degree of flexibility being built into all products and processes, giving the consumer the
option to pick and choose, to create and build, to experiment and test, across a wide
range. Menu-driven products, service options from doorstep service to call centres,
payment options from web-based to ATM modes, make the life of the consumer and his
dealings with us as insurance companies easier.
The phenomenon is also translating, into a newfound vigour in erstwhile sluggish and
traditionally inward-looking areas like claims and investments. Thus, facilities for lodging
claims on the phone, and downloading claim forms from the Net, are becoming the norm,
while options on where the premium is to be invested is being offered to the consumer.
Early times yet...someone said this in a whisper to me. I agree, but the consumer is
enjoying this refreshing trend, and learning and benefiting from it.

REFERENCE
1. IRDA Website.
2. LICI Website.
3. Websites of other Private Insurance Companies.

[ End of Part 4 of 4. Concluded ]

Himansu S M / 18-Feb-2009

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