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Thursday, January 29, 2009

Insurance-dual benefit of protection and returns on investments

Insurance as an asset class is gaining attention, not only as part of tax saving investments, but also due to the current slowdown in the global and domestic economy. With uncertainties looking large and the economic prospects weakening, and also due to huge losses staring in most investment asset classes including commodities, shares, real estate etc, time has come for the investor to restore the balance, which is historically tilted against insurance for ages.

Industry Performance:

The industry recorded 38,8976 policies in the month of November 2008 under the individual single premium category with Rs 1309.62 crore premium under written. The 1992 policies under group single premium collected a premium of Rs 927.14 crore in November 2008 and Rs 8052.26 crore upto November 2008 compared with Rs 5455.68 crore in the corresponding period of previous year. However the number of policies under group single premium category was more in the period upto November 2007 (14028) over the period upto November 2008 (12513). Cumulative premium / no.of policies upto the month is net of cancellations which may occur during the free look period.

Meanwhile under individual non-single premium category, 3327976 policies collected premium of Rs 3073.94 crore in November 2008 and Rs 25167.57 crore in the period upto November 2008 through 23080840 policies/schemes. The group non single premium category collected premium of Rs 2289.01 crore in April-November 2008 over Rs 673.38 crore in the corresponding period of previous year. Here the number of policies/schemes was more than in April-November 2007.

In the month of November 2008 the non life insurance general category recorded a premium of Rs 2223.45 crore, a rise of 0.11% over Rs 2220.96 crore in November 2007. The public sector insurers had higher share of Rs 1284.12 crore over Rs 939.33 crore of private sector in November 2008. However the rise in total premium under written in November 2008 over November 2007 was primarily due to rise in private sector premium collection, while the fall in public sector premium collection restricted this rise. The gross premium underwritten rose by 9.57% in April-November 2008 over April-November 2007 mainly led by a rise of 15.19% in premium collection by private sector.

Among the specialized institutions, Star Health & Allied Insurance shined like a star by collecting premium of Rs 318.76 crore in April-November 2008 over Rs 98.99 crore in the corresponding period of previous year.

Need of the hour:

An adequate insurance will ensure that even if your income or heart stops ticking, your family / dependent's lifestyle does not change significantly. Viewing this as benchmark, most of us are under insured.

As the financial year draws to a close, investors rush to make investments in tax saving instruments. Section 80C lists down the instruments, which you can invest in order to save tax. You can invest a maximum of Rs 1 lakh in all these instruments put together and the entire amount of Rs 1 lakh will be deducted from your taxable income. Among others are Unit linked insurance plans (ULIPs) offered by insurance companies.

ULIPs: Unit Linked Insurance Plans or ULIPs are fast emerging as a way to enjoy best of both worlds - Life insurance with the benefits of Equity investments. ULIP for planning long term goals, like regular pensions, children's education and marriage, invest the premium money in equity market, thereby providing much higher returns in the long run.

All ULIP plans provide income tax deductions of up to Rs. 1,00,000 under section 80C. In this, the Returns are tax-free in the hands of the investor. ULIPs also allow an investor to switch funds during a downturn and protect his investment, and, importantly, also give him a life cover. However, if your annual premium exceeds 20% of the sum assured on the policy, the investor will not get the tax benefit.

In a recent move to save the life insurance industry several hundred crore in capital requirement, the insurance regulator has eased solvency margins for unit-linked insurance plans. Solvency margin is the excess of assets over liabilities that an insurer maintains as a prudential measure in the interest of policyholders.

The move will help enhance ULIP sales, especially pension and health products. It will also lower the cost structure in ULIPs. Life insurers selling ULIPs will have a level playing field vis a vis companies selling traditional products whose solvency margins were lowered recently. A lower solvency capital would mean that insurers will also have more money to underwrite new business. It will also ease the pressure on bringing in extra capital.

Pension Plans: Pension plans apart from playing a significant role in retirement planning, also offer tax benefits under a dedicated section i.e. Section 80CCC. Premiums paid for the same are eligible for deduction. It is a market-linked security and the interest rate depends on the fund management.

The Maximum investment limit is Rs 10000. Most insurance companies give the individual an option to withdraw a part (25-33%) of this sum as a lump sum on maturity. The amount withdrawn or the cash component is tax-free. As there is no tax rebate for those with income above Rs 500,000 it is better to invest in a retirement plan and thereby, claim the Section 80CCC deduction.

With the entry of private players in the Insurance sector, the Unit linked insurance policies (ULIPS) have gained huge popularity. But with the crash in capital markets, most of these ULIPs have seen massive erosion in their NAVs. As a result, now pure insurance products (like Endowment policy, Whole Life Policy) and guaranteed returns policies are gaining momentum.

Life insurance companies have recently started offering guaranteed-return products to entice risk-averse investors who are looking to park their earnings in safe havens. Mostly these are single-premium policies where you have to invest a certain sum of money with the maturity proceeds coming to you only at the end of the chosen term. Besides, most of these policies also provide tax benefits to investors.

An investor can get almost equal return on investment when compared with similar tax-exempt schemes. The interest rate on investment in National Savings Certificate (NSC) (with a half-Yearly Compounding), and public provident fund (PPF) (Compounded annually), is 8% with a lock in period of 6 and 15 years respectively.

In bank fixed deposit (FD) schemes, rate on long-term FD of five years or more is in the 8-9% range from the New Year. This would translate into an interest income of 9.5-11% over five years. In life insurance, take for instance, the new schemes coming up are promising a guaranteed return upto 9%-10% per annum, depending upon the investment tenure.

Though, in terms of returns these investments provide nearly equal returns but they are relatively illiquid instruments, as investors cannot get the money back before maturity even in times of exigencies. Single-premium life insurance schemes, however, give investors the freedom to walk out of the scheme after a year.

Here we take a look at some of guaranteed-return insurance plans:

IDBI Fortis Bondsurance

Aiming to tap customers looking for guaranteed returns, IDBI Fortis Life Insurance has recently launched a guaranteed-return plan named Bondsurance. Bondsurance offers guaranteed return on investment along with life insurance cover. With a one-time minimum investment of just Rs 20,000, Bondsurance is specially crafted for those looking for attractive guaranteed returns with the promise of insurance protection.

The plan, in fact, addresses the needs of those willing to put away money for either 5 years or 10 years, earning a guaranteed return on the premium paid. At the same time, in the short term, Bondsurance offers liquidity after the first year with a special surrender value in case one needs the funds in urgency. The plan also comes with two attractive tax benefits under Sec 80C and 10(10D) of the I-T Act.

According to the company, an investment of Rs 100,000 in Bondsurance would fetch Rs 2.03 lakh for customers in the age bracket of 8 years to 32 years on maturity, at the end of ten years. The maturity amount, however, varies with age and term of the plan.

Aegon Religare Guaranteed Return Plan

This is also a single-premium plan that guarantees tax-free returns along with life cover. It is a close-ended scheme that offers guaranteed returns at a compounded annual rate 7.2 per cent for two tenures: 7 and 10 years.

Anybody in the age group of 90 days to 45 years can buy this policy by paying single premium in the range of Rs 50,000 to Rs 4 lakh. The returns on maturity are tax-free and the plan comes with an added benefit of life cover -- five times of the single premium paid. The policy, which requires no medical test, is open for subscription for a limited period only.

Tata AIG Life InvestAssure Insta

Tata AIG Life Insurance Company Limited has launched Tata AIG Life InvestAssure Insta. The policy can be bought for anyone between the ages of 30 days and 60 years with maximum maturity age of 75 years. The policy offers annualized premium options of Rs. 20,000, Rs. 30,000, Rs. 40,000 and Rs. 50,000 which the customer can decide upon in accordance to his convenience. The premium paid under this policy is eligible for tax benefits u/s 80C of the Income Tax Act, 1961. Moreover, life insurance proceeds enjoy tax benefits as per section 10(10D) of the said Act.

Tata AIG Life InvestAssure Insta is designed to help the policyholder obtain valuable protection enhanced by the benefit of getting the most out of his investment and the growth potential through high allocation rates and further supplement it with a guaranteed maturity bonus. The customer can choose from a spread of five fund options depending upon his risk taking appetite:

Top 50 fund

Top 200 fund

Aggressive Flexi fund

Stable Flexi fund

Bond fund

On survival to the end of the policy term, the policyholder will receive the Total Fund Value, which is equal to the value of the Regular Premium Account, plus the value of the Top-Up Premium Account (if applicable) valued at applicable unit price. In addition, they will also receive the Maturity Bonus of 5% of the Regular Premium Account as on the maturity date, provided all due premiums have been paid. However, the maturity bonus will not be applicable on death/lapse/surrender or on the Top-up Fund Value under the policy.

Reliance Life ULIPs with guaranteed return

Reliance Life Insurance has launched two unique unit-linked plans under Reliance Guaranteed Return Plan Series I with insurance and pension options, assuring financial security with guaranteed maturity benefit at 6.85 per cent compounded annually plus upside, if any.

The single unit linked insurance plan is available for limited period in two options: Reliance Guaranteed Return Plan Series I , Insurance and Reliance Guaranteed Return Plan Series I , Pension with fixed term of five years. Under Reliance Guaranteed Return Plan Series I, investment rate of return would amount to 10.4 per cent presuming tax benefits at 10 per cent rate of return and tax rate of 33.99 per cent.

The new plan also provides partial withdrawal benefits in insurance option after three years. Minimum withdrawal amount would be Rs 5,000, whereas maximum withdrawal amount should be 20 per cent of the fund value at the time of withdrawal.

Besides maturity additions in insurance option, death benefit comes with sum assured plus fund value. The insured can choose any life cover between 1.25 to 5 times of single premium. In pension variant, in addition to maturity benefits, the guaranteed return on death is available during the fifth year.

Birla Sun Life's Dream Plan

Birla Sun Life Insurance Dream Plan is a long-term unit linked insurance plan which offers guaranteed maturity benefits with options to double or triple the guaranteed maturity benefit by choosing 200 per cent or 300 per cent options.

It also gives choice to enhance life cover anytime during the policy term at minimal additional cost. However, the enhanced sum assured chosen must be at least Rs 50,000. This is not a limited period plan and you can pay the policy premium monthly, quarterly, half-yearly or annually.

Outlook

With the financial crisis compounding, investors have started giving more preference to financial protection. And thus the new schemes of insurance companies with guaranteed returns are seeking more attention of the investors. Along with protection tax benefits provided by these schemes have also pulled tax savvy investors towards them.

source: Capital Market

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