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Insurance

Insurance is a financial product which manages risk. Risk may be defined as uncertainty which could result in an occurrence of loss. Insurance provides financial protection against untoward occurrences.

In India, less than 2% of the population is insured. Insurance awareness is very low and hence the low penetration rates. Till recently, the insurance sector was under state control. In life insurance, there was only one company - Life Insurance Corporation of India, and in general insurance there were four companies. However, in 2000, the Insurance Regulatory and Development Authority gave licenses to companies in the private sector to enter life and non-life insurance sectors.

Today there are 13 life and 8 non-life insurance companies in the private sector. There has been a dramatic growth of the insurance sector with the advent of the private sector players. Customers now have a whole range of products which cater to their myriad needs, which can be customised to their specific requirements.

Life insurance covers the risks of dying young as well as the risk of living long. In life insurance, there are basically three broad categories of products:
     1. Pure insurance: Term plans.
     2. Investment-cum-insurance: Endowment, Money-back, Whole-life and Unit-linked.
     3. Pure investment: Pension.

What is Term Insurance?

Term insurance plans cover only the risk of death during the period of insurance coverage. The premium paid is towards cover of risk only. There is no return of premium or a part of it at the end of the period. The premium rates are the lowest in term insurance since the coverage is only for pure risk and there is no investment element. The premium level depends upon the amount insured which is known as sum assured, age of the insured, health and medical condition and occupation. Generally the period is for one year. Single premium plans for longer periods are also available. Term insurance plans are most useful for basic insurance coverage.

What are Endowment Plans?

Endowment plans offer some investment opportunity wherein at the end of the policy period the customers get some return on the cumulative premiums paid. In the event of death, the nominees get the sum assured amount plus some returns. On survival of the policy period, the insured gets the sum assured along with returns. Hence the premiums are higher than term plans. Endowment plans are of two types – with and without profit plans. With-profit plans provide higher returns than without-profit plans by virtue of the sharing of profits earned on that plan with the customers known as bonus whereas the without profit plans just pay a nominal return for continuing with the plan till the end.

What are Money-back Plans?

Money-back plans are similar to endowment plans, but they return the sum assured to the insured at pre-determined intervals during the period of insurance. Along with the last installment of the sum assured at the end of the insurance coverage, a bonus is also paid based upon rates announced each year since inception of coverage. In case of death during the period, the nominees get the full sum assured irrespective of the number of periodic money back amounts received. Money back policy is most useful for young married couples, since it provides periodic sums of money which are useful for various life events like child entering school, buying durables, meeting margin amount of large loans like housing, higher education of children, children's marriage, etc.

What are Whole-life Plans?

Whole-life plans provide lifetime insurance coverage unlike the above plans which provide coverage only for a defined period generally upto 70 years age. Under whole-life, the premium paying term can be either for a specified period or upto a maturity age. After maturity age, there is an option either to encash by receiving sum assured along with bonus or continue with insurance cover.

What are Unit-linked Plans?

Unit-linked insurance plans provide options to invest premiums in a mix of equities and debt instruments – growth, balanced and income plans - as defined by the customer, based upon their risk appetite. The performance of the investments can be monitored by tracking the net asset values which are published regularly. There is an option to switch between the plans based upon the perception of risk and market conditions. Unit linked plans are very popular now-a-days. It should be borne in mind that these are essentially investment oriented insurance products which only those with adequate market knowledge should get into.

What are Pension Plans?

Pension plans however do not provide insurance cover. They are useful for those who are not covered by pension at their work places. These plans provide a steady source of income after retirement, which can also carry on after the death of the person, covering the lifetime of the spouse. Pension plans are of two basic types in terms of income streams – immediate or deferred. Unit-linked pension plans are also offered where there is a choice of investment between equities and debt. Here net asset values are published regularly.

What are Riders?

Most of the above insurance plans are available with a choice of riders. Riders essentially provide for an additional cover of insurance from specific risks for an incremental nominal premium. The risks covered by riders are: critical illnesses, medical expenses, disability, accidental death, etc. These additional insurance benefits were introduced to the Indian market by the new private sector insurance companies.

What are the income tax benefits from Life Insurance Plans?

Premium paid for life insurance has been a prime vehicle for reducing taxes. Till the last financial year, rebate under Section 88 was available. From this year, premium paid on life insurance is eligible as a deduction from taxable income under Section 80C. Receipts from insurance companies, namely, sum assured, bonus, maturity benefits and claims are largely tax free. Exceptions are certain single premium plans, plans where premium exceeds 20% of sum assured and LIC's Jeevan Aadhar Plan.

What are Non-life Insurance products?

These insurance products are excellent risk management covers. Some of them are a must in our lives like motor, health, home insurance, etc. The various types of non-life insurance covers which are available are: health. personal accident, home, motor, travel, baggage, transit, pet, liability, etc.

Non-life insurance period is annual. The premiums are not high. Everyone should have basic covers for home, health, personal accident, travel as a primary protection against increasing risks of today characterised by rising violence and calamities. Its better to spend a penny in insuring ones health and belongings rather than lose a pound due to some unforeseen illness, fire, or earthquake.

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