Term insurance is the most important life insurance policy that we recommend to our clients. If you have bought a decent term insurance, then you probably don’t need any other life insurance policy. Here is a quick guide to buying the best term insurance.
Find how much term insurance can you buy
Usually companies will give a cover of 20-25 times of your gross income( in case of salaried) and about 10-15 times in case of self employed/business. For higher sums( 5 cr+) , it depends on case to case basis and is the final call is undertaken by the underwriting team of the insurer. Recently we had a client who was eligible for 13 cr term insurance, applied for 10 cr and got 7 cr cover!
Find how much term insurance premium can you easily pay on an annual basis.
I have seen many people discontinuing their premiums because after 2-3 years they suddenly find premiums to be too high and don’t see the value in paying them. After all a term insurance is not like a mutual fund which will grow in value as time passes! So choose a cover that you actually need and can easily pay for the next 30-35 years.
Choose the right duration for which you need cover.
I have seen many people go for very high duration covers. Many say that I need term insurance till 80! Here one should understand the point that term insurance is most needed between 30-60 years. This is the time when you are building your assets, your children are growing and your family is dependent on you for its finances. Post 60, you actually might not need a term insurance cover. For those who wish to cover their liabilities for a longer duration a cover up to 70-75 years is sufficient. So keep this simple and this should not be a big criteria to decide an insurer.
Avoid riders and extras
Insurers have this habit of complicating a simple product and they will keep on adding features to distinguish themselves from other players. This causes unnecessary confusion in the mind of the consumer. For example, take HDFC Life- first came Click2Protect, then click2protect plus and now click2protect 3D+. One can even expect 4D++ and 5D+++ in the future! Apart from an odd accidental death cover( if it is cheap), we recommend not to go with riders. Instead of buying that 2000 rs. rider, spend that money on buying extra cover if you can!
Compare premiums of online term insurance policies.
You don’t have to buy a term insurance policy from your broker as it will cost you about 20-30% higher. Always compare term insurance online and find plans that are the cheapest. You don’t want to pay a lot of money for a very simple product.
Compare claim settlement ratio of insurers.
Although IRDA has made it a rule that if you have paid regular premiums for 3 years, your policy can’t be rejected, I still recommend to go with players that have consistently high claim settlement ratio. At the same time, I won’t pay 30-40% higher for that policy. So anything that is cheap and above 95% should just work fine. As a matter of fact, claim rejection for 3 year+ policies is less than 0.1%.
Make correct declarations about your health and income.
I have seen many clients tempted to hide their health issues while filling up the online term plan proposal forms. Never do that. If you get a higher premium from one insurer , there are 10 others in the market. Giving wrong information is considered fraud and your claim is liable to be rejected. This defeats the whole purpose of buying a term insurance.
Choose a nominee and tell your family members about the policy.
Always choose a nominee for your policy and inform your family members about it so that they are aware of it. We have come across many clients whose families struggle to find the financial details of their deceased ones. As this is a product you are buying for your family, they need to know about it. They should know about the insurer, the cover you have taken and the duration of the insurance.Please note that the claim settlement process for an online policy is same as an offline policy.
We have been tracking IRDA claim settlement of insurers for 3+ years.Here is the latest data on IRDA claim settlement ratio of life insurers in 2016-17( for which data is available). Most of the good insurers are now having 95%+ claim settlement ratios in 2016-17.
Max Life Insurance claim settlement ratio for 2016-17- 97.59%
HDFC Life claim settlement ratio for 2016-17-99.16%
ICICI Prudential claim settlement ratio for 2016-17-97.2%
Edelweiss Tokio claim settlement ratio for 2016-17- 93.29%
Kotak Life claim settlement ratio for 2016-17-92.59%
Reliance Life claim settlement ratio for 2016-17- 94.91%
SBI Life claim settlement ratio in 2016-17- 97.98%
Birla Sunlife claim settlement ratio in 2016-17- 94.21%
This also means that one can go for the cheapest term plan with 95%+ claim ratio. You can compare the data at www.trucompare.in/terminsurance
We are in the process of updating our website with the latest data.
Recently I asked someone- What did you learn from the recent train accident near Kanpur? And he gave me a long answer on -how to improve railway security, how Suresh prabhu should resign, so on and so forth..
But he never thought for a second that- this could have happened to him!! And if this were to happen to him, how will his family cope up with the situation- both emotionally and economically! Not to my surprise- he had never imagined such a situation because we never wish to think about death and the negative feelings associated with the same. As a mater of fact, we have been told to be optimism. But the sheer optimism of those 143 passengers couldn’t save them from death and the same optimism is not going to help the children who survived!
How many of those do you think would have a term insurance cover? Not many I guess..
So while it pays to be an optimist, one has to be prepared for worst scenarios in life- that is what will make you and your family navigate such situations in life!
So if you are still avoiding term insurance as it doesn’t give you any return- think again! You could have been one of the passengers in that train that hoped to reach its destination the next day! Think about the financial security this one decision of yours can provide can provide to your family.
So I urge you to have a quick term plan comparison and protect your family today.
I had written sometime back that interest rates are headed lower and so far that trajectory has held. With recent demonetization, the biggest impact will be on interest rates and don’t be surprised if 1 year FD fetches you only 5.5 to 6% from the current 7%.
With lots of deposits coming into the system and Govt. able to reduce its fiscal deficit, there will be a lot of downward pressure on the interest rates. With inflation around 4%, the real rate of interest in the economy should be around 5.5%. So if you are a saver, who believes in FD- you are on for a shock in the coming times as your post tax returns will fall to 3-4%.( which implies that it will take you 15-20 years to double your money!)
At the same time, lower interest rates will be good for the economy and might start a permanent bull market in equities. So it might be prudent to take a bit of risk to enhance your returns by investing in equity market.
Not taking any risk might turn out to be the biggest risk! So make volatility your friend and take the plunge.
Update: Please check updated data for 2016-17( till March 31, 2017) here.
Here is the IRDA claim settlement ratio 2016-17 for a few term life insurance for which data is available .
- HDFC Life has settled about 23006 claims in 2016-17 while rejecting only 123 claims giving it a claim settlement ratio of 98%
- Max Life insurance has settled about 4137 claims in 2016-17 while rejecting about 77 claims giving it a claim settlement ratio of 93%. About 5% claims are pending.
- SBI Life has settled about 19856 claims with claim settlement of 91.6% till Sep 30, 2016
Hdfc Life has also given some statistics on why claims are getting rejected. This is for the first time we are seeing insurers giving reasons for claim rejection:
“Out of 53 repudiated claims,45% were repudiated due to non disclosure of existing health conditions, 19% were repudiated due to misrepresentation of age, 17% were repudiated due to income misrepresentation, 9% were repudiated due to non- disclosure of insurance with other insurance companies prior to our policy, 6% due to misrepresentation of occupation and 4% due to other misrepresentation.”
This information should help you avoid these mistakes while buying a term insurance policy.
To see the latest premiums and claim settlement ratio of term insurance , compare now.
Whenever I ask people about retirement planning, they think that I am talking about a distant future which will be taken care of automatically. (I don’t blame them as it is psychologically difficult for people to take such a long term view of things).And when I show them how ill prepared they are for their retirement based on their current savings rate and investment returns, they get a rude shock!
Many people think that their income/expense levels will remain the same post retirement. Most of people working in the private sector won’t have the luxury of a pension in their retirement years. So it is our responsibility to build a retirement corpus that will last us for our life.
In India, most of the people start to work between 22-25 and retire by 60- a working life of about 35 to 40 years. With average age expected to climb up to 80-85 years in the coming times, one needs to be able to live of your retirement income for atleast 25-30 years. Have you really estimated your expenses and income during that time? Have you estimated your medical expenses?
I find people planning a lot for their kid’s education or their child’s marriage but never think or plan about their own retirement needs. Without any planning, you might have really difficult times meeting your expenses in your old age.
In the coming times, financial planning will not be a luxury but a necessity.
If you go to any mutual fund website- you will see the same MF listed under “Regular Plan” and “Direct Plan”. So you have a ICICI Pru Discovery Fund- Direct Plan and ICICI Pru Discovery- Regular plan. So what exactly is the difference between the two plans and which one should you invest in?
- If you look at their equity portfolios, both regular plans and direct plans have essentially the same stocks.
- The only difference is between their “expense ratio” which is like a fund management fee that the mutual fund charges from its investors. This ranges from 0.5 to 3% for many equity funds.
- Direct plans are funds that you buy directly from the mutual fund company without the intervention of any MF distributor/agent whereas regular plans are the plans where a part of your investments goes as “commissions” to the MF agent/bank/broker.
- Direct plans have lower expense ratios as compared to regular plans, thereby enhancing your returns by 0.5-1.5% in many cases. Take an example of ICICI Pru Discovery Fund that we talked about. The expense ratio of direct plan is 0.88% whereas that of regular plan is 2.16%- a difference of about 1.25% per annum. As a result direct plan has a 1 year return of about 1% whereas regular plan has a 1 year return of -0.25%. This is the money going into the pocket of your agent/advisor.
- So if you are DIY investor who knows which funds to buy, then you should definitely buy direct plans . If you are KYC compliant, you can buy directly from MF websites. If you first time investor, get yourself KYC complaint first .
We always recommend that you hire an investment advisor and pay him separately for portfolio management rather than paying unnecessary commissions on regular MF plans. Buying regular plans encourages MF agents to churn your portfolio more frequently as their incentive comes from extra commissions!
If you have any questions regarding MF investments, feel free to contact us. We construct efficient portfolios based on direct MF plans and diversify using asset allocation techniques rather than buying and selling 25 different schemes in the portfolio.
It refuses to amaze me how the insurance industry will try to complicate a simple product like a term plan. As Indians are not ready to pay for insurance and still view it is an investment, insurance companies have manufactured a product that comes with a return of premium at the end of the tenure? Isn’t this wonderful? So should one go for such plans? Lets do some simple math to find out:
I had a look at Aegon Religare’s return of premium plan for a 30 year old non smoker male for a sum assured of 1 crore. The premium comes around 23,000 per annum and the coverage is only available till 50 years. Compare this to a normal online term plan which will cost around 8000 for 30-35 years.
Now lets compare the so called “returns” of these 2 options:
In return of premium plan, you’d invest 23000 every year and get back your 4.6 lakhs at the end of year 20. One of biggest drawbacks is that you are not covered in your 50’s !
In the normal term plan, you’d pay 8000 and get 0% return on the same.Assume that you manage to get about 7% on the remaining 15000/annum for the next 20 years. So what do you get here. A back of envelop calculation shows that you’d get around 660,000 after 20 years! That gives you a saving of about 2 lakhs plus you get covered till 70!
Now most of the people can’t do this calculation and fall into the trap of “securing their money” and insurers are happy to give them such fancy products.
Our recommendation is always to go with simple term plan. Put rest of your money into good investment products that can get you 8-12% returns!
Most of the people who put their money in the market, do not know if they are long term investors in the market or if they are short term traders. There are couple of differences between traders and investors that one should understand before putting any money into the stock market (via equities or mutual funds).
Traits of Investors
- Investors invest based on company fundamentals and have a deep knowledge about company fundamentals like its business model, its growth potential, quality of the business and the management etc.
- Investors are usually contrary by nature- they buy value when others are selling in panic. They don’t believe in timing the market.
- Most of the good investors run concentrated portfolios and don’t have more than 20-30 stocks in their portfolios. This allows them to do deep research into few names rather than buy the complete market.
- Most of the investors hold the stock for a long period of time-usually more than 2-3 years. They are willing to suffer massive drawdowns (upto 50% of their capital) during bear market phases. As a matter of fact, they might add to their positions during downturns.
- Their market edge lies in picking good stocks and holding them for really long term. So imagine holding an infosys for 15-20 years and taking all those 2008 type corrections in your stride!
- The risk with fundamental investing is holding on to “wrong stocks” for long period of time. In the current scenario imagine the difference between holding PSU banks for last 5-7 years and holding private sector banks like Yes Bank/IndusInd Bank for 5-7 years
Traits of Traders
- A stock trader usually trades based on price action and rides the market trends. His holding time can be few hours to few months.
- A Trader is essentually a market timer and tries to time the market in various time frames. He usually uses technical analysis tools/charts as well as macro factors to take his trades. Many successful traders employ mathematical algorithms to make buy and sell decisions.
- A trader is not akin to using levearge to enhance his/her returns during trending markets.He main objective is to ride the upside/downside momentum in stocks.
- A trader practices strong risk managment and is quick to get put of losing positions. He is a master student of probability and is alsways listeing to the market sentiment.
- A trader is always looking for risk adjusted returns and is always looking to limit his drawdown during bear markets. Some traders might even go short during bear phases to profit from the same!
- His biggest strength is his ability to cut his losses which gives him an edge over the investing crowd!
So are you a trader or an investor? Many times we enetr a market for short term gains but when we see a loss we turn into an investor and then end up owning dead stocks for long periods of time.On the other times- we say we are a long term investors but don’t have the patience to keep our good stocks for really long periods of time.
So it is important to undersatnd your goals and objectives before you put any money into the market. And remember- no strategy will work all the time in the market.
I am still appalled to find many people still buying life insurance policies( especially endowment/single premium/money back) for the purpose of investment. When you are investing your money, you want to have returns that beat inflation for a longer period of time. When you are buying life insurance, you are doing so to protect your family against financial distress in case of your sudden death! The two objectives have nothing in common.
In India , financial advisors ( read insurance agents) sell these policies in name of tax saving,bonuses,long term returns etc. If you see the hard fats, most of such policies won’t yield you more than 5% in the long term. Let me give you an example:
Lets look at a benefit illustration of LIC Endowment Plan:
As you can see, a 30 year old health male is paying about 2900 per Lakh of insurance. So what does the person get @4% returns- 2.4 lakhs. (don’t even bother to look at 8% returns as LIC bonuses range between 3-5%). Now when people sell you this policy, then 2.4 lakhs looks like a huge amount at maturity but actually you’d have actually put about 90,000 as investment in this plan and you won’t even double your investment in 35 years! ( The reason for the same is the fact that the bonus is not compounded and the bonus rates are too low- thats double whammy for any long term investment!). Also not to forget- you can’t sell your investments for 35 years(unless you are willing to take a loss on your investments for a surrender value)
Money back policies are even worst in terms of returns but play on the investor psychology of “getting his money back”.
Now look at the insurance bit- by paying 2900 per annum, you are getting a cover of just 1 lakh whereas a similar sum can buy you a 25-50 lakhs of term insurance cover! Get a quote here.
So next time when someone coaxes you to buy a traditional/endowment plan- ask him/her these hard questions. This might be a good time to take a fresh look at your insurance and investment portfolio. Also remember that money decisions are not to be taken based on emotions but based on data and your financial goals. You work hard for your money, let it work even harder for you.