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All you need to know about restoration benefit in health insurance

The restoration benefit in health insurance is a feature that reinstates the total sum insured in case it gets exhausted any time within the policy period.

 

After enduring a long and eventful period of COVID-19, it’s natural to ponder over the adequacy of your health insurance cover. Whether the plan can cover prolonged hospitalisation or will it fall short if more family members need it? Many policyholders second-guess their choice of plan, given the current times. Bring in the soaring medical inflation into the picture and the possibility of exhausting your sum insured in a single hospitalisation doesn’t seem so far-fetched after all. This is where the restoration benefit in health insurance comes to your rescue. It’s the simplest way to add an extra layer of protection for yourself and your loved ones against an expected medical crisis – or perhaps more.

 

The restoration benefit in health insurance is a feature that reinstates the total sum insured in case it gets exhausted any time within the policy period. This feature has found many takers amongst the people who opt for family floater plans. This especially works for these plans because the sum insured is shared by the whole family, and the benefit stands to cover more than one family member’s hospitalisation expenses.

 

The restoration benefit option is an in-built feature in almost every other extensive health insurance plan. Here’s all you need to know about it and how to make the best of it.

 

How Restoration Benefit Works
Simply put, restoration benefit restores the original sum insured amount if the policyholder uses it up any time during the policy period. For instance, you have a family floater plan of Rs 5 lakh, and have to undergo a sudden surgery that exhausts Rs 4 lakh. Now, if any of the other family members need hospitalisation that costs another Rs 2 lakh, the balance of Rs 1 lakh will have to be paid out of your pocket. However, if you have the restoration benefit feature in your policy, the original amount of Rs 5 lakh would be replenished as soon as the sum insured is exhausted in full.

 

Types of Restoration Benefits
There are two kinds of restoration benefits –

 

# Complete exhaustion – Here, the restoration benefits come into the picture only when the whole sum insured gets exhausted. If the entire sum is not exhausted, the benefit won’t get triggered and the policyholder would have to pay the balance amount out of pocket. Suppose, you have a cover of Rs 5 lakh and your heart surgery uses up Rs 4 lakh. Now, if you need Rs 2 lakh additionally for an unrelated claim in the same year, the restoration benefit won’t get triggered because your original sum insured is not completely exhausted.

 

# Partial exhaustion – Under this, the benefits can be availed even if some amount of sum insured gets used up. Some insurers offer to cover a second claim amount even if there’s some amount left from your sum insured. Take the above case here, and the restoration benefit will get triggered in case of partial exhaustion. So, your second claim will be covered as well even if you have Rs 1 lakh left out of your original sum insured.

 

Check with your insurer on the terms and conditions of both these types and opt for the one that best fits your needs. Also, your family history comes as an important deciding factor before choosing the restoration benefit.

 

What To Check Before Opting For It
Here’s your checklist before opting for restoration benefit in your health plan:

 

# The restoration benefit feature makes the premium costlier. Don’t forget to ask how this is going to affect your premium.

 

# The most important rule to remember is that restoration benefit gets triggered only for unrelated medical claims. Suppose you exhaust your sum insured over a heart surgery, then usually the restoration benefit will not cover a second heart-related claim in the same year. Understand from your insurer the type of claim they will cover and also the quantum of restoration benefit that will be covered. For instance, Aditya Birla Capital offers a restoration cover of 150% of the sum insured for a non-related illness for a cover of Rs 5 lakh. However, Max Bupa Health Insurance offers unlimited restoration of the sum insured for related as well as non-related illness for the same cover of Rs 5 lakh.

 

# Check with your insurer on the relevant conditions that apply for the same or different illnesses for different family members.

 

# The restoration sum insured usually cannot be carried forward to the next year even if you do not use it till its validity.

 

# Check if the benefit will trigger if the sum insured gets exhausted in a single claim or if it works in the case of multiple claims as well.

 

# Lastly, don’t just depend on restoration benefit for your protection. Rather, always opt for a higher sum insured to ensure your plan can take care of medical emergencies.

 

 

Source: Financialexpress

Rich vs Wealthy: Which One Are You?

What’s the difference between the rich and the wealthy? Since both have enough money to cover their needs, your answer will likely be “Nothing.” However, ‘rich’ and ‘wealthy’ are far from synonymous in the personal finance world. This article will examine rich vs wealthy in detail, clearing any ambiguities you may have about these terms by providing some useful tips, insights, FAQs, and examples highlighting the difference between the rich and the wealthy.

 

What Is Considered Rich?
Being rich means having enough money or income to live a relatively comfortable life. According to many experts, the three factors that qualify one to be considered rich are:

 

Having a Lot of Income
You’re a rich person if you receive a high salary that allows you to live comfortably while being primarily sustained by your paychecks and bank account, which help you navigate your high cost of living and many expenses.

 

Spending a Lot of Money

Another feature that highlights the rich meaning is the ability to spend a lot of money. If you’re rich, you’ll likely have little qualms about spending freely on many things that others would think twice about.

 

Showing Off How Much Money You Have
Rich people typically live flashy lifestyles that show off their status to outsiders. Glamorous displays of cars, clothing, shoes and other possessions are telltale signs of a rich person.

 

However, if you’re a rich person, your money is only good for a finite amount of time. Although you’re in a fairly good financial position, true financial independence eludes you, as many rich people spend more than they earn and end up in debt quickly. Think of lottery winners as examples of the filthy rich meaning—they make a lot of cash that helps them afford flashier lifestyles, splurging on fast cars, clothes, designer perfumes, expensive shoes, and other material objects. However, they often go broke because sustaining their lifestyle is unfeasible in the long run.

 

What Does It Mean to Be Wealthy
Not all rich people are wealthy, but all wealthy people are rich. The difference between being wealthy vs rich is that wealthy individuals can control and manage their money, spending their time making investments to create a sustainable lifestyle. Consequently, they can enjoy their riches without a time limit due to their sustainability.

 

Spotting a Wealthy Person
A defining feature of the wealthy is that they rarely look the part. Individuals at the apex of financial freedom are typically not as flashy as the rich. They generally aren’t interested in impressing others with how much money they have or engaging in what is considered rich. Consequently, spotting the wealthy can be challenging, because you may pass them by every day without even realizing it.

 

How the Wealthy Gain Their Wealth
There are various factors that contribute to becoming wealthy:

 

Savings
Saving may seem like a very elementary step to wealth building, but it’s arguably the most important. Small sums regularly saved over time can eventually add up to immense wealth, so it’s no surprise that the wealthy are some of the biggest savers around. There are many ways to achieve financial freedom through saving, including opening some great IRA savings accounts.

 

Investing
The wealthy complement their excellent savings habit by putting their money to work through investing, a key aspect of the wealthy meaning. Consequently, they usually have assets like real estate, shares in the stock market, antiques, gold, and art. Investing allows the wealthy to amass even more money and increase their net worth. Therefore, the straightforward answer to the popularly Googled question “Is investing a great idea?” is a resounding yes.

 

Frugality
Being frugal is a mindset that makes, grows, and retains wealth. As such, the wealthy are often reluctant to lose their hard-earned money to unnecessary expenses.

 

It’s critical to note that the wealthy are also financially educated individuals who know all there is to learn about making and keeping money. This knowledge often confirms the difference between rich and wealthy.

 

Rich vs Wealthy: Differences
Although both being wealthy and rich means having enough money in your bank account to get by, it goes way beyond that. A rich person is usually someone with a huge salary or income stream. However, someone who makes way less may be in better financial health than a rich person if they invest and save aggressively.

Also, rich people will spend freely and use their income to fund lavish lifestyles, while wealthy individuals are more interested in saving and investing a huge chunk of their cash in profitable avenues like the top TaaS stocks to buy.

 

Another key difference between the wealthy and rich is that the wealthy maintain a middle-class lifestyle since they’re focused on building long-term wealth by generating assets. To simplify things, take a look at other key aspects of the difference between the rich and the wealthy:

 

• The rich engage in little to no financial planning, whereas the wealthy take notice of affordability and their spending habits, engaging in estate planning, budgeting, and tax strategies.

 

• Rich people have high expenses compared to income, while the wealthy have low expenses compared to income.

 

• Another key difference between the wealthy vs rich is that the rich have finite money that will soon run out, but the wealthy have sustainable money that will last.

 

• The rich usually store their money in cash and material assets, while the wealthy keep theirs in investments and long-term accounts. With a great Robo advisor’s assistance, you can start investing too, so keep this in mind.

 

• Rich people, mostly rely on a high salary or income, with no long-term investment plan. On the other hand, the wealthy have numerous revenue streams to reduce risk and diversify their income, so they don’t have to worry about pensions or 401K.

 

• The rich are obsessed with hoarding material items and upgrading their lifestyle frequently. However, buying assets is what is considered wealthy, even though the wealthy may also buy other things occasionally.

 

 

It’s preferable to be wealthy than rich. Wealth brings stability and financial security, offering you more time to spend as you please without having to stress about money, so the mental health benefits are enormous as well.

 

Net Worth
Furthermore, the concept of net worth is crucial in the wealthy vs rich conversation. The question of the possibility of retiring at 60 with $500k is often asked by ordinary individuals interested in net worth, or the value of your assets minus any liabilities you owe. Knowing about net worth is vital in the difference between rich and wealthy, while also offering a reference point to measure progress towards your wealth-building goals. As you continue earning, saving, and investing, your net worth will grow, but you’ll need to focus on saving more and spending less if your net worth is pretty low.

 

Why Rich People End up Indebted
As mentioned early on, being rich doesn’t necessarily mean having a high net worth or always having money—frequently spending significant amounts of cash on non-essential stuff also fits the rich definition. Rich people also often spend more than their income, getting into debt in no time. Therefore, even though you might be a rich person living in a fancy mansion or driving an expensive car and earning, say, $200,000 annually, if you spend $225,000 yearly in expenses, bankruptcy will come knocking on your door soon.

 

Is It Better to Be Rich or Wealthy?
Adequate savings, proper investing, frugality, and true financial freedom are what is considered wealthy in 2022. On the other hand, a huge income, excessive spending, extravagance, and possible debt are associated with just being rich. Therefore, it’s better to save, invest, and be frugal with your money to build wealth instead of being just rich.

 

 

Source: Review42

Goal-Based Investing: How Does It Help Create Wealth?

From our school days, we have been taught that goal setting is fundamental to our long-term success. After all, it is difficult to get to the desired destination without clearly defining the destination. But once you realize what is important to you, the goals set by you will help you remain determined to achieve them.

 

Like all other aspects of life, this applies to our finances as well. And this is where the concept of investing based on your financial goals or goal-based investing comes in.

 

In this blog, we will explain goal-based investing, how you can plan for financial goals, and how it helps in wealth creation.

 

What Is Goal-Based Investing?

 

We all have so many things we want to achieve in the future. This can be buying a car, a home, going for a trip, planning for a peaceful retirement, etc. So it is easy to feel overwhelmed and sometimes worry about how you will achieve all your goals.

 

This is where goal-based investing helps. Goal-based investing is all about identifying your financial goals, setting a timeline for each one of them, and investing for them regularly to be able to reach them. So essentially, you give all your dreams and financial goals a structure.

 

Benefits Of Goal-Based Investing

 

1. You Can Identify Accurate Amount To Fulfil Your Financial Goal

 

When you do goal-based investing, you will list down the goal you want to achieve, by when you want to achieve it, and the money you will need for it. And while you do it, you will consider the current cost of achieving that goal and increase in its price.

 

For instance, let’s assume you want to plan higher education for your child 10 years away. Currently, it costs Rs. 10 lakh. When you plan for it, you will calculate how much it will cost in the future after factoring in the inflation. So, assuming an average inflation rate of 8% in education, it will cost nearly Rs. 21.6 lakh in 10 years. Now you know how much money you will need for this goal

 

2. Financial Goals Help You Pick Right Investment Products

 

When you know the amount you will need for a goal and know the time you have to accumulate that corpus, you can effectively build your investment strategy. You can pick from asset classes like equity, debt, gold, etc., as per your investment horizon and financial goals.

 

For instance, if your short-term goals, like travel, kid’s school fees, etc., you want the money no matter what. So your focus will be on collecting that money and getting some growth on it. And hence you will go for Debt Funds or even Fixed Deposits.

 

On the other hand, for your medium-term goals (3-5 years away) like buying a car, you can have a mix of Equity and Debt. That’s because you have a slightly longer investment horizon, and if there is some interim volatility or a fall, you can live with it. So Hybrid Funds become the right product for you. And on end are long-term goals for which you can pick pure equity funds and focus only on growing your money.

 

3. Financial Goals Help You Rebalance Your Portfolio

 

When all investments are linked to financial goals, it helps you review and rebalance your portfolio at correct intervals. And also enables you to adopt the appropriate asset allocation strategy.

 

For instance, when you approach a long-term goal like retirement, you need to gradually reduce your allocation from Equity and increase allocation to fixed income products. This is the key to protecting your gains and making sure you will have the money at the time you need it.

 

4. Financial Goals Help You Avoid Debt Trap

 

If you do not clearly define your goals and not invest in them, the chances are that you will not have enough money when the time comes. In such a situation, you might be forced to take a loan. The loan will help you achieve the goal at that point. However, you can end up in a debt trap.

 

Therefore, it is essential to stay clear of taking loans as much as possible. Take the goal-based investing approach and you will never need to take a loan in desperation.

 

 

5. Financial Goals Help You Maintain Fiscal Discipline

 

Investing without goals is a less disciplined way of investing. Many investors who do not have a goal in mind eventually stop investing due to some distraction or random reason.

 

But if you have specific goals to achieve, you are more likely to stay the course. Because you know that you will never reach your goal if you stop your investments. This clarity on the cost of not investing can be a significant driver to continue investing.

 

So you are more likely to deal with adverse market movements in a better way if you follow goal-based investing. This is a massive advantage because keeping your emotions at bay is as important as picking the right investment products in investing.

 

 

Bottomline

 

Mapping out all your needs gives you a clear picture of your finances. Goal-based investing helps you answer important questions like how much to invest, where to invest, and when to start investing. Moreover, it also gives you a purpose to stay invested. And helps you fight your biggest enemy – Your impulsiveness.

 

Source: ETMoney

How to choose a term life insurance plan

Term insurance plans were introduced with a very basic structure – the plan will offer a sum assured upon the death of the policyholder, will provide coverage till 65 years and premiums can be paid in only the annual mode. However, it started getting more complex, when more and more insurers started offering online term life insurance plans. Today there are – limited pay plans, increasing cover plans, staggered payout plans, return of premium plans and dozens of combinations. While this profusion of choices is good, it is also becoming a problem for most of us to decide which plan to buy.

 

In this blog we will tell you about the most important variables to consider to make the process of choosing a term insurance plan.

 

And, here are the 5 things to consider when buying a term life insurance plan.

 

Number 1: Calculate how much term insurance coverage you need:

 

Your term life insurance coverage should broadly assess how much money your family would need if you were to meet with an untimely death. The best way to do this is to grab a piece of paper and start calculating the following.

 

• One, estimate your dependent family’s monthly expenses and multiply it with 150. The multiple of 150 factors in future inflation.

 

• Two, add your liabilities on the account of home loan, personal loan, credit card bills.

 

• Three, deduct all the liquid assets you already have in the form of FDs, stocks or mutual funds.

 

• Four, add your expenses planned on the account of important life goals that are likely to happen in the next 15 years. Like your children’s higher studies or their marriage.

 

• Five, add the retirement corpus that you would want to leave for your spouse on his or her retirement.

 

Number 2: Determine the tenure of your plan:

 

Once you know how much coverage you need, it is important to know till what age you would need it for. The tenure should not be too little as the policy might lapse before your financial obligations are completed. At the same time, the tenure should not be too long because the premium charged would be too high on the account of the higher tenure.

 

The right way to estimate the tenure of your term life insurance plan is to determine by what year your liquid net worth, i.e. the total investment you have in mutual funds, provident fund, stock, etc after subtracting your liabilities, will be more than your term life insurance cover that we have calculated in the earlier section.

 

The age at which these two numbers coincide should be the age till which you need coverage. Post that, your assets will be enough to take care of your family in your absence.

 

Number 3: Target the highest Peace-of-Mind per rupee premium:

 

Here, we use the term Peace-of-Mind rather than coverage per rupee of premium because consumers often value some key intangibles while making a decision.

 

For choosing a term plan, these factors could be the stability of the insurance provider or its reputation in the eyes of the policyholder. Term life insurance is a long-term contract, often running for 30 to 50 years. Hence, it is important for you to be happy with your decision about the insurance plan you have picked, which would be a combination of the premium you pay and your perception about your insurance provider.

 

 

Number 4: Choose your add-ons wisely:

 

Term life insurance plans offer riders at a reasonable cost which should be certainly considered by you even if they might not fit your requirement.

 

There are four major riders that are available:

 

• Additional cover for death due to accident:

In case you die due to an accident during the policy tenure, this amount would be paid to you in addition to the basic sum assured.

 

• Cover for critical illness:

A lump sum amount is paid to the policyholder on being diagnosed with one of the diseases which has been mentioned as a critical illness in the policy by the insurer.

 

• Waiver of premium on disability:

If the policyholder becomes permanently disabled during the policy tenure, the future premiums for the policy would be waived off.

 

• Waiver of premium on critical illness:

If the policyholder is diagnosed with one of the critical illnesses mentioned in the policy during the policy tenure, the future premiums for the policy would be waived off.

 

Of the four riders, two riders, i.e. waiver of premium on disability and waiver of premium on critical illness, come at a low premium. The rider for critical illness cover is the most expensive. Hence, you have to run sum research to find out if the additional benefits match up with the premium charged. And read the fine print of all the add-ons as they tend to be different for different insurance companies.

 

Number 5: Broadly look at the claim settlement ratio:

 

Claim settlement ratio usually attracts a lot of consumer attention. It indicates the efficiency at which the policies are settled by the insurance company. So when you see the 95 percent in the claim-settlement ratio column, it means 95 out of the 100 claims reported to the insurance company were settled.

 

However a word of caution here. The claim settlement ratio is merely an indication. If the claim settlement ratio of a company is more than 95 percent, then the company has been very efficient about settling claims. You really don’t need to go much deeper into it to see who has 99, or who has a 98.5 percent ratio. You should consider the claim settlement ratio as a filter rather than a key decision-making criteria.

 

Bottomline:

 

Term life insurance is a long term contract between you and your insurer, and it will benefit your family when you are not there. It is in your best interest to choose the right plan for your family by considering all the five factors discussed in the article.

 

Source: ETMoney

Export Credit Insurance – an overview

Our Credit Insurance Policy is designed for companies that are selling their goods and/or services on credit to overseas buyers. This policy provides coverage to companies for outstanding receivables that are within approved credit terms, thereby protecting the Insured against non-payment risk by its buyers.

 

Scope of cover

• The policy covers loss due to any or all of the following risks:

• Commercial Risk

• Non payment by the buyer – protracted default

• Insolvency of the buyer

 

Political Risk

 

• Military or civil war, revolution, riot or insurrection

• General moratorium on payment by the government of buyer’s country

• Cancellation of import license

• Government decision preventing performance

• Political events, economic difficulties, legislative or administrative measures preventing payment

• Non payment by government buyer

• Premium

• The premium is expressed as a rate in % of the insurable turnover

 

Basis of premium calculation:

 

• Extent of coverage sought

• 70% / 80% / 90% of the individual bill

• Risk rating of business sectors

• Countries included in the portfolio

• Insured turnover

• Trade losses of insured

• Exclusions

 

Significant exclusions are:

 

• Non-payment arising due to trade disputes

• Sales to a private individual who intends to use the goods or service for non-professional purposes

• Sales to an associate company (political and AOG risk can be covered)

• Sales contracts where payment is received in advance

• Sales under irrevocable and confirmed Letter of Credit

• Loss due to foreign currency fluctuations

 

Nuclear risks

 

A war between two or more of the following countries: France, China, Russia, the United Kingdom and the United States of America
A war between the Insured’s country and the country of the buyer

 

Source: ICICIlombard

What is Trade Credit Insurance?

Your business is likely to be affected by risks which are beyond your control. These entail commercial and political risks. Trade credit insurance has been especially formulated to protect the policyholder’s business against risks which are beyond their control. A comprehensive trade credit insurance policy ensures improvement of bottom line quality, increase profits and reduce risks of unforeseen customer insolvency. You can also offer credit to new customers. This improves funding access at competitive rates. This is an insurance for short term account, due within 12 months.

 

Benefits of Trade Credit Insurance Policy:

 

Trade Credit Insurance has many benefits, they have been listed below –

 

• It protects your business against risks which are out of your control.

• It improves bottom line quality of the business.

• It increases profits and reduces risks of unforeseen customer insolvency.

• It lets you offer credit to new customers.

• It improves funding access at competitive rates.

• It protects from anticipated earnings restatement.

• It optimises bank financing. This is done by insuring trade receivables.

• It supplements credit risk management.

 

Trade Credit Insurance Covers:

 

Trade Credit Insurance provides coverage against commercial and political risks for your business. This insurance helps companies attain goals by turning over their sales into cash conversation.

 

• Covers the complete turnover with stipulated limits. This is done for top purchasers. For small purchases the limit is discretionary.

 

• This insurance provides coverage to large purchasers of clients.

 

• Open accounts sales-export and domestic are protected by trade insurance against non-payment from the purchaser. This can be caused due to buyer insolvency i.e. if the buyer declares bankruptcy of business, buyer doesn’t declare bankruptcy but is unable to pay (protracted default), political risk like inconvertibility of currency.

 

Who is Trade Insurance ideal for?

 

As mentioned, Trade Credit insurance assists companies who sell their goods on open account basis. They seek protection by manufacturers and wholesalers, who dispatch goods on credit. This targets both domestic and off-shore customers.

 

Example of credit insurance

 

Say your company has profit margin of 5%. But one of your buyers piles up a debt of Rs. 100,000 on you. In this scenario, you need to create enhanced sales worth Rs. 2,000,000. This is required to compensate for lost profits. If your company faces non-payment, it makes your company weaker by reducing your company’s investment power. If you have a comprehensive credit insurance policy, you can handle the account receivables and lessen the losses of the company in case there is a non-payment. This type of insurance is tailor-made according to the size of your company, the type of business, business needs and the sector your business belongs to. This insurance is extended from small-medium entreprises (SMEs) to large multinationals.

 

Trade Credit Insurance Claims settlement process:

 

It is a quick and hassle free process to settle your trade insurance claim. Just ensure that you furnish all the essential documents (valid and duly filled/stamped) with your claims from. For further details on this, seek assistance from your insurance provider.

 

The aforementioned reasons clearly show how buying trade credit insurance is a smart and wise choice. But before you settle down with buying a certain policy, make sure that you do a thorough groundwork and identify your requirements, i.e. exactly what do you need the trade credit insurance cover for.

 

Source: Bankbazaar

Here’s why one should not fall for guaranteed life insurance plans

Life insurance companies rule the roost in the last few months of the tax saving season. The flavours of the season are traditional life insurance policies — endowments and money-back, for instance — with guarantees thrown in. In a falling interest rate scenario, such guarantee works as a bait to entice those looking at life insurance for tax benefits.

 

Guaranteed life insurance plans are the mainstay of almost all insurance companies. In such plans, instead of declaring bonus, which can vary depending on the profits that the insurers make, insurers declare a ‘guaranteed addition’ (GA) or ‘guaranteed return’ in lieu of bonus. On the face of it, such plans appear attractive with lots of guarantees thrown in at different stages of the policy. After all, the maturity amount is guaranteed and so are the monthly payouts.

 

What are the guarantees?

Do not be surprised if such plans boast of guaranteed addition of 7-9 per cent of premium per annum or guaranteed payouts of 126-138 per cent of the annual premium each year. Looking at these figures, who would not fall for such guarantees?

 

What are the actual returns?

The guaranteed addition is not equivalent to the actual annualised return. These guaranteed benefits accrue only on maturity and hence the actual return will not be what is perceived or told to the customer. Guarantee always comes at a cost, therefore, the returns, after adjusting for the costs because of the guarantee, are low in such plans.

 

Although actual returns would depend on one’s age, term and premium amount, the average IRR (internal rate of return) in most traditional plans, including money-back, endowments, lie between 4 and 6 per cent per annum. The plans with guarantees would carry even lower returns.

 

An example
Let’s see how a typical guaranteed plan works. Assuming there’s a guaranteed plan for a 10-year term, but with a premium paying eight-year term. The plan offers guaranteed payout of 150 per cent of premium every year after maturity of 8 years.

 

It means that the premium is to be paid for 8 years, but life cover will run for 10 years. After maturity, payouts will happen for the next 8 years. Illustratively, if the premium is Rs 20,000, it has to be paid for the initial 8 years. Thereafter, from 10th till the 17th year, there will be annual payout of Rs 30,000. The IRR in the above plan comes to 2.9 per cent per annum!

 

Types of guarantees
The structure of the guaranteed plans is not the same across insurers. Some may offer a guaranteed return based on the premium, while others on the sum assured. The guarantee may also differ based on the term of the policy or even the premium paying term. Also, in some plans, the guaranteed returns get added to the policy from the second year onwards, while in some, it may start at a later date.

 

Some of these plans are similar to money-back plans wherein there is regular flow of income at regular intervals, while in some, there could be a lump sum payment on maturity. Further, in a few of them, payouts happen after maturity for a certain number of years.

 

Guaranteed traditional plans gets complex

The sales pitch could be anything, but hidden beneath the complex wordings of insurance plans is the payout structure. The traditional life insurance, representing the endowments and the money-back kind of policies, has undergone a sea change. The terms and conditions of the payout are so convoluted that comprehending it may not be an easy task for many.

 

Sample this: The premium, for a specific age and sum assured (SA), is paid for a limited period (say, 5 years) while the term of the plan is 15 years. Based on the above parameters, the insurer will calculate a guaranteed maturity value and depending on that, will start paying a certain percentage of it as guaranteed cash amount starting the non-premium payment period (from the 6th year) till the end of the term.

 

Similarly, there could be a guaranteed plan in which every 5th year, 125 per cent of premium is paid out, while the GA is added to policy each year, to be had on maturity along with SA (less amount paid every fifth year). In few other guarantee plans, the payout could be entirely on maturity, including GA and SA.

 

Unlike in the past when they were simple and straightforward to understand, the newer versions have lots of twists and turns in them. With guarantees thrown in, such plans may appear attractive, but the actual return in them is around 5 per cent per annum, or even lower.

 

Conclusion
Buying life insurance merely to save tax could be financially damaging. Traditional plans are inflexible and lock in funds for 15-30 years with a return of 5 per cent. Stay away from traditional insurance plans, with or without the inbuilt guarantees. Rather, meet your protection need through a pure term insurance plan and park your savings in Public Provident Fund (PPF) or Equity Linked Savings Scheme (ELSS) for meeting long-term goals, while keeping the tax liability at bay.

 

Source: Economictimes

5 reasons why you should not take term insurance until you turn 75

Got a term plan for your family? Or may be you’re planning to take the term plan in a few days. If you are, good for you!. One of the biggest questions, every person considering term insurance has, is – “Should I take the cover for the maximum period?”. This is exactly what Chetan also asked on a forum.

 

Just like him, hundreds of investors have the same question over and over again, and we tell them, “Just take it only until you reach 60 years of age.”

 

And they happily ignore our suggestion; as if we are crazy, suggesting this to them. The “Insurance only till 60 years” looks kooky to them – kind of a “wrong deal” and they want to get “maximum benefit” out of the term plan. “The chances of my family receiving the claim amount is higher when I am covered for long” is the common thought process of every person who is in the mad rush of buying the highest possible tenure.

 

Trust us, that’s flawed thinking and we will explain why. More than a sermon, think of this article as a discussion, where we put some points in front of you and you reflect and ask yourself – “Does it really make sense? or not?” and then make your own decision. So here are those 5 reasons on – why you should not take Insurance till the age of 75 years or more

 

1. You don’t need it beyond your working life

You really need to ask yourself the question – “Why am I taking Life Insurance?” and the answer is – “Because right now, I don’t have enough net worth, which will help my family if I am gone” or in other words – “Because my family is financially dependent on me.”

For a person who is not earning and does not bring money home, his death will cause family only emotional loss; not financial loss. Hence, logically you need to cover yourself through a life insurance product, only for the time you are working and others are financially dependent on you.

 

2. You will have “probably” have enough wealth by the time you retire anyway

Stretching the 1st point, if you are taking life insurance cover until you are 70-75 years, will you really need it at that time? Do you really feel that you will have any reason to have a cover of 1 crore that time (after 30-40 years?) . I am sure (more confident than you), that you would have completed all your financial goals by that time, you will have your own home by that time and you will have done everything in your life by that time. You focus area at that old age will be very different than what you focus on right now.

 

To understand this point, you have to stop for a moment and go into 2040-50; when you are retired and close to the heaven’s door. Are your children really financially dependent on your income – which does not exist? Is your spouse dependent on your income? You must have already accumulated enough wealth by that time and you must be getting some income out of that. Your death has nothing to do with family cash flows at the time.

 

3. The premium factors in your tenure already

 

Most of the people who feel that they are smart enough to take term plan till 75 years, forget that on the other side is a professional business running for decades now. They have hired people who are 10 times smarter, who design products (they are called Actuaries) that generate large profits for companies and not investors. Life Insurance is a “for-profit” business. They design things, so that they earn profit. If a company allows you to take a plan that lasts until you turn 75, why have they done that? Why did they allow that to happen? The premiums they charge already factor in everything. You pay premiums to get that term plan, it does not come free!

 

4. You will live longer – and they already know that.

Like I said in my last point, companies are “for-profit” businesses. They will not issue you a policy if your chances of living beyond 75 is not high. If you are a healthy person, already earning well, have access to good health care, what are the chances you will live beyond 75 years of age? Extremely high, that’s what!

 

Look around you – Are people dying early on average? No, you see people living beyond 80-85 already and here we are talking about your future which is 30-40 years away, when the average life expectancy of an average person in India would be closer to 73-76 years anyway (as per projections by govt studies.)

 

Now just imagine this … Compared to the 1.25 billion people in our country, are you in top 25% or lower?

 

Which means that you have much much better prospects to live beyond 80-85 years. Which brings me to another point, that you should seriously worry about about your retirement planning a lot more than the less important question of insurance beyond 70-75 years.

 

Even when we do financial planning for our clients, we make sure that we plan for their retirement beyond 85 years and have them covered only till 60 yrs or even lower if they feel they will retire earlier. The important point to understand here is that, a life insurance coverage is just a support for your family in your early life when you are making money, your financial replacement, if you will. So when a life insurance company issues you a term plan until 75 years, it’s not you who are smart, but the company! They know, with a really high degree of probability, you will keep paying the premiums till 75 years.

 

It’s all chance. Yes, there will be people who will die before they reach 75 years of age and yes, their family will get a lot of money, but it really is just the game of chances … Companies make profits because of those who will live beyond 75 years and not by those who die before that.

 

5. The value of your sum assured is peanuts later

I hear it most of the time – “I am taking the term plan till 75 years, so that even if I die, my family will get the money. So, the higher the tenure, higher the chances of making money.” But they forget that by doing so, they are actually helping the insurance guys make profit, but lets say you die at 70 years. Celebrations! Your family will get that 1 crore, which at this moment sounds good, but will not be worth a lot that time.

 

Let me show you the mirror that lets you look into the future 🙂

 

Let’s say you are a 30 year old guy, and your monthly expenses are 40k per month. You say to yourself, “Let me take that term plan worth 1 crore so that in case, I die my family can get 1 crore which will provide them some good monthly income.”

 

It would be very good number if you die early in your life! . With each passing year that 1 crore will be worth less. If you die the next year of taking the term plan, the worth of that 1 crore is pretty much same, 1 crore. But if you die after 10 yrs, that 1 crore will be worth 50 lacs in today’s world. So getting 1 crore after 10 yrs is same as getting 50 lacs right now. Are you getting my point? The money you get in term plan is a constant number, not linked to inflation!

 

So imagine you have taken the term plan till 75 years and you die at 70 (after 40 yrs of taking the term plan), what is the worth of that same 1 crore at that time? Hold your breath! It’ll not more than 6-7 lacs assuming a inflation of 7% and even if inflation for next 40 yrs is a small 5%, it would not be worth 15 lacs today! . So when your family gets that 1 crore after 40 yrs, it’s kind of worthless. No one would be depending on that money anyway; it’s just a bonus on your children’s inheritance money!

 

Act like a real informed and smart investor

I have been seeing this madness for many months now and was constantly wondering why people are focusing so much on this small thing called “long tenure” in the term plan. I see investors abandoning one insurance company for another just because the other company is offering a term plan till 75 years.

 

You are allowing yourself to fall into a trap if you do this. If you have already taken the term plan till 75 years, do not worry … do not cancel it, just let it run it’s course. Stop paying premiums when you feel that your family can be taken care of, by the wealth you have generated. If you are planning to take a term plan right now, take it for as long as it takes you to retire, probably till 55 to 60 years, but not beyond that.

Source: Jagoinvestor

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