Unhappy with your non-linked policy? Consider early surrender

 

Unhappy with your non-linked policy? Consider early surrender

But if you have held it for long, run the numbers; continuing may be prudent

In December 2023, the Insurance Regulatory and Development Authority of India (Irdai) issued an exposure draft on the surrender value of non-linked insurance policies. Had those proposals been implemented, they would have made surrendering of life insurance policies less painful for policyholders.

The guaranteed surrender value (GSV) rates that apply to non-linked policies from April, 2024 have not changed. The regulator has maintained the status quo on rates.

The revised surrender value guidelines issued by Irdai are a reiteration of the regulator’s intent to ensure that customers stay invested in life insurance policies for the long term.

These GSV rates are lined to holding period. If a policyholder surrenders his policy before it completes three years, the GSV will be lower than if he surrenders it between the fourth and the seventh policy year.

 

Insurer’s perspective

An insurance company creates long-term liabilities for itself upon selling non-linked, traditional plans (money-back and endowment). To meet them, it creates long-term assets by investing in long-tenure instruments, usually government securities and equities. When a customer surrenders the policy, the insurer has to unwind these investments and could have to take losses if interest rates are up or equity markets are not doing well. Insurers argue that making surrendering of policies painless and easy would lead to an asset-liability mismatch for insurers. 

With a significant portion of insurance plans invested in long-term assets such as long-term bonds and equities, immediate surrender would necessitate insurers to maintain more liquidity, requiring investment in short-term assets instead. This would ultimately impact the maturity returns of customers.

Higher surrender costs in the initial years deter the temptation to withdraw while ensuring that insurance providers are able to service these policies effectively without affecting their bottom line.

Insurers plan to modify their product mix. A separate set of products is expected to be launched with higher surrender values than the minimum required, which will cater to customers seeking higher liquidity, albeit with slightly lower maturity returns. 

 

 

Customers get a bad deal

The policyholder always takes a loss under this GSV regime. For however long a policy is held, the policyholder never gets the entire premium back, forget about a return on the total premium amount. They get 90 per cent of total premiums back even in the last couple of years of the policy term.

Insurers pay a special surrender value, but that is not guaranteed and depends on a host of factors.   

Financial advisors disagree with insurers’ argument about having to unwind long-term investments. The asset-liability mismatch argument does not hold since insurers create long-term assets based on their past experience of surrenders. Hence, there is no excess long-term investment that needs to be unwound.

Insurers also argue that it takes a lot of effort to sell a policy, due to which they have to pay high upfront commissions to agents. These costs need to be deducted when a policy is surrendered. Investment products from all other regulators have moved to trail commissions which in turn prevents mis-selling.

 

Issue of low persistency

Persistency ratio is the percentage of the total number of policies or premium amount that remains in force from inception to various periods. On average, after five years, the numbers of life insurance policies in force drops to around half.

A major reason for low persistency is mis-selling. When customers realize they have been sold an unsuitable policy, they exit. When an exit happens, whether early or late in the tenure, at no point does the insurer, agent, distributor or banc assurance partner suffer a loss. The only party that ends up paying a heavy price owing to the high surrender charges is the customer.

 

Enter with caution

Avoid mixing insurance and investment. Any product that pays a commission as high as 35 per cent in the first year to the agent or the distributor cannot be good for the customer.

Most traditional plans have an internal rate of return (IRR) between 4 and 6 per cent. These are low returns for a 20 to 30-year product.

The only class of customers who may perhaps invest in these plans is the financially non-savvy ones who have so far invested only in real estate and gold. Such customers are often afraid of losing money in the financial markets. For them the safety of insurance products is a big pull.

The rest, who are either financially savvy or have access to good advice, may avoid them.

 

When should you surrender?

Policyholders in the early part of the policy tenure, who feel they have made the wrong choice, should exit despite the considerable loss.

Policyholders must overcome the sunk cost fallacy and surrender these policies sooner rather than later.

If you have been in the policy for three to five years, take the loss and exit. Once you have crossed the seven-or 10-year mark, get and informed person to calculate the pros and cons. In many cases, it may make sense to continue servicing the policy.

SURRENDER VALUE: WHAT’S THE FUARANTEED PAYOUT?

Non-single premium policy

 Years of surrender                                               % of total premiums paid

2^nd                                                                                   30

3^rd                                                                                    35

4^th to 7^th                                                                          50

Within 2 years of Maturity                                             90

For More Details: Pooja Manoj Gupta, visit www.giia26.com

 Email: pmgiia26.com Mobile  9868944340

MAKE CLAIMS EASIER: SHARE POLICY INFO, FILING INSTRUCTIONS WITH FAMILY

 

MAKE CLAIMS EASIER: SHARE POLICY INFO, FILING INSTRUCTIONS WITH FAMILY

In numerous instances, members are unaware of the policy’s existence, let alone its details

Life insurance policies sold through agents tend to have a higher rate of unclaimed funds compared to those sold via the banc assurance channel or digital platforms.

“Unclaimed life insurance funds refer to the death or survival benefits from policies that have not been claimed by beneficiaries or policyholders.

Policyholders and beneficiaries need to be proactive to avoid funds that belong to them from going unclaimed.

 

Why funds go unclaimed

Lack of awareness: If policyholders fail to share crucial details with their beneficiaries, it can hinder the claim process. “We have come across instances of families being unaware of the purchase of a life insurance policy.

Policies can remain unclaimed due to beneficiaries predeceasing the policyholder or the absence of a nominated beneficiary. Sometimes, the nomination is not filled or updated with the insurer.

Policyholders should update their mobile number, email address, bank details, and address with the insurer. “Updating beneficiaries’ contact details is crucial for the insurer to identify rightful beneficiaries in case of unforeseen events.

Forgotten policies: People with multiple policies may forget those purchased years ago or for small sums. “Since many policies have long tenures, sometimes extending up to 100 years, policyholders at times forget about certain policies.”

Know-your-customer (KYC) updates: Failure to update Know Your Customer (KYC) documents or bank details can also prevent policyholders or beneficiaries form claiming benefits. Sometimes, policyholders cannot be contracted due to change of address and other contact details due to, say, marriage, and relocation to a different place or abroad, or switch to non-resident status.

Claims not submitted: Policyholders and beneficiaries need to proactively initiate the claims process. “A significant portion of unclaimed funds arises due to policyholders failing to submit maturity claims or death claims.

Sometimes, claims are deemed non-payable due to disputes or other reasons.

Business insurance: In these policies, unclaimed funds can arise due to disputes among partners or the dissolution of partnership and companies. “Disputes may arise in Keyman insurance policies if employers or proposers refuse to pay.

Where are unclaimed funds parked: Insurers try to locate and notify beneficiaries through letters, phone calls, and other means of communication.  If no response is received within 12 months, the amount is classified as unclaimed. These funds are transferred to the “Unclaimed funds” account and invested in market-linked funds. “These funds are invested according to unclaimed fund regulations and are expected to earn 4 per cent or more per year.” When policyholders or nominees reach out, insurers pay them the death or maturity benefit. After 10 years unclaimed funds, are transferred to the Senior Citizens’ Welfare Fund (SCWF).

Checking for unclaimed funds: Policyholders or beneficiaries should search the insurer’s website for these funds. “Insurers are required to display information about unclaimed amounts of Rs 1000 or more on their websites.

Insurers offer online search facilities on their websites. “Individuals can search for outstanding claims using basic details such as the policyholder’s name, date of birth, policy number, and permanent account number. The customer support department of insurers also provides guidance.

 Policyholders or beneficiaries can also visit a branch. Insurers usually ask for bank details and KYC documents. “If a beneficiary reaches out for death benefit, their identity proof, policy document, and proof of relationship with the deceased are asked for”.

Prevent unclaimed funds from arising: Policyholders must maintain records of all their policies and keep their family members informed. “Share policy details, contact information, and instructions for filling claims.

Regularly review policies to assess changing needs, update beneficiary information, and ensure that policies remain active. “Regular reviews help policyholders stay informed about their coverage and minimize the risk of funds being left unclaimed.

Shahane emphasizes that nominee bank details are crucial for processing unclaimed amounts. Customers should update their NEFTs to ensure they can receive instant payments.

 

Ø  Insures must transfer unclaimed policyholder amounts that are over 10 years old to the Senior Citizens’ Welfare Fund (SCWF) by March 1 each year

Ø  Policyholders or beneficiaries can claim their dues within 25 years from the date of transfer from the insurer to the SCWF

Ø  According to Section 126 of the Finance Act, 2015, unclaimed funds will escheat (be taken over) to the central government if not claimed within 25 years.

 

 

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile  9868944340

 

COMMIT TO MINIMUM 7-YEAR HORIZON AFTER RALLY IN GOLD

 

COMMIT TO MINIMUM 7-YEAR HORIZON AFTER RALLY IN GOLD

Gold scaled a new closing peak of Rs 65383 per 10 grams on March 11. The yellow metal has relied 17.8 per cent over the past year. While gold may remain volatile over the next few months, its prospects remain bright over the medium term.

 

What Sparked the rally

The rally in gold began towards the end of February, following the release of the Personal Consumption Expenditure (PCE) Price Index. This index aligned with expectations. Its release came on the heels of the January Consumer Price Index (CPI), which had exceeded expectations. The PCE price index mitigated concerns about inflation.

Other recent data has pointed to growing weakness in the US economy. Disappointing US ISM manufacturing and services data hinted at an economic slowdown. The latest US unemployment data also showed weakness in the labor market.

US interest rates may now be cut sooner. Earlier, the first rate cut was expected in June but now some market participants expect the first cut in May.

Positive drivers Fed policy, US economic concerns

The primary factor that will influence gold prices over the next 12 months is US Fed policy. US CPI inflation is gradually moving towards the Fed’s target of 2 per cent, supporting the case for rate cuts.

The US economy has so far managed to weather the impact of high interest rates sand tight credit conditions owing to fiscal spending and consumers running down their savings. Support from these factors may wane in 2024. A slowdown would prompt the Fed to lower interest rates. A non-yielding asset like gold becomes more attractive when global interest rates decrease. Historically gold and interest rates have been negatively correlated.

 

Geopolitical tensions: Tensions in the Middle East and the war between Russia and Ukraine are driving safe-haven demand for gold.

 

Central bank purchases : In 2023, central banks purchased 1037 tones of gold, according to World Gold Council data. This was only slightly less than the record purchases in 2022. This trend is expected to continue in 2024.

 

Elections : Numerous elections will take place this year, including in the US, India, and Europe. Political uncertainty could unsettle the equity markets and lead to gold buying.

Run up in equities : Equity markets, both globally and in India, have experienced significant rallies, leading to high valuations. Pullbacks may occur if earnings growth disappoints. Gold typically performs well during equity market corrections.

 

Physical demand : Despite high prices, countries like India and China have shown strong demand. The robust demand for physical gold is expected to support prices.

 

Inhibiting factors : If the US economy achieves a soft landing, wherein inflation decreases without significantly harming growth, and the Federal Reserve either postpones rate cuts or reduces the quantum of rate cuts, gold prices could experience a pullback. Investors should watch US economic indicators closely. Recent data have come in below estimates. Improvement in manufacturing and services PMI and labor market data could restrict upward price movement.

 

Expect near-term volatility

Experts expect gold to remain volatile over the next few months. Over the medium term, however, they are optimistic about the yellow metal’s prospects, considering the imminent turn in the US interest-rate cycle. Gold prices will remain elevated over the medium term as the yellow metal tends to perform well in a low interest rate scenario. Modi informs that his firm’s target for the year is Rs 69000 per 10 gram.  

 

Rebalance after run-up

Booking partial profits and rebalancing if allocation has exceeded 15 per cent. After the recent run-up, gold may experience price correction. New investors should stagger their purchases rather than buy lump-sum. Money suggests entering with a horizon of seven years or more.

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile  9868944340

Low credit score? Go for loan against insurance policy

 

Low credit score? Go for loan against insurance policy

Expect smaller loan approvals in policy’s early years, which may necessitate selling of investments instead

New regulations on the surrender value of insurance policies have come into force from April 1. Surrender value is the amount paid by an insurance company when a customer ends a policy before maturity. Under the new guidelines released by the Insurance Regulatory and Development Authority of India (Irdai), a life insurance policy’s value is likely to be lower if it is surrendered within three years, and higher if it is surrendered between the fourth and the seventh year. Experts are of the view that if you need funds, you should avoid surrendering your policy and instead avail of a loan against it.

In insurance, a long tenure holds the key. Substantial benefits typically accrue only after 20 to 30 years. That is why insures and experts recommend taking a loan instead of surrendering the policy.

Only some policies are eligible

Loan against insurance is available only against a few types of policies. If an individual owns a traditional life insurance policy with a savings component, such as an endowment or a money back plan, they can utilize it to obtain a loan for various financial purpose. Term plans, which only provide a death benefit and lack cash value, are ineligible. Similarly, unit-linked insurance plans (Ulips) may also not quality due to their returns being tied to the stock market.

 

Who offers these loans ?

Life insurance companies, banks and non-banking financial companies (NBFCs) offer these loans. Experts say it is better to approach the insurer (from whom you purchased the policy) for this loan. Banks will give you a slightly lesser amount compared to the insurer. Banks and NBFCs may also charge you a slightly higher rate.

Banks usually offer loans against life insurance policies in the form of an overdraft facility via the current account. Policyholder s who face frequent cash flow mismatches may consider the overdraft facility.

 

Low-cost loan

The interest rates on these loans are lower than on a personal loan. They are usually in the range of 9-9.5 per cent, compared to personal loans, which charge 12 per cent or more.

The amount lent can go up to 90 per cent of the surrender value of the policy. Banks and NBFCs typically provide loans within a span of four to seven days, while insurers take three to five days. Some insurers have adopted online processes, reducing the waiting time to just a couple of days. A loan against a life insurance policy is processed and disbursed fast since no extra checking or scrutiny is involved, when the loan is taken from the insurance company.

Availing a loan against a life insurance policy is convenient. The application process is simple. Even individuals with low credit scores qualify for this loan since credit checks are not required.

The repayment terms of this loan are also flexible. You can pay only the interest if you like. The principle can be paid at any point in time. He adds that it’s preferable to pay the principle as soon as possible so that the interest cost gets reduced.

Another benefit of these policies, are that defaulting doesn’t negatively impact the credit score. Lenders and insurers use the surrender value of the insurance policy to recover the unpaid loan amount, interest, and charges.

 

Small loan amount in initial years

One downside of these loans is that the loan amount will be small in the initial years of a policy. It may take years for a policy to accumulate significant cash value (or surrender value), thereby limiting the amount that can be borrowed. Returns on traditional plans tend to be in the range of 5-6 per cent. They will drop further if you take a loan against the policy at the rate of 8-9 per cent.

 

Liquidate investments

A life insurance policy is for the financial security of dependants. Taking a loan against it hurts that purpose. If you have some investments, take a loan against them. Policyholders should first explore loans against other assets like gold loans, mutual funds, stocks, bonds and property.

Withdrawing from debt instruments like fixed deposits and debt mutual funds, and even equities, is better than taking this loan.

If you don’t have assets to liquidate and there is no other choice, then a loan against an insurance policy is better than taking a personal loan.

Policyholders should keep paying the premiums on time (on the traditional plan against which they have taken the loan) and in addition purchase a term insurance policy to have a financial safety net for the family.

 

POLICY PAYOUTS IN VARIOUS SCENARIOS

• Loan amount mot paid and policyholder dies: Your family will get the sum assured but after deducting the loan amount

 

• You are not able to pay but your policy matures: The loan will get deducted from the maturity amount and the rest will come to you

 

• You are not able to pay, and loan amount and interest amount go beyond surrender value: Lender will foreclose the policy

 

• Note, since policy will be assigned to the lender: it will have first right on the policy to the extent of the money due to it

   For More Details: Pooja Manoj Gupta, visit www.giia26.com
   Email: pmgiia26.com  Mobile 9868944340

   

RETIREMENT PLANNING FOR WOMEN

 

RETIREMENT PLANNING FOR WOMEN

Save diligently to counter the impact of career breaks

 

On this International Women’s Day, let us first delve into why women’s retirement planning must differ from men’s. We will then examine strategies that can help you achieve this vital financial milestone. 

Key challenges

Women have a longer life span than men. Data indicates the average life expectancy at birth for both genders is 72 years in India It is 73.6 years for women and 70.5 year for men. Thus, women, on average, can expect to live for three years longer. For working women from well-to-do backgrounds, the life expectancy is likely to be even higher. Thus, women need to save more to cater to a longer lifespan.

Women, however, tend to experience disruptions in their careers. In their late 20s or early 30s, they might need to take a break or two to have children and raise them. This hampers their career prospects, earnings, and saving potential.

Even when they return to work, they find it difficult to devote time beyond the regular office hours due to their familial responsibilities. This hurts their prospects in competitive environments.

Inherited wealth is the most significant source of wealth creation globally. When someone inherits assets from parents in their mid-20s or 30s, it elevates them to a higher financial status. But in many parts of the country, women face unequal inheritance rights.

 

Start early

Women must begin to save from the day they start working to reap the benefit of compounding. Imagine you are aiming for a Rs 10 crore corpus by age 60. Let us assume a 12 per cent annual rate of return. If you start at 25, you would require a monthly investment of Rs 15000. If you delay the start to age 30 the monthly contribution increases to Rs 28000. And if you wait until 40, the saving required skyrockets to Rs 1 lakh per month. Women should Endeavour to save at least 15-20 per cent of their income for retirement.

 

Prepare for career breaks

Save money for career breaks. Being financially prepared will enable you to choose a better and more significant role on return. If you are financially desperate, you may settle for the first available option, which will affect your future earning and saving potential.

 

 

 

Setting up the retirement portfolio

For this long-terms objective, investing in equities is a must, as they alone have the ability to outpace inflation. Being overly risk-averse can hurt you.

If you earn a 12 per cent return form equities, your money will double in six years. If you invest in a fixed deposit that gives a post-tax return of 5 per cent, your money will double in approximately 14 years. Over a 35-year career span, the difference in final corpus will be massive.

Build an asset-allocated portfolio with a healthy mix of equity, debt, and gold using mutual funds.

To decide your equity allocation, use the 100 minus age thumb rule as a starting point, then modify it further by taking into account your life stage and risk tolerance.

Rebalance the portfolio once annually. Retirement plans (like Employees Provident Fund) where the employer makes a matching contribution.

Having your own health insurance cover is vital so that a large expenditure caused by a critical ailment does not derail your retirement saving journey.

Maintain an emergency corpus equivalent to 6-12 months of expenses to avoid touching your retirement corpus in case of a sudden need.

 

Mistakes to avoid   

If you leave investing for retirement until too late, it could prove to be a critical mistake. Overspending on children’s education and consumption needs can also hurt. Relying on gold alone to achieve retirement security is another fatal error.

Finally, take charge of your personal finances.

Delegating the responsibility of investing to male counterparts, like a father or a husband, often proves costly in case of death or divorce.

 

TERM PLAN

Critical for single women with dependents

• Single women who earn and have dependent children or elderly parents must buy adequate term cover
• Buy personal cover instead of relying on the group cover offered by the employer
• Decide the sum assured based on earning potential over a lifetime, or by taking into account the family’s current and future expenses and goals
• Buy cover early to lock in a lower premium rate
• Select an insurer with a claim settlement ratio of over 95 per cent
• Avoid insurance-cum-investment plans : The insurance cover is usually insufficient and the returns are low

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile  9868944340

INSURANCE FOR ELECTRIC VEHICLES, Ensure all-round protection for battery with add-on cover

 

INSURANCE FOR ELECTRIC VEHICLES

Ensure all-round protection for battery with add-on cover

Return-to-invoice, zero depreciation for major components are must-haves

Electric Vehicles (EVs) are fast gaining popularity. While they still account for only a small percentage of total automobile sales, their sales volumes are growing rapidly with each passing year. Customers must understand the nuances of EV insurance and ensure that their vehicles enjoy comprehensive protection.

 

Similarities and differences

There are a few similarities between the insurance covers available for internal combustion engine (ICE) vehicles and EVs. Third-party cover is compulsory for both. EV buyers should also ideally complement, it with a standalone own damaged cover, or buy a comprehensive cover (which includes both third-party and own damage cover).

Insurance for EVs is usually costlier.  The price of an EV is usually higher than that of a comparable ICE vehicle, so the insurance premium is also about 10 to 20 per cent higher.

Customers may need to buy a few add-on covers to safeguard their EVs. The battery, for instance, must be comprehensively covered. The battery contributes almost 60 per cent of the vehicle cost. Any major damage to the battery may involve replacing it completely as repair may not always be possible.

Many people buy their own charging stations. These are not normally covered in the main motor vehicle policy and must be additionally insured.

Cover the battery 

The manufacturer typically offers a warranty at the time of purchase. One can also buy an extended warranty for another year or two. In case of an EV, if something goes wrong with the battery, the cost burden is almost akin to purchasing a new vehicle; hence one should buy the extended warranty offered by the manufacturer, at least for the battery.

In addition, one should also purchase an add-on cover for the battery. If there is no external issue and yet your battery stops working or its performance reduces, those issues will be covered by the battery warranty. But if there is a sudden power surge due to which the battery stops working, or the battery catches fire, the battery add-on cover will come in handy in those circumstances.

The battery, charger and accessories should be covered even while the parts are detached from the vehicle, Furthermore, zero depreciation should apply at the time of claim settlement (including to the electric motor).

 Buy right IDV

As the EV grows older, make sure that it has the right insurance declared value ( or IDV, the sum insured in a motor vehicle policy). At present, the rate at which the value of an EV should depreciate each year is not clear. The thumb rule of 10 per cent depreciation each year.

Buy these add-ons

Experts suggest buying a return-to-invoice add-on. Even if your vehicle is stolen or damaged completely, you will get its original price, which may be higher than the IDV, as compensation.

It covers damage to the propulsion motor along with internal parts of the insured vehicle arising out of water ingression and /or leakage of oil or grease.

The EV add-on cover should come with roadside assistance services that EVs require, such as help with charging the battery, towing the vehicle to the nearest charging station, mobile generators, etc. The policy should offer coverage for regular updates and replacements so that there is coverage for the latest features. The insurance policy, according to him, should also offer incentives or discounts, considering the eco-friendly nature of EVs, and should leverage any incentives offered by the government. NCB Protection is another useful add-on. It protects the No Claim bonus (NCB) even if a claim is made during the policy period. 

 

CRITICAL CONSIDERATIONS FOR EV INSURANCE BUYERS

§  The coverage and exclusions of EV add-on covers may differ from one insurer to another, so read the policy document and understand both what is covered and what is excluded

§  In particular, understand battery related exclusion: your claim could be denied if you fail to maintain battery health or don’t charge it according to the manufacture’s  guidelines

§  Understand if there are limitations on the number of claims

§  Avoid repairs from unauthorised places or without the insurer’s prior approval

§  Be transparent about modifications made to your EV; failure to do so can lead to claim denial

 

 

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile  9868944340