What you should know before taking Insurance cover for Retirement
Treat insurance as just that : A
life cover
Not as a nest egg for retirement or
as a tax saving instrument. Life Insurance Corporation (LIC)
sells a few plans, such as Jeevan Dhara, Jeevan Akshay
and Jeevan Suraksha, as savings plans for retirement.
The cover in all these schemes has two components - a
monthly pension and a guaranteed lump-sum payment in the
event of the insured person’s death. In other words,
interest and return of capital. You have several options
within each scheme, with minor variations in the design
of pension periods and life cover. In some plans, LIC
offers pension for life but gobbles up the capital.
You may also choose a plan without a
life cover, offering only a pension. Should you go in
for one of these? Not really, if your objective is to
save, since the returns on these plans are unattractive
compared with what you might get elsewhere. Consider
this. Jeevan Suraksha, for example, has five options.
The minimum age of entry to the policy is 25 years and
the maximum, 60 years. You can opt to receive pension
when you turn 55. Tax breaks are available under section
80 CC of the Income Tax Act on contribution to the
pension plan.
But the pension itself will be fully
taxable. If you are in the 30% tax bracket and set aside
Rs 250 a month in Jeevan Suraksha, it amounts to
investing Rs 175 a month, allowing for the tax break.
This, over 30 years, according to LIC’s tables, will
grow to a corpus of Rs 5.84 lacs, without a life cover
and even less with one. On this capital, LIC pays about
13% a year as pension, fully taxable. If you check out
the public provident fund, the Unit-Linked Insurance
Plan of the Unit Trust of India and systematic
investment plan of a good mutual fund, you will find the
return at least two-three percentage points higher.
This reasoning holds good for other
saving plans in LIC’s bag, too, like Jeevan Balya and
Jeevan Sukanya meant for children’s future needs. A
similar logic applies to the tax breaks you get in
opting for a life cover. Whatever cover you go for, you
will get some tax break anyway. And the maturity amount,
if you survive the full term of the policy, is exempt
from income tax. But treat these as incidental.
Not as a nest egg for retirement or
as a tax saving instrument. Life Insurance Corp (LIC)
sells a few plans, such as Jeevan Dhara, Jeevan Akshay
and Jeevan Suraksha, as savings plans for retirement.
The cover in all these schemes has two components -- a
monthly pension and a guaranteed lump-sum payment in the
event of the insured person's death. In other words,
interest and return of capital. You have several options
within each scheme, with minor variations in the design
of pension periods and life cover. In some plans, LIC
offers pension for life but gobbles up the capital.
You may also choose a plan without a
life cover, offering only a pension. Should you go in
for one of these? Not really, if your objective is to
save, since the returns on these plans are unattractive
compared with what you might get elsewhere. Consider
this. Jeevan Suraksha, for example, has five options.
The minimum age of entry to the policy is 25 years and
the maximum, 60 years. You can opt to receive pension
when you turn 55. Tax breaks are available under section
80 CC of the Income Tax Act on contribution to the
pension plan.
But the pension itself will be fully
taxable. If you are in the 30% tax bracket and set aside
Rs 250 a month in Jeevan Suraksha, it amounts to
investing Rs 175 a month, allowing for the tax break.
This, over 30 years, according to LIC's tables, will
grow to a corpus of Rs 5.84 lacs, without a life cover
and even less with one. On this capital, LIC pays about
13% a year as pension, fully taxable. If you check out
the public provident fund, the Unit-Linked Insurance
Plan of the Unit Trust of India and systematic
investment plan of a good mutual fund, you will find the
return at least two-three percentage points higher.
This reasoning holds good for other
saving plans in LIC's bag, too, like Jeevan Balya and
Jeevan Sukanya meant for children's future needs. A
similar logic applies to the tax breaks you get in
opting for a life cover. Whatever cover you go for, you
will get some tax break anyway. And the maturity amount,
if you survive the full term of the policy, is exempt
from income tax. But treat these as incidental.
There is none. When you scout around
for the right life insurance policy, your insurance
agent will try to convince you about the merits of going
for one with profit, a policy that offers a `bonus'.
Remember, the agent is only trying to increase his
income. A `with-profit' policy will cost you more. Since
the agent's commission is worked out as a certain
percentage of your premium, he is obviously interested
in selling it to you to earn a few more bucks. But is
there any profit to be made?
Let's check it out with an example.
You are 20 and want to invest in a `with profit'
endowment assurance policy. You want to take a cover of
Rs 1 lacs for 25 years. Your annual premium will work
out to be Rs 3,746. This is about Rs 1,770 more than
what you would pay on a `without profit' policy. In
1997-98, LIC's bonus rate on an endowment policy for 25
years was Rs 71 (on every Rs 1,000 of the sum insured).
This means, on maturity of the policy, you will earn Rs
1.78 lacs (Rs 71 x 100 x 25) as bonus.
But remember, you will have to pay an
additional Rs 1,770 a year over the normal premium for
25 years to earn this. If you invest this amount
elsewhere at a 12% return, you will earn about Rs 2.64
lacs at the end of 25 years. So, a bonus tag in a policy
will fetch you Rs 86,000 less than what a conservative
investment would earn. Doesn't it make sense to prefer a
low-premium policy?
You can't afford to forget about life
insurance, just because you have taken a life insurance
policy. It's only too tempting to do so, particularly if
your bank deducts premium regularly from your account
and sends it to LIC. Since life insurance is a long-term
product, over the years, you might get so used to this
routine deduction that you may tend take it for granted
and ignore reviewing life insurance cover in your
financial planning exercises in the future. Assumptions
concerning the financial needs of your family, the state
of your health, anticipated inflation rate and the
financial performance of your other investments may all
change a few years later.
You must remember that these are
variables and are closely linked to your risk cover.
Ideally, you should review your life insurance cover
every year and check whether any of these variables has
changed. Also, an increase in the number of dependents
in your family on your income is going to raise the
stakes. For example, if you had one child when you took
an insurance policy but now have another, you may have
to rework the numbers and take an additional cover.
Right now, you have no option but to
go to LIC if you want to take a life cover. Lack of
competition has had a damaging effect on LIC's
functioning. Consider this. An average Indian lives much
longer today than he did two decades ago. This means
that he should pay less for a life cover since the
chances are that he will live longer than he did back
then. But on a whole range of policies that LIC offers,
there has been no change in premium rates since 1980,
when mortality tables were last computed on insured
lives. There has been some tinkering in bonus rates but
not at regular intervals.
In life insurance, the consumer is
certainly not the king. Moves to let the private sector
and foreign firms into the insurance sector have been
repeatedly aborted. But it is almost certain that they
will get in -- if not today, certainly tomorrow. When
that happens, you will not only have new insurers but
also more products to choose from. Even LIC's own
service standards may improve. Premium rates may be
realistically revised. Chances are that all this will
happen within the next two years, if not earlier. If all
your insurance needs are tied up by then, you won't have
any room to manoeuvre and you won't benefit. A tip: keep
some portion of your insurance risk uncovered so that
you will be able to dictate terms to insurers who will
be competing to woo you.
The ultimate beneficiary of your
insurance is not you, but your dear ones. They should
know what you have done for them. Share the details.
Consult them when planning a policy. Leave clear
instructions about your policies and, more important,
let your spouse know where you have kept the papers.
Inform your family of its rights. For example, LIC is
expected to settle a claim within six months of someone
filing it. Your kin will thank you for making your death
a non-event for them, at least financially.
REVIEW YOUR INSURANCE NEEDS
REGULARLY
You can’t afford to forget about
life insurance, just because you have taken a life
insurance policy. It’s only too tempting to do so,
particularly if your bank deducts premium regularly from
your account and sends it to LIC. Since life insurance
is a long-term product, over the years, you might get so
used to this routine deduction that you may tend take it
for granted and ignore reviewing life insurance cover in
your financial planning exercises in the future.
Assumptions concerning the financial needs of your
family, the state of your health, anticipated inflation
rate and the financial performance of your other
investments may all change a few years later.
You must remember that these are
variables and are closely linked to your risk cover.
Ideally, you should review your life insurance cover
every year and check whether any of these variables has
changed. Also, an increase in the number of dependents
in your family on your income is going to raise the
stake. For example, if you had one child when you took
an insurance policy but now have another, you may have
to rework the numbers and take an additional cover.
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