It is interesting to note that 75% of premium, collected by LIC, is from ULIPs and 25% from non-linked products, but a number of policies sold in the market for small ticket, longer duration is 80% (non-linked) and 20% in ULIPs.
Unit Linked Insurance Products (ULIPs), which were the root cause of a spat between two regulators - the Insurance Regulatory and Development Authority (IRDA) and the Securities and Exchange Board of India (SEBI), continued to perform above expectations. According to TS Vijayan, chairman, Life Insurance Corporation of India (LIC), there is no crisis in ULIPs as they had phenomenal performance till now.
Speaking at the press conference, Mr Vijayan told reporters, "The customer's choice will be important. If market is good, customer invests in ULIPs. If interest rates are good, they prefer non-linked policies. We hope to give a thrust to traditional products because they serve the insurance purpose for longer duration, especially in smaller markets. Insurance products should be long-term contractual and savings products. Regular premium policies give discipline."
It is interesting to note that 75% of premium, collected by LIC, is from ULIPs and 25% from non-linked products, but a number of policies sold in the market for small ticket, longer duration is 80% (non-linked) and 20% in ULIPs.
Speaking about the new changes in regulations from 1st September by IRDA, the LIC chairman said he does not see much impact on business with respect to it. IRDA has set out new norms for ULIPs from 1st September, which means lower commissions and lower surrender charges.
Mr Vijayan says, "Surrender charges and expense ratio were already changed. Some revisions will be done to products so that there will be no gap between existing and new products."
Insurance business has 150% solvency norms, well capitalised and regulated business. LIC has certainly adapted to changes to retain its market leader position. According to Mr Vijayan, the new changes from 1st September may in fact help LIC more than any other life insurance company.
LIC is the oldest and largest insurance company selling traditional plans for decades before the advent of ULIPs and its selling machine is well-oiled to sell such plans. The insurance major has huge workforce of 15 lakh agents that will increase by 20%. TS Vijayan cited high termination ratio because the job has to suit agents. He opined that out of three lakh agents they plan to recruit; only two lakh will stay after a year. Many LIC agents work on a part-time basis selling about 37 insurance policies every year.
Mr Vijayan says, "Insurance is a matter of risk business and we are prepared for any eventuality. Any change is a challenge. We are prepared to take advantage of changes. We have to bring three-four new products every year in the insurance business. This year, we will have higher number of new products due to changes in regulations. We will have a mix of traditional and ULIPs."
The LIC chief emphasised on annuity business to help guaranteed pensions. According to him, LIC HFL (LIC Housing Finance) is a listed company and is doing extremely well, LIC Mutual Fund is doing very well, its credit card business started operations last year and has sold 25,000 cards till March 2010. LIC will have an international wholly-owned subsidiary in Singapore soon, he said.
LIC is implementing changes in Information Technology (IT) with the help of an internal IT team and Wipro. The IT platform will move from traditional COBOL (Common Business Oriented Language) platform to new web-based technology. New customer relationship management (CRM) initiatives will involve service requests to be accepted by 10,000 agents and development officers. This will help to service from numerous touch points without opening more offices. There will be customer education initiative to help understand what to look for when buying insurance products and how to avail best services.
LIC lapse ratio is 3%. There are several CRM initiatives for reviving lapsed policies. One is to pay old arrears in instalments, not bulk. The other is a special waiver scheme. The relationship renewal programme is to help find if customer is adequately covered.
Till the year 2000, there was a monopoly of the LIC in the Indian market. It then faced challenges with new competitors. There were no restrictions to open branches, bringing insurance products, agents, or money after insurance business was opened for competition. Mr Vijayan says, "The company felt threatened, but made changes and prospered."
LIC has given a record dividend of Rs1,029 crore to the central government after declaring valuation surplus of Rs23,478 crore for the year 2009-10.
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Life insurance should be purchased only if required and to the extent required. A. N. Shanbhag is perhaps the best Indian writer on investment and financial planning. This is what he has to say about life insurance:
"There is no substitute for life insurance.
Life insurance is not an investment.
It is a social and commercial instrument to provide financial security in the event of death of the insured.
If dependents can look after themselves comfortably without the amount insured, life insurance is not needed.
Life insurance is like a life saving drug. If you need it, you must have it irrespective of the cost. If you do not need it and you take it, it can have very bad side effects on your financial health."
So the first question to be asked is: Do you need life insurance?
The answer is simple. You need life insurance only if you have financial dependants. If no one is going to be financially affected by your absence, you do not need life insurance.
The next question is: How much life insurance do you need?
The answer is, enough to keep your financial dependants in the lifestyle they are used to, ensure that they are debt-free, and provide for their reasonably foreseeable future needs. In other words, enough to compensate your dependents for the adverse financial situation caused by your absence.
Let us take a simple example for attempting to calculate how much life insurance a person needs. Suppose there is a family consisting of husband, wife and two very young children. Let us assume that the monthly normal expenditure of this family is Rs 25,000/-. That means a cash requirement of Rs 3 lakhs per annum, to ensure that the family lives in the lifestyle it is accustomed to.
Now supposing the husband is the sole bread winner of this family. His first concern will be that the family will not have the cash flow of Rs 3 lakhs per annum, in case he should suddenly be removed from the scene. Therefore, he must calculate what size of corpus must be invested in a safe avenue of investment like a bank fixed deposit, to ensure that the family gets Rs 3 lakhs per annum. If a corpus of Rs 43 lakhs is invested in a safe avenue like a bank fixed deposit at an average rate of interest of say 7% p.a., it will provide the family with the required income stream.
However, this does not mean that the husband must rush out and straightaway purchase Rs 43 lakhs worth of insurance. There are some deductions to be made from this corpus. For example, he may already be having financial savings of say Rs 10 lakhs. His wife may have financial resources of her own of another Rs 15 lakhs. Let us say that the value of his retirement benefits, existing insurance policies and other cash flows that will accrue in case of his death amount to another Rs 5 lakhs. This total of Rs 30 lakhs must be deducted from the Rs 43 lakhs corpus envisaged earlier, since it will be available to provide the necessary income stream.
Therefore, there is an uninsured gap of Rs 13 lakhs, that is 43 lakhs minus Rs 30 lakhs. This is the amount for which life insurance must be taken. We have of course given a very simple example, assuming that this family has already taken care of its housing requirements. You can discuss with your close family members and calculate your own insurance requirements.
Going back to the example under consideration, if when doing your calculations, you find that your total liquid assets are say Rs 45 lakhs, that is more than the corpus of Rs 43 lakhs that would be required to provide income to take care of normal expenditure, then you do not have an uninsured gap and you certainly do not require life insurance.
One final point. Do not be fooled by advisors who do complicated calculations to arrive at how much life insurance you need. They will add things like child education, marriage expenses, etc., to inflate the quantum of insurance to be taken. No one can predict the future, especially the distant future. The period of vulnerability is one, two, three or a maximum of five years after a death occurs in a family, especially of a breadwinner or important earning member. Human beings are very resilient by nature and are capable of adjusting to, and dealing with, new, adverse situations, in the medium to long term. It is in the short-term that they are vulnerable and need the protection of life insurance.
When we talk about expenses based on which to calculate life insurance needs, we generally talk about normal current monthly expenses. There is however definitely no harm in a slight increase in the estimate of these normal expenses. For example, if we are talking about Rs 25,000/-worth of normal monthly expenses, you certainly can provide for Rs 30,000/- normal expenses for the purpose of life insurance requirement calculations.
However, there is no need to substantially inflate these figures or worry about providing for 10 or 20 years hence. No one can predict the future including what shape general circumstances or economic circumstances including inflation is going to take. The two simple examples are; Twelve years ago, the cost of a telephone call from Mangalore to Bombay was more than 26 rupees per minute. If anyone had predicted that the cost of this call would come down to less than Rs 2.40 per minute, he would have been laughed at and dismissed as a madman. Similarly, if someone had predicted that one day, you would have air tickets of Re 1/- (subject of course to conditions) available in India, no one would have believed the prediction.
There is already a built-in safeguard in taking only normal monthly expenses for insurance calculations. In practical terms, we have observed that the expenses of a family tend to go down immediately after the death of one of its members. This is because expenses that used to be incurred on that particular person are no longer incurred.
Further, as mentioned earlier, it is impossible to predict future inflation rates and future fund requirements. So long as the rest of the family is adequately insured for health, and to the extent required for life, the best you can do in life insurance is enable a corpus to take care of normal expenses for the next few years, say a maximum of 5 or 6 years.
It is important and most people do not realise it when they buy insurance: Human beings are extremely resilient. They tend to adjust sooner rather than later to new situations, including existing, adverse situations. The greatest period of vulnerability is generally not more than, one, two or at the most three years from the date of death of the breadwinner.
The final point for consideration is, what kind of life insurance to take?
There is only one type of life insurance that is truly beneficial for the person buying it, and that is pure term insurance. This type of insurance is sometimes also called pure insurance or term insurance. Term insurance provides compensation in case the risk, against which protection is sought, actually occurs. There is no mixing up with investment. Term insurance is extremely economical.
Going back to our example, in case there is an uninsured gap of Rs 13 lakhs and you go to an adviosor, he will actively discourage you from taking term insurance saying that you get nothing back for all the premiums you pay. He will not mention of course, that you will get protection from the perceived risk, which is the sole objective of term insurance.
If you take a 10-year term policy for Rs 13 lakhs, and if you are aged about 35 years, the term insurance premium may not be be more than Rs 5,000/- per year. If you survive the term of the policy, you get nothing back. No problem. Be happy you survived! If something unfortunate happens, your nominees get Rs 13 lakhs. Term insurance is that simple.
If having taken a term policy, at sometime in the future, you decide that you no longer need insurance; all you have to do is stop paying the next premium. This brings another important point. Life insurance should be taken when there is a need for it and should be discontinued when the need for it disappears. So, life insurance requirements should be reviewed once in a while, at least once in five years.
If you have taken a housing loan, then you must take adequate mortgage insurance, which is nothing but term life insurance, which will result in the insurance company paying off the entire housing loan in case of your untimely demise. Life insurance is too important a subject to deal with lightly.
Your mostly comments are quite ovious regarding investment angle but you should know the value of insurance first.Compulsory saving, intangible product nature, human life value, inflation rate,and several factors are responsible to purchase life insurance for an individual. Clubing of all family incomes are not legimate to count individual life insurance need.It is core fact which you mentioned in your text but you should also keep in mind that insurance is the subject matter of solicitation. You have a lots of money, you can purchase every thing in your life but in case of insurance you can not proceed to buy the insurance need because it is quite intangible in nature.Wealth creation is totally limitlesshabit.Please keep the insurance sentiment very positive.
Thanks for your kind comment on the concept of ‘life insurance’. The answer of my Investment Guru for you kind comment is as follows.
I would like to reproduce the two dictionary definitions of the word ‘insurance’, one from an ordinary dictionary and the other form a financial dictionary.
The general dictionary describes insurance as “the act, system or business of insuring property, life, one’s person, etc. against loss or harm arising in specified contingencies such as fire, accident, death, disability or the like, in consideration of a payment proportionate to the risk involved. “
The financial dictionary defines insurance as “a contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company which pools clients’ risks to make payment more affordable, in exchange for a premium.”
These two definitions bring out the essence of insurance. The one who has commented on our insurance concept, says that you should know the value of insurance first. In fact, it is he who is ignorant about the value of insurance. Compulsory saving, intangible product nature, human life value, inflation rate, and other jargon mentioned by him are not to be found anywhere in the two definitions that speak about the core of insurance.
This person has requested you to keep the insurance sentiment very positive. But, every great writer on finance and investment has only negative things to say about certain aspects of insurance and especially insurance companies and agents.
Let me reproduce what A N Shanbagh says: “Normal life insurance premiums come bundled with the pure premium part combined with the part that gets invested on your behalf. The policy is sold more as an investment where the insurance just comes along. Of course, and understandably, brokers earn a far greater commission if they sell you policies other than term cover. Term insurance is consistent with the universal policy – go to insurance companies for life cover and financial institutions for investment.”
Burton Malkiel puts it even better: “There are two broad categories of life insurance products available - high-premium policies that combine insurance with an investment account and low-premium term insurance that provides death benefits only with no buildup of cash value. But high premium policies provide the most advantages to the insurance agent who sells them and collects high sales charges. Early premiums go mainly for sales commissions and other overhead, rather than for buildup of cash value. Thus, not all your money goes to work. Hence for most people, I favour the do-it-yourself approach. Buy term insurance for protection and invest the difference yourself in a tax-deferred retirement plan.”
N J Yasaswy says “You should always remember that insurance is a protection and not really an investment, because the financial returns are rather meagre. If you take inflation into account, there could even be a negative rate of real return at the time of maturity of your insurance policies. The rate of return (based on Internal Rate of Return) on any policy will not be more than 2% to 3% p.a. The most important piece of advice is that you should never allow agents to influence your insurance decisions. You should gather all data from the agent, evaluate, and only then decide. Most of the insurance agents have only a superficial knowledge and cannot offer sound advice.”
Therefore, my retort to the person who commented about your article is: Go back to the dictionary and first learn what insurance is all about. Then you will realize why Evan Esar, the American comedian, said: “Insurance is the business of protecting you against everything, except the insurance agent!”
Your comments and proverbs are completely biased in respect of service brand i.e.- insurance agent. You have mentioned about 2 to 3% real interest rate in insurance investment, it is quite improper because LIC is the sound organisation that pays handsome rate of interest to their customers because it has huge surplus amount to distribute bonuses to their innocent customers. It has 11.50 lakh asset under management and 30.60 crores inforce policies.It is not a matter of pride for the organisation which can build third highest populated country of the whole world.Such financial institution can never cheat the customers.See the profile of LIC very deeply. Thanks
Thanks for your interesting comments. Please note that, we are not against anybody. We are only against wrong concepts since for us our client's interest is paramount and nothing else. You can notice the same in all our writeup. Anyway, lets not further argue on the concept since its never ending. Thanks
Really it is a matter of great pride for us to work in this vast organisation who is completely devoted to the customers and their satisfaction. Indeed LIC is LIC.No one can touch the height of LIC in forthcoming arena..