Look before you exit

Exiting an insurance policy is not just a matter of procedure. It’s equally important to know if it’s financially viable, says Vidyalaxmi

THE earliest exit option available on a life insurance policy is 15 days. It’s called the ‘free-look’ period. Some insurers have extended this period to 30 days. This is basically an option to return your policy (if you don’t like it ) and get your money back. But the problem is that unlike buying consumer products such as washing machine or weight reducing equipment, the 15 to 30-day period is too less to understand whether you have made a bad decision.
Apart from this ‘early bird’ exit option, there are three other possible ways to exit an insurance policy. They are — exit by way of policy lapse or surrender or making the policy ‘fully paid’.
As a rule, there are no exit options available during the first three years of a policy tenure. And after three years your insurance policy acquires a cash value. Insurers call that as the surrender value, which is usually around 30% of the total premiums paid after the first year. The surrender value increases as you inch closer to the maturity date of the policy. For example, if you have paid an annual premium of Rs 30,000 and want to exit in the fifth year, the surrender value will work out to Rs 45,000. That would 30% of the premiums paid for five years. Now, you will have to decide if you want to reinvest this money to make up for the losses and facilitate wealth creation by investing in other high yielding instruments. For instance, it might not be a bad idea to exit a participative pension policy (which usually maintains debt oriented portfolio) after the first five years and reinvest in an equityoriented portfolio. With an investment horizon of 10 years or more, you could get a better deal. You could also convert endowment plans to whole life plans and in the process make the policy a fully-paid one. In effect, you don’t pay any more premiums. Accordingly the insurer will lower the sum assured as the years pass by. However, in this case you get the sum assured and the bonus accrues only after the policy ends.
One word of caution here: whenever you quit from your insurance investment, you have to ensure that you have taken an adequate risk cover as a back up for the unseen contingencies.
When should you hold on?
If you have another 5 years to go for the expiry of the policy, its better to stay invested. Essentially your policy would be growing well at this stage after factoring in all the costs and other deductions. If you discontinue your policy at this stage, you can’t even generate returns and make up for the losses by investing the balance premiums elsewhere.
Tax implications
If you exit from your policy within three years from the effective date, you will have to pay off for the tax benefits you enjoyed on the previous premium payments. So before deciding to call it quits, it’s better to know how much you would lose monetarily.
The simplest way to avoid all the hassle is just read the fine print. The next time your agent tells you to sign on the dotted lines, do the due diligence. Have a look at the policy document and make sure you understand it

Kenya: Micro Insurance Firms to Cater for Violence Claims

18 February 2008
Posted to the web 19 February 2008

Steve Mbogo

Michael Owino used to run a phone shop in Kisumu City. However, it was vandalized during the post-election violence and he lost stock worth about Sh300,000. He lost his livelihood.

Mr James Kamau, a pharmacist in Busia, lost his entire stock worth Sh800,000. He and his family of five sought refuge in Uganda. Estimates put the losses within the small and medium enterprises sector at about Sh4 billion.

This would have been doom and gloom for the business owners, where a majority of Kenya entrepreneurs fall, if a new concept of insurance, known as micro insurance, had not landed in Kenya. Micro insurance is essentially insuring low income households by enabling them to pool together small amounts of money, which is then used as a premium to cover their specific risks.

Unlike the conventional insurance, micro insurance requires clients to pay low premiums and is generally targeted at people working in the informal sector.

In countries like India and South Africa, micro insurance has been used to empower the poor, ensuring that as many people as possible access related financial and medical services in addition to having 'shock absorbers' for such risks.

Statistics indicate that of the four billion people worldwide who live on less than two dollars a day, less than 10 million have access to any form of insurance. In Kenya, the concept was initiated by the Co-operative Insurance Company (CIC) and the United Nations Development Programme.

Through partnerships, it has now been embraced by various micro-finance health management institutions including the National Health Insurance Fund (NHIF)

CIC is for instance making unconditional claims payment for losses resulting from the political violence, contrary to other insurance companies that have said honouring such claims will be conditional.

Claims so far lodged with the company are about Sh60 million, mainly from small businesses that were either looted or burnt during the violence resulting from a disputed presidential vote tallying process. That is why for Mr Owino and Mr Kamau, reestablishing their businesses again will not be a headache.

Mr Nelson Kuria, the managing director of the CIC explained that the decision to honour the claims is based on the company's business model and social considerations.

"Ours is a co-operative insurance with a social consideration, different from the commercial insurance companies," he said. "When you are in this kind of business one cannot be a hard-nosed capitalist." CIC currently insures 75 microfinance related schemes. It has insured a total of 163, 784 individual members with a total sum insured being Sh17. 76 billion as of December 2007.

Mr Kuria said the decision to pay the claims arising from the political risk is because microfinance unlike the conventional commercial insurance products is not run using the traditional business model.

"Micro insurance products have minimum exclusion," said Mr Kuria. "The kinds of people who are interested in these products require simple and straight foreword products."

It offers micro insurance products that cover death and total permanent disability, funeral expenses, personal accident, fire and burglary. Others include comprehensive inpatient family medical cover personal accident, funeral expenses and livestock insurance

And now for the first time, the concept is to be extended to hawkers through a comprehensive product that first provides basic personal accident cover of up to Sh100,000 in the case of death, total disability and a weekly income in case of an accident for at least 104 weeks or two years. The second segment covers funeral expenses which are paid for within 48 hours. This will be up to Sh30,000.

The third is the medical cover which comes in handy because of the vulnerability of the low income earners to diseases essentially because of their lifestyle.

The cover bears very little exclusions and enables the holder to get medial attention from private, government and mission hospitals.

Relevant Links East Africa Banking and Insurance Economy, Business and Finance Conflict, Peace and Security Kenya

For this segment of the cover, CIC has partnered with the National Health Insurance Fund, which means the cover will provide a family package for inpatient services only.

Premium paid will depend on the size and the risk and the level of benefit facing the particular group or scheme but will range from Sh10 to Sh15 per day.

Around the world, the concept is also gaining prominence. Early this month, the Micro Insurance Agency (MIA), which is part of the Opportunity International, a global microfinance charity received unspecified funding from the Bill and Melinda Gates Foundation to provide life, health and crop insurance to 21 million poor people in 11 countries in Africa, Asia and Latin America.

Life insurance plans can stand as security against loans

A life insurance plan provides an excellent way to stand as a security against the loan received by the insured
The insurance business in India isn’t just growing, but also becoming more sophisticated in terms of product offerings. To help readers keep ahead of developments in this business, Mint features a Q&A on insurance every Monday.
I am a 40-year-old man and I have an auto components business. I have given a loan to my brother to start a new business. Can a creditor take a life insurance policy in the name of his debtor to secure the money given by him? If yes, then can his family claim any part of it in case he dies?
Yes, a creditor can take a life insurance policy on the life of his debtor as he has an insurable interest in the life of his debtor to the extent of his loan. A life insurance plan provides an excellent way to stand as a security against the loan received by the insured. The value of the policy normally does not exceed the amount of the loan. The general rule is that after the debt is repaid, the creditor loses all interest in the policy. After that, the benefits of the policy can go to the policyholder and can be claimed by his family on his death. In case the value of the policy exceeds the amount of loan, the balance money is paid to the beneficiaries ofthe insured.
I am a 30-year-old man and I am planning to upgrade my life insurance with a term plan. I already have an endowment plan. What is term life insurance?
A term plan is one of the first insurance plans that one should buy. In term plans, in case of the policyholder’s death during the period of the policy, his nominee gets the “sum assured” (or the cover amount, as it is commonly known). But if the policyholder survives the period of the policy, he gets nothing. Term plans have the lowest premium among various insurance plans and provide peace of mind against life’s eventualities.
Readers are welcome to write in with their queries to askmint@livemint.com. The questions will be answered by senior executives from leading insurance firms.
This week’s expert is Rajesh Relan, managing director, MetLife India Insurance Co.

India Growth Story

Indian insurance sector to become Rs.2 trillion by 2010

New Delhi, Dec 24 - India's thriving insurance sector is all set to grow from Rs.500 billion to Rs.2 trillion ($50.7 billion) by 2010, says the Associated Chambers of Commerce and Industry of India (ASSOCHAM).The main reasons for such a major growth would be the coming of private players and aggressive marketing, the industry chamber said.The industry, which has seen a compounded annual growth rate of around 175 percent in the last couple of years, is likely to throw up several new avenues of business potential.The private sector insurance business is likely to achieve a growth rate of 140 percent as against the public sector's growth rate of 35-40 percent.'On account of intense marketing strategies adopted by private insurance players, the market share of state owned insurance companies have come down to 70 percent in the last four-five years from over 97 percent,' said Assocham president Venugopal N. Dhoot.Assocham also indicated that the role of private players would increase significantly in rural areas as it has enormous growth potential.Insurers should develop viable and cost-effective distribution channels and build consumer awareness and confidence, it said.

India Growth Story