Insurance gateway for black money

New Delhi: Tinoo and Arvind Joshi, the suspended IAS couple from Madhya Pradesh, faced CBI raids soon after it was discovered that they had purchased life insurance policies from a private insurer. The high-value transaction could not have gone unnoticed. 

    But there are several thousand cases that go undetected. For long, life insurance policies have been seen as a passport to convert "black money" into "white". There are multiple ways that agents use for anyone willing to bring unaccounted cash into the financial system. 
    Insurance industry executives and agents said the easiest way to do it is to pass on the commission to the client. For instance, if you buy a policy for Rs 1 crore, the commission amount of, say, Rs 20 lakh is given to the agent who then passes it on to the policyholder, although sharing of commission is illegal and can lead to cancellation of the agent's permit. 
    In fact, that is one reason why relatives of businessmen, politicians and filmstars often become agents as the commission doesn't need to be transferred to the insured and yet remains within the family. 
    But can someone with Rs 1crore cash buy a policy? "It's possible and agents are willing partners," said a prominent development officer of Life Insurance Corporation. The development officer, who manages a group of agents for the company, claimed that there were several instances where Rs 50,000 — the permissible level of cash deposits — was deposited in cash on a daily basis and often went undetected. After a few days, the company issues a policy and the entire amount then gets "white". 
    Insurance company executives said this operation was best suited for single-premium policies, or those where the entire premium was paid upfront. Therefore, the commission also comes in one go. 
    There is yet another common practice in the industry, which relates to lapsed policies and even managements are involved. 
    Typically, these operations are undertaken by dummy agents or financierturned agent in what is commonly known as recycling in industry parlance. The agent, usually someone with loads of unaccounted cash, becomes an agent and gets a list of policies that are no longer operational as the premium has not been paid. The agent then approaches the policyholders and revives the policy by paying the pending installment. This entitles the agent to the commission and helps in converting the amount into white. There are also allegations that micro insurance policies are the latest tool as several covers have been issued to "fake policyholders".

Can you rely on free insurance?

Don't be lured into buying products just because they come with free or additional insurance. Find out if they suit your requirements     Indian customers love freebies. Shampoo sales soar if a soap bar comes free with it. A microwave oven is a hit if you bundle it with free cookware. These marketing gimmicks keep the cash registers ringing in retail outlets.      The financial marketplace is no different as companies lure customers with offers of cheap—even free—insurance. Mutual fund investors are offered free life insurance, car buyers are given free vehicle insurance, and home loan customers are told to take a loan cover at a nominal cost. So, along with the base product, you get another absolutely free. Or so you think.      The first rule of intelligent spending is that there are no free lunches. Besides, in order to avail of this free insurance, the customer may be signing up for a product that does not really suit his needs. In a discussion paper released last year, the Insurance Regulatory and Development Authority (Irda) had noted that bundling could raise 'certain concerns for the consumer'. 'Packaging two or more products could become unfair to the consumer as it impedes choice and makes price comparison difficult,' the regulator had observed.      The bigger danger is that free insurance gives the consumer a false sense of security. Theinsurance cover may not be adequate. For instance, the free insurance that comes with SIPs in mutual funds is capped at 20 lakh. Experts say that one should have a cover of at least 4-5 times his annual income. Besides, there are too many strings attached, making this type ofinsurance a poor substitute for a regular term cover bought independently.      ET Wealth examined a few of these two-inone products on offer and discovered that while some were beneficial for customers, in many others, the buyer did not really derive any value from the bundling of insurance with other products and services.  Free car insurance  The free cover is only a substitute for the cash discount offered by a car dealer.  The car market is going through a bad phase. The sales fell 6.7% in 2012-13, the first time in 10 years. Car manufacturers are trying every trick to push sales. One such gimmick is freeinsurance offered to buyers.  WHAT'S THE GAIN?  Free car insurance, even if it is only for one year, is a big draw with buyers, who may have emptied out their bank accounts for the down payment. You can also expect better claims servicing because the dealer will follow up your case with the insurer. The convenience of getting all the paperwork done under one roof is another positive.  WHERE'S THE CATCH?  The free insurance is not really free, but a substitute for the cash discount offered on a car. "The insurance premium for the first year to be paid by the customer is borne by the dealer," says Madhukar Sinha, national head, personal lines, Tata-AIG General.      Besides, the free insurance may not include add-on covers. "It will typically not include the zero depreciation cover and engine protection," says Ajay Bimbhet, managing director, Royal Sundaram Alliance Insurance. "Occasionally, these plans also offer customised benefits, but this is usually in the case of high-end vehicles," says Arvind Laddha, CEO, VantageInsurance Brokers.      The bigger problem is that you may never know whether you got a good deal. Moreover, you will have no say in the insurance company or the product on offer. The dealer will tie up with the insurer of his choice.  Free life cover with SIPs in mutual funds  It's beneficial, but shouldn't be a replacement for a regular term cover.  Imagine a Ulip that charges you only 2.25% a year, doesn't levy a heavy penalty if you quit investing, and doesn't deduct any surrender charges on premature withdrawals. The SIPinsurance plans from three mutual fund houses—Reliance Mutual Fund, ICICI Prudential Mutual Fund and Birla Sun Life Mutual Fund—offer exactly this. SIP investors get a free life cover under these plans.  WHAT'S THE GAIN?  On the face of it, the offer looks good. As we said earlier, it's like buying a Ulip without paying the exorbitant charges. "The investor gets a life insurance cover merely by having a SIP in an equity scheme at no additional cost," says Srikanth Meenakshi, director, FundsIndia.  WHERE'S THE CATCH?  The insurance comes wrapped in several terms and conditions. First, the investor gets a life cover only if his SIPs are on track. There is an exception in case of Birla SIP Century. If you have given 36 SIP instalments, the cover continues even if you stop investing. However, if you switch to another plan or make partial withdrawals, the contract terminates. Even partial withdrawal results in the insurance being terminated.      There is also a heavy exit load of around 2% if you switch or redeem the investment before     the completion of the      SIP tenure. So, make sure you      choose a scheme that can offer stable returns over the long term. Go for a diversified plan with a good record, instead of a fund that has given jerky returns.      Accident cover with      credit cards  The cover offered is very cheap and should not make you opt for a costly card.  Personal accident insurance is a unique cover that everybody needs, but very few buy. Some credit card issuers offer a free personal accident cover along with their high-end cards. Others offer discounted prices to their customers. The option comes in handy if the card holder dies or suffers a disability due to an accident.  WHAT'S THE GAIN?  The biggest advantage here is that one gets covered against a risk that he would have otherwise ignored. As mentioned earlier, very few people buy a personal accident cover. Convenience is the other benefit. "The cardholder pays a small premium every month, which does not pinch his pocket, but ensures a greater protection for his family," adds Bimbhet.  WHERE'S THE CATCH?  The free accident cover comes with stiff terms and conditions. Some require you to use your card for a minimum amount. Others want you to make a minimum number of transactions every quarter. Some don't consider buying fuel in the calculation.      Personal accident insurance is a very lowcost cover. An insurance cover of 2 lakh costs only 150 a year. "The free cover does not offer any great value to the buyer. Don't opt for a credit card only because it offers a free personal accident cover. Only if the cover is 20-50 lakh does it add real value," says Mahavir Chopra, head, personal lines and e-business, with health insurance consultancy firm, Medimanage.      The bigger problem is that such free personal accident covers offer basic protection against     death and total permanent disability. The partial and temporary disabilities are not usually covered. So, you should buy a policy yourself, instead of depending on the free cover. Besides, the claim settlement procedure could be tedious because the claim is to be routed through the card issuer. "You have to intimate the card issuer, not the insurer. Since this is not a core function of the card issuer, expect the service to be mediocre," says Chopra.      Term insurance with      home loans  Buy regular term insurance that will continue even if the home loan ends.  Lenders don't like to take risks. So, before they give you a home loan, they will size up your income level, repayment capacity and credit history. Even if everything is in order, they will push you to take a home loan cover along with the loan.  WHAT'S THE GAIN?  Home loan covers are usually single premium policies. The premium is paid through the loan, so the buyer doesn't feel the pinch. "Borrowers also have the option of buying such covers directly from the life insurer. They need not pay the premium upfront, but can choose to pay it over a period of, say, five years," says Sanjeev Pujari, chief actuary, SBI Life. Also, since this is offered as part of a group cover, individuals can get a high cover and are not required to undergo medical check-ups before buying the plan.  WHERE'S THE CATCH?  Unlike a regular term insurance, loan insurance plans offer a reducing cover. This also means that if you choose to refinance the loan with another bank, you will lose the insurance benefit.      Besides, this cover is for the term of the loan, while in most cases a borrower prepays the loan. Why pay for a 15-year plan when you actually need the cover for 7-8 years?      A better option would be to buy a regular term plan when you take a loan. Even after you have repaid the loan, the cover will continue to protect you. As the table shows, for a marginally higher premium, you can get a cover that does not diminish.

Health Insurance covers may cost 20% more

Mumbai: The insurance regulator has cleared a hike in health insurance rates for policies issued by New India Assurance, the country's largest non-life insurer. The new rates are on an average 20% higher than the old ones which were in force from 2007 and will come into effect from next month. 

    The rate hike could trigger similar revisions among other state-owned non-life insurers since New India, being the largest, sets the benchmark for rates. 
    TOI had reported in its January 26 edition that public sector insurers are set to revise health insurance rates by 20-25%. 
    Announcing the imminent hike, G Srinivasan, chairman, New India Assurance, said, "Our rates have not been revised since 2007. The revision in rates will result in an average increase of around 20% but it will vary from segment to segment." For renewal policies, the new rates will take a bit longer to be applicable as the insurer would have to provide a three-month notice. 
    At present, for an individual aged up to 35 years in Mumbai, the cost of a Rs 5-lakh health insurance cover is Rs 5,410, which goes up to Rs 6,078 after factoring in service tax. Going by what insurers say, the cost could go up to Rs 7,300 after the hike. But this would vary according to the individual's health profile and location. Premium varies with location because of variations in cost of treatment. Insurers have been complaining that losses in health insurance have been over 120%. Besides raising rates, the state-owned non-life companies are trying to reduce losses in health insurance by floating their own third-party administrator (TPA) — a separate entity that will manage the health insurance business and network with hospitals. According to Srinivasan, the TPA was expected to be incorporates by January next year.
    Announcing the results on Wednesday, Srinivasan said that the company has earned a net profit of Rs 843.66 crore — the highest in five years and up almost five times from last year's Rs 179.31 crore. The net worth of the company rose to Rs 7,737.36 crore from Rs 7,057 crore in the previous year. The company trimmed its underwriting losses to Rs 1,800 crore from Rs 2,200 crore following a reduction in claims-to-premium income ratio. 
SHOCK TREATMENT 

• New India Assurance has got IRDA's nod to hike health insurance premiums by an average 20% 

• New India usually sets the trend as it's country's largest non-life insurer 

• A Rs 5L health cover for a 35-yr-old Mumbaikar will go up to Rs 7,300 from about Rs 6,000 (with service tax) 

• Rates will change according to heath profiles and location