Postal life insurance policies offer high returns with low premium.

SECURING THE FUTURE

Though not available to all, the eligible among us should grab the opportunity

POSTAL Life Insurance (PLI), a 125-year-old life insurance scheme run by the department of posts, is a good option for people eligible for it as it charges lower premiums and offers higher returns than comparable policies of life insurers.
    The policy, started in 1884 for the employees of Posts & Telegraphs Department, has since been extended to cover all central and state government employees and those working in staterun companies, or about 70% of organised sector employees in the country. In 1995, the department launched Rural Postal Life Insurance to take the benefits to all villagers who account for 60% of India's population.
    It offers better returns than other comparable products. For example, Postal Life Insurance has announced a bonus of Rs 70 per Rs 1,000 sum assured on its endowment policy – where the insured gets the sum assured plus annual bonuses when the policy period is over – irrespective of maturity since 2003.
    In contrast, average bonus announced by the Life Insurance Corporation (LIC), India's largest life insurer, for endowment policies was in the range of Rs 30-48 in past five years.
    Let's take the example of a 30-yearold government employee.
    If he buys PLI's endowment policy called Santosh for risk cover of Rs 1 lakh for a period of 20 years, he will be paying a premium of Rs 400 every month. For a similar policy offered by LIC, the Endowment Assurance Plan, the monthly premium is Rs 442.
    At the time of maturity, after 20 years, he will receive a total of Rs 2,40,000 at the current bonus rate of Rs 70 per Rs 1,000 sum assured. His net earnings, if subtracted total premium paid during the policy, will be Rs 1,44,000.
    In the case of LIC Endowment Assurance Policy, the proceeds could be Rs 2,04,000 (sum assured + accrued bonus + terminal bonus) at the current bonus rates.
    The rate of reversionary bonus is Rs 42 per Rs 1,000 sum assured, while terminal bonus is Rs 200 per Rs 1,000 sum assured. Thus, the net earnings in the LIC scheme will be much lower at Rs 98,000.
    The next obvious question is its tax treatment. Investment in PLI gets all tax benefits any life policy is entitled for. The returns are tax-free and premium payment is subject to tax exemption under 80c.
    A policyholder can pay the premium at any post office across the country. Some selected government departments have the facility of recovering premium from salary. But it is better to take a premium passbook.
    Postal Life Insurance, however, is not for investors who are looking for new-age products like unit-linked insurance policies (ULIPs) and pension plans. The postal department offers six plainvanilla plans: Suraksha (whole life assurance), Santosh (endowment assurance), Suvidha (convertible whole life insurance), Sumangal (anticipated endowment assurance), Yugal Suraksha (joint endowment) and Children's Policy.
    These policies just offer death cover while LIC and other insurance companies offer accidental death benefit with extra premiums. So, if you are interested in a plain vanilla insurance and if you are eligible for it, then Postal Life Insurance is a great value proposition.
pallavi.mulay@timesgroup.com 

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Why insurance cos prefer young customers?

Fears of Lifestyle Change At Later Stage Force Insurance Companies To Find Young Customers

 WHEN insurance companies say that it makes sense to start buying life cover early, they highlight how lower mortality charges enable you to buy a cheaper cover or how the power of compounding helps you earn better returns. But there is another reason why buying early makes sense. A little known section in the insurance Act makes it difficult for life companies from hiking rates for those whose life style changes subsequently or those who acquire harmful habits such as smoking or drinking later in life.
    In other words, any individual who buys a policy at age 20 and starts smoking at say 23 would continue paying the rates for a non-smoker. This is because according to Section 45 of the Insurance Act, an insurer cannot call in question any policy claiming that statements made were false or inaccurate after two years of the policy being taken out. This will make huge difference in the premium that the policyholder has to pay since the rate for smokers is almost 30% higher than what non-smokers pay.
    This holds for any person who later in life acquires a drinking problem as well. "But if it comes to our notice later that the proposer was suffering from clinical depression at the time of buying the policy, but did not disclose the same and took to excessive drinking later, we will not pay," said Andrew Cartwright, appointed actuary of Kotak Life Insurance, which had introduced a plan targeted specifically at non-smokers.
    Insurers say the rates are determined on the condition of the insured at the time of proposal, and continue to be in force later, despite any changes in the insured's lifestyle. According to Gorakhnath Agarwal, chief actuary at Future Generali Life Insurance, if any policyholder starts smoking or drinking after buying the policy, it is unlikely to result in a life threatening medical condition within two years of purchase - the time frame within which the proposal can be called to question. This is the practice followed by insurance companies world over because if insurers were not restricted from calling into question policies they would question every death claim on the grounds that it was because of a change in lifestyle which was not reported to the company.
    While nicotine content in the blood is the key indicator of the proposer's smoking/tobacco habits, flawed liver functioning as determined by blood tests would point to alcohol abuse. Alcohol consumption in excess of four units per day is also considered as abuse. "Though there is the possibility of some policyholders objecting to medical tests, the objections will be highest among clients with something to hide and hence, medical examinations are crucial," reasons Mr Cartwright.
    While buyers are not penalised for subsequent change in lifestyle, they are also not rewarded for more responsible behaviour. So even if a buyer chooses to give up smoking or drinking after buying a policy he will end up paying higher rates all his life. "At the time of issuance of policy, the company assesses the risk based on relevant medical and financial information provided by the customer. Thereafter the contract will continue between the company and the insured, irrespective of the change in the policyholder's financial or medical situation," explains Fabien Jeudy, chief actuarial officer, Birla Sun Life Insurance.

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