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Are you adequately insured?

For meeting your unpredictable needs, get insurance coverage

Financial needs of individuals can be broadly divided into two categories unpredictable needs and predictable needs. Unpredictable needs should always come first because they can arise any time. Most people ignore this basic fact of personal financial planning. It is not unusual for financial planners to come across clients who have built a substantial capital to meet their predictable needs but have neglected their unpredictable needs altogether.

Predictable needs are many, such as buying a house, children's education and marriage expenses and most importantly planing for retirement. Predictable needs are normally met through prudent investment planning and wealth creation. Unpredictable needs on the other hand are met mainly through adequate insurance.

Risk of something all of us face every day of our lives, recognizing this we should take steps to avoid or reduce the risks encountered. Insurance against personal risks (death, disability, medical,) property risks (household) and liability risk (under statute of common law) is must in the portfolio of a prudent person.

By payment of premium the financial consequence of these risks are effectively transferred to another party - the insurance company. This is the cheapest and best and best way for accomplishing risk management.

The first step in financial planning is to make provisions for emergency needs such as a critical illness, disability or unemployment. As a thumb rule, one should keep aside four to six months income for meeting emergencies. Liquid funds are a good alternative to savings bank account for the cash component of your portfolio. They generate higher returns while offering the same degree of liquidity.

Certain insurance policies also give you protection against emergency needs. A personal accident policy guarantees you an amount of money to replace any loss of income. Interruption to income as a result of a disability, whether short or long term can be devastating at any stage. Perhaps the most important type of insurance for any individual are health insurance or medical insurance. These types of insurance reimburse your hospitalization and treatment expenses arising out of an accident or illness. Death is a certain event but not a predictable one. Every individual who has dependents should purchase adequate life insurance especially if he or she is the sole earning member of the family. The value of human life is to estimate.

Most people pay little attention to this vital aspect of personal finance and end up being grossly under-insured. An individuals health lifestyle number of dependents occupation anticipated needs etc. all affect the purchase decision of life insurance. The sum assured on a person's life is a tricky thing to calculate and one should seek the services of a financial planer to buy adequate insurance. The other aspect of insurance is to safeguard your as sets from unpredictable events. The ownership of property carries with it risks since assets may be damaged destroyed or stolen. It is not just enough to seek adequate insurance for the assets but also to protect against any loss of income arising from the assets. Individuals also face liability risks.

Liability risks when our actions or inaction's result in loss damage or injury to other people or their property. The motor insurance you normally purchase protects you from all the risks of the motor car being damaged destroyed or stolen.

It also protects you from liability risks if you were to cause damage or injure to other people or property while driving your motorcar.


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Insurance Provides Nothing but a Peace of Mind

Most people hate paying insurance premiums, as many do not make claims. But for long term security, insurance is a must. Here is the positive aspect of taking an insurance policy. Most of us spend a lot of our time and effort in establishing ourselves materially. These goals are building a career, creating the best opportunities for our family accumulating wealth and so on. These are very important things. However all these things are also fairly fragile. In the blink of an eye through some disastrous event, what you have one moment may be let in-tatters the next moment, with years of blood, sweat and tears going straight down the drain. Floods, riots, burglaries, earthquakes, heart attacks banana skips on the pavement and the list goes on.

The trouble with insurance not surprisingly is that most people hate paying for it, as most of the times they make no claims but insurance is perhaps one of the most important parts of our long term security. It protects the assets we have presently and therefore helps secure the future. Ask yourself the following question " If I don’t want to pay for insurance, How am I going to be able to replace my home, my personal possession or my car, If something happens to them?"

There are hundred ways to make insurance payments more affordable. New insurance schemes have plans for automatic debit of bank account or credit card for the premium on a monthly basis, rather than paying one large annual fee. This helps your cash flow. However it may be noted that paying one annual premium is often cheaper than 12 monthly premiums. You should also factor insurance in to your budget just as you do with basics like food, clothes and power bills.

Another misconception about insurance is that it is a static one-shot affair, where you decide on your sum assured and then pay the premiums as and when demanded. The fact is that as we move through life, the insurance need varies. One needs to be careful of the throwing money away to over insurance or have the wrong type of insurance or even more dangerously to be under insured.

As a general rule, insure your belonging to a level where thy can be fully replaced with something comparable and new in the event of a claim and insure your life and income to the point where you and / or your beneficiary will be free of debt and capable of living a life of reasonable comfort for many years, preferably until the time you and/or your surviving partner dies . This involves regularly updating all your insurance to reflect your changing position in life. You will also need to ensure that all your insurance are indexed to inflation, both in terms of the amount of cover you have and with claim, any ongoing pay-out you might receive.

The two main groups of non-commercial insurance are property and personal life. Say we need car insurance as a legal obligation. This is compulsary as it provides insurance against any claim bought by another person for any injury or death caused to them by your car. Due to this provision, most of us unfailingly ensure that the vehicle is insured and it would be unthinkable for us to drive out of the showroom in our brand new car without first getting an insurance cover note. Other types of property insurance are home insurance, contents insurance or a combination of both.

Home insurance covers your home, the actual building itself-against damage caused by all sorts of disasters, including fire, earthquakes, hurricanes, vandalism, riots and floods. Contents insurance covers all your belongings inside your home such as furniture, clothing, electronic equipments, and so on against all these dangers and most significantly also provides coverage against theft. Combined home and contents insurance is exactly what the name implies - a single policy that covers both the building and everything in it, what's more, there are usually cheaper than a separate home and a separate contents policy providing the same level of cover. Personal insurance includes life, income and health insurance. At times, it is the most important insurance we can have. People tend to under-insure themselves in these areas, based on the assumption that misfortune will never happen to them- but it can and does.

It's best to look upon insurance as a protection product rather than as an investment product. Most of the popular policies share their investment surpluses with the policyholders in the form of bonuses. But these policies may also have a higher cost component to them in the form of higher premium. You also have a choice of low- cost high -cover plans. Where you pay a lower premium but don't share surplus. A good choice in this category is Bima Kiran from LIC. As far as finding the right insurance is concerned, you can get it through insurance agents, financial planners, or straight from insurance companies. A great change we are witnessing now is that we now have the flexibility to shop around for insurance. This point can't be stressed enough. This change from that of a seller market to that of a buyer's market is the best news for you. Premium and conditions will vary significantly will vary significantly, as to companies themselves. The day is not far when you will not be afraid to ask and insurer to give you a better quote than the one first offered particularly if you have a policy or two already with them or have been a customer for a reasonable time.


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Understanding Auto Insurance

Every body wanted to know about vehicle insurance

What is insured: Any light motor vehicle used for social, domestic, and pleasure purpose.

Insured against what risk: loss or damage by accident, fire, lighting, self, ignition, external explosion, burglary, house breaking or theft, malicious act; riot and strike; terrorism; earthquake flood, cyclone and inundation whilst in transit by rail, road, air elevator, left perils under liability for third party injury \ death third party property and liability to paid driver. On payment of appropriate additional premium, damage to electrical \ electronic accessories, personal accidental cover for driver, insured or any named person, un-named passengers can also be taken.

Who can insure: Individual and corporate owners of private cars and financier of the car having insurable interest in it.

What will the policy pay and how much: The insurance premium shall vary depending up on the type of vehicle, age of vehicle, the types of insurance cover taken etc.

When will the policy not pay: Consequential; depreciation; wear and dear; mechanical and electrical breakdown; when vehicle is used out side the geographical area; when used country to limitation to use; driven by a person other than the driver stated in driver closed- war perils, unclear perils and drunken driving.

Third party insurance cover for personal injury includes: Liability for death or injury to third parties means that you are insured against that or injury pedestrians, occupant of other vehicle, for unlimited amounts. Passengers of private vehicles and pillion riders are also deemed covered.


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Pure Insurance vis a vis with investment

Insurance is not an investment. It is a necessity for those who need it. Such people should always go in for higher cover and low premium policies. "True Insurance" called ‘term insurance ‘ covers the policyholder for a desired number of years against death. It does not have any maturity, paid up or surrender values. If the policyholder dies, the beneficiary (nominee or legatee) gets the sum assured. But, during the lifetime the policyholder does not get anything. Amazingly, the LIC does not have any pure insurance cover to offer. All its policies are a mix of term insurance and investment.

The LIC mixes up security with investment and leaves the investor little option other than buying the mixed product. Amongst such mixed products, there are a few policies where the weight age of term insurance is quite heavy. We shall examine such policies:

LIC 2-year Term Policy

This is essential a pure term insurance product. However this policy is not found very popular.

Convertible Term Assurance

The convertible Term Assurance (Without profit) is the closest to real insurance. It is given in Table-58 of the LIC premium table. Policies under this plan will be issued for five to seven years. This policy does not offer any surrender value, loan or paid up values. However this policy provides the option to convert the policy into either a Limited Payment Life Policy or an Endowment Assurance policy.

Triple Cover

There are two policies namely Jeevan Mitra and Jeewan Griha.

Triple cover means that if the policyholder dies during the term of these policies, the LIC pays triple the sum assured. On endowment, it pays only the single sum assured on survival at maturity.

Jeewan Mitra is a with profit policy. Presently the bonus rate is Rs.80/-per thousand. In case the policy with a sum assured of Rs. 10 lacs gets matured due to death of the insured with in the cover period, the sum paid shall be Rs.50 lacs. Rs. 50 lacs consist of sum assured of Rs.10 lacs plus double of Rs. 20 lacs. The bonus element is presumed to be Rs.20 lacs. In case the policy holder survives, the sum of Rs.30 lacs ( Rs. 10plus 20) shall be paid to him.


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New Jeevam Dhara

Is New Jeevan Dhar's 11.25 Percent Return Real?

Though offering an attractive return of up to 11.25 %, a number of tax issue relating to LIC New Jeevan Dhara Pension plan need to be clarified.

New Jeevan Dhara is essentially a deferred annuity, under which either single premium or annual premium for a deferment period of 2 years to 25 years is required to be paid. On vesting the annuity, annuity holder ant has the option to receive annuity at guaranteed rates, or exercise a cash option if a deferment priod is 10 years or more.

This plan has received popular attention, mainly on account of the cash option available after the deferment period of 10 years. According to the plan, by paying a single premium of 68500/- the cash option available at the end of 10 years’ deferment period works out to Rs. 2 lakhs. This equates to an effective annual compounded yell of proximately 11.25%.

The above return about 11.25% p.a. is being received as attractive, particularly keeping in view the cut in interest rates on small saving and RBI relief Bonds. However, a number of taxes related question are perplexing the investor, particularly since even LIC is silent till date on this issue.

Are the annuity and cash option amounts received under the plan taxable?

For finding the answer, we may need to look into various sections. Sec. 88, Sec 10(10D), Sec.10(10A) are the related sections. Sec 10(10D) provides that income from any sum received under a life insurance policy, including the sum received as bonus on such policy shall be exempt from tax. However the proceeds from Key man Insurance policy and the policies made under Sec. 80DDA shall be not be exempt. New Jeewan Dhara is not a life insurance policy but a deferred annuity or a pension plan of the LIC. Thus the tax exemption as applicable on such policies is in doubt.

In case the policies are commuted, the commuted value shall be governed by the provisions of sec.10(10A). Sub clause (iii) of Sec 10(10A) provides that any payment in commutation of pension received from a fund under Sec. 10(23AAB) is considered as tax exempt. Clause (23AAB) of Sec.10 refers to a fund set up by LIC of India on or after 1/8/96 under a pension scheme as approved by the controller of Insurance or IRDA. We are not clear that the pension fund presently set up for the new Jeewan Dhara scheme is approved by these authorities. If approved comes thru, such commutation shall be tax exempt.

Are the rebate u/s 88 available?

The next issue is whether investors are entitled to avail of the benefits of rebate u/s 88 for the single premium or annual premium. Sec. 88(2)(ii) and (xiia) are the related sections. Sec 88(2)(ii) provides for the benefit of income tax rebate in respect of any sum paid to keep in effect a contract for deferred annuity provided such contract do not contain any option for the investor to receive a cash payment in lieu thereof. Therefore the tax rebate under this section is not available.


However it is interesting to note that Sec. 88(2)(xiia) makes a separate provision for granting income tax rebate in respect of any sum to effect such contract for annuity. Such plan should be notified by the Central Govt. Till date there has been no such notification.


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Why purchase an insurance policy

The insurance scene in India is opening up, the now, customers can get a good deal on this vital instrument which saves more than money.

A young tech in a software company refuses to take out a life insurance policy. What's reason? His wife too was well employed, so he didn't think it made any sense to insure his life. And as everyone knows, the return from an insurance policy is not too good.

Do you think of insurance as an investment? The answer is no. Naturally, because you can’t equate an insurance policy with the other investment products, in other sense is in fact that contribution to insurance products qualifies for tax rebate. "You need an insurance policy for protection of actual value of vehicle and protection of family in itself is an investment," If you do not consider the rate return on insurance policy, surely going for it makes a lot of sense.

For one, it helps inculcate the saving habit, and for the long term. Too even if your spouse is employed, you should think of an insurance policy, simply, because the choice of nomination to take a policy lies with you. You can always make a non-earning member of your family as a nominee. Beside, insuring your life, you can take a policy for varies other products, your car, mobile, phone and house can all be insured for a nominal premium. Not many are aware that by paying a monthly premium of just Rs 100, one can insure his mobile phone. Even if they know, very few actually get down to insuring their handsets. In fact, it wouldn't be a surprise if insurance companies withdraw this scheme altogether for lack of insurance. However awareness is far better for motor insurance, mainly because it has been made compulsory by law. In fact with theft of vehicle on the rise in Delhi, car insurance helps rid you of a major worry. If you don't want to spend too much on the premium, you can opt of a third party insurance, which costs less than Rs 400. However it is always better to go for a comprehensive insurance cover. The list of insurable products can only grow if you make insurance a habit of life.

But if you have a home of your own, house insurance should be on top of your agenda. Not only does it provide cover, it even takes care of your house loan repayment commitment.


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Insurance Terminology explained

Buying insurance is not easy beside worrying about which is the right policy for you, there is a whole maze of terminology to negotiates. We make your task easier with this glossary

  • Annuity Plans

These plans provide for a "pension" (or a mix of a lump sump amount and a pension) to be paid to the policy holder or his spouse. In the event of death of both of them during the policy period a lump sump amount provided for the next of kin.

  • Business Insurance

A policy which primarily provides coverage of benefits to a business as contrasted to an individual. It is issued to indemnify a business for the loss of services of key employee or a partner who becomes disabled.

  • Convertible whole life policy

A mix of "whole life policy" and "endowment policy" it provides for very low insurance premiums with maximum risk cover while the life assured is just beginning his working career and possibility of converting the policy to an "endowment" policy after five years of commencement.

  • Double/Triple Cover Plans

These offer to the beneficiaries double/triple the sum assured on death of life assured during the term of the policy. On survival to the date of maturity the basic sum assured is paid to the assured. These are low-premium plans, most useful for situations such as housing.

  • Endowment Policy

The assured has to pay an annual premium which is determined on the basis of assured's age at entry and the term of the policy. The insured amount is payable either at the end of specified number of years or upon the death of the insured person, whichever is earlier.

  • Family insurance

A life insurance policy providing insurance on all or several family members in one contract, generally whole life insurance on the principal breadwinner and small amounts of term insurance on the other spouse and children including those born after the policy is issued.

  • Guaranteed Insurance Sum (GIS)

A lump sum purchase of is given to purchase future pensions under the Jeevan Akshay Plan. This amount is referred to as GIS. And the monthly pension that is payable one month after payment of first premium is calculated on the basis of age of at entry.

  • Group Life Insurance

Life insurance usually without medical examination of a group under a master policy. It is typically issued to an employer for the benefit of employees, or to members of an association for example a professional membership group. The individual members of the group hold certificates as evidence of their insurance.


  • Indemnity

Legal principle that specifies as insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss.


  • Joint Life Endowment Assurance Plans

The sum assured (plus any accrued bonuses) under this type of policy is payable on the end of the endowment term or on the first death of the two lives assured, whichever is earlier. Typically (though not a necessity) taken out by a couple, a variation is available for couples only. In this case, the sum assured will be payable on first death and then again on the second death (along with all vested bonuses) if both deaths occur during the term of policy . If one or both lives survive to the maturity date, the sum assured along with all wasted bonuses will be payable on maturity date. Premiums during this plan cease on the first death or the expiry of the selected term, whichever is earlier. Another variation provides Fr annuity to both/surviving spouse or a lump sum amount to the legal heirs.


  • Lapsed policy

A policy which has terminated and is no longer is force due to non-payment of premium due.


  • Limited Payment life policy

Premiums need to be paid only for a certain number of years of until death if is occurs within this period. Proceeds of the policy are granted to the beneficiaries whenever death of the policy holder occurs. Again this policy can also be of the "with profits" or "without profits" type.


  • Loyalty additions

The loyalty addition is given upon the maturity of the policy, and not before. It's a small percentage of the sum assured. Broadly speaking loyalty addition is the difference between the performance of the insurance company and the further additions. It is LIC's effort to further share its surplus after valuation with the policy holders, as LIC is a non-profit organization.


  • Money Back Policy

Unlike endowment plans, in money back policies, the policy holder gets periodic "survivance payments" during the term of the policy and a lump sum amount on surviving its term. In the event of death during term of policy the beneficiary gets the full sum assured, without any deductions for the amounts paid till date, and no further premiums are required to be paid. These types of policies are very popular, since they can be tailored to get large amounts at specific periods as per the needs of the policy holder.


  • Premium Back Term Insurance Plans

These provide for refund of all the premiums paid, in the event of the life assured surviving to the beneficiaries in the event death occurs during the policy term.


  • Vesting Age

The age at which the recceipt of pension starts in an insurance-cum-pension plan.


  • Whole life policy

Premiums are paid throughout the lifetime of life assured. this can be with profits or without profits (A "with profit" policy is eligible for various bonuses declared by LIC every year, while a "without profit" policy does not have this privilege.)


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