Split Term Cover

Dear Friends, Many a times I & several others had advised to opt split Term Covers. But a common person is not able to understand the logic & benefit offered by split Term Covers. Here I’m discussing the benefit of split Term Cover with the prem. Illustrations of LIC’s Anmol Jeevan Term Plan. 

Let’s assume a normal healthy male aged 30 years wants to take term cover of 60L as per his financial liabilities for next 25 years. The different prem. Quotes (service Tax included in the prem.) are given below. 

 

Table – 1 for LIC Anmol Jeevan Plan
Cover amount	Term	Premium
6000000	25	22928
1500000	25	5732
1500000	20	4841
1500000	15	4217
1500000	10	3846
Split Cover Total Prem.		18636

 

 Now from Table -1,

If the person opts a single cover of 60L Rs. for next 25 years, the prem. Outgo is 22928 Rs. Now imagine the situation after 8-10 years, He thinks there is no need for such high cover & a lower cover of say 40-45L is sufficient. But he can’t do anything bcoz if he opts to stop his current single cover of 60L Rs. the prem. For new cover of 40-45L ‘ll be higher for remaining period as he is taking the cover at later age. If he opts to remain with the single cover, he is paying prem. For the cover he doesn’t require.

Now for split covers of 15L each for 25, 20, 15 & 10 years the total prem. Outgo is18636 Rs. only. On a first hand there is an immediate saving of appx. 4300 Rs. per annum & the best part is after 8-10 years the person in question can simply stop his 10Y 15L policy as per his changed cover requirement. Already he is paying less prem. Every year for split cover than a single cover & after stopping the 10 year policy. There ‘ll be additional saving of 3846 Rs. These saving amounts can be invested for better investment. The same thing can be done to other policies also one by one after passing of some more years. 

 On a concluding note, it’s finally the choice of the person what he wants. The major flip side or should I say negative side of this strategy of split cover is, in case the financial liabilities increase (normally Fin. Liabs. Decreased, but in extra ordinary cases it may increase also), There ‘ll be shortage of cover & the person ‘ll have to take more cover as per his changed liabilities. 

Jeevan Varsha - New Guaranteed Return Money Back Plan from LIC

Dear friends, There is a new money back product on offer from LIC with GTD. Returns. The plan is open for purchase from 16th February, 2009 to 31st March, 2009.  The prem. paid are eligible for Section 80C Tax benefits as well as money back & maturity amounts are also Tax free underSection  10 (10) (D). Here is the plan scan for benefit of all of you.

ELIGIBILITY CONDITIONS

Minimum Entry Age: 15 years (completed)

Maximum Entry Age: 66 years (Nearest Birthday) for 9 years term policy, 63 years (Nearest Birthday) for 12 years term policy

Policy Term : 9 years & 12 years

Premium Paying Term: 9 years

Maximum Maturity Age: 75years (Nearest Birthday)

Minimum Sum Assured: Rs. 75,000/- for monthly ECS mode               : Rs. 50,000/- for other modes

Maximum Sum Assured: No limit 

PREMIUM PAYMENT MODES: Yearly, Half-Yearly, Quarterly, Monthly (by ECS mode only).

Survival Benefits:

For 9 Years Policy Term

15% of the Sum Assured is payable at the end of 3 years.

25% of the Sum Assured is payable at the end of 6 years.

60% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 9 years.

For 12 Years Policy Term

10% of the Sum Assured is payable at the end of 3 years.

20% of the Sum Assured is payable at the end of 6 years.

30% of the Sum Assured is payable at the end of 9 years

40% of the Sum Assured is payable together with Guaranteed Additions, and Loyalty Addition, if any, at the end of 12 years.

Death Benefit:

In case of death of the life assured during the policy term, the full sum assured is payable irrespective of the survival benefits paid earlier.

On death during the policy term excluding last policy year: Sum Assured with accrued Guaranteed Additions

On death during last policy year: Sum Assured with accrued Guaranteed Additions along with Loyalty Addition, if any.

Guaranteed Addition :

The policy provides for Guaranteed Addition at the following rates:

Rs. 65 per thousand Sum Assured per year for a policy of 9 years term.

Rs. 70 per thousand Sum Assured per year for a policy of 12 years term.

I calculated the return generated by this policy for a healthy male aged 30 years & sum assured of 10L Rs. with annual prem. Mode (to get highest rebate on tabular prem. Thru annual prem. Mode & high sum assured) for both term 9 & 12 years. For 9Y policy the prem. is 153909 Rs. per annum & for 12Y policy the prem. is 157094 Rs. per annum. Now plz. Go thru the following calculation. Here I had assumed the money back received from the policy ‘ll be reinvested till maturity of policy to earn post tax return of 8%.

1. 9Y Term

A. Total prem. paid over the policy term = 1385181 Rs.

B. 1st M/B (Money Back) after 3Y = 150000

C. Value of B at policy maturity (after remaining 6Y) = 238031

D.  2^nd M/B after 6Y = 250000

E. Value of D at policy maturity = 314928

F. Final M/B at policy maturity = 600000

G. Gtd. Addition @ 65 Rs. per annum per 1000 SA = 585000

H. Loyality addition (not Gtd.) = 50000

I. Total Maturity amount =  C+E+F+G+H = 1788000 Rs. appx.

For an annual prem. of 1.54L Rs. The I above (maturity amount) is @ 5% rate of return only.

2. 12Y Term

A. Total prem. paid over the policy term = 1413846 Rs.

B. 1st M/B after 3Y = 100000

C. Value of B at policy maturity (after remaining 6Y) = 199900

D.  2^nd M/B after 6Y = 200000

E. Value of D at policy maturity = 317374

F. 3^rd M/B after 9Y = 300000

G. Value of F at policy maturity = 377913

H. Final M/B at policy maturity = 400000

I. Gtd. Addition @ 70 Rs. per annum per 1000 SA = 840000

J. Loyality addition (not Gtd.) = 75000

K. Total Maturity amount =  C+E+G+H+I+J = 2210000 Rs. appx.

For an annual prem. of 1.57L Rs. The K above (maturity amount) is @ 5.62% rate of return only.

 

Conclusion –  From the above calculation, everyone can see itself that the returns generated by this policy r not that much impressive as it looks on first glance. For lower Sum assured say 1L or 2L Rs. & for higher age the returns ‘ll be even lower. Also there is no guarantee of Loyality addition which I had considered in my calculation.

Plz. Don’t fall in the trap of gtd. Returns offered by this policy. It’s making wealth for LIC & it’s agents only, not for U, the Policy Holder. 

14.16% or 33.99%? Which Tax Rate is higher?

Strange isn’t it! With out doubt majority of U ‘ll declare 14.16% as lower Tax than 33.99%. Some of u may be thinking what I’m talking about? My dear friends my question is quite interesting & a valid one. Let me clear u what I’m asking?

All of us already aware that Div. Distribution Tax on Debt based MFs is 14.16% where as STCG Tax on debt funds for a person in the highest Tax slab is 33.99%. Now think again on my question & answer.

Now read below to find the truth –

I assume there r 2 investors Mr. Sharma & Mr. Kapoor. Both r in the highest Tax slab of 33.99%. Now both have a surplus saving of 10L Rs. Which both want to invest in secure debt funds. There is a debt fund available for investment @ NAV of 10 Rs. for both Growth as well as Div. payout option. Mr. Sharma opts to invest in Div. payout option. While Mr. Kapoor has some other plans & invest in Growth option. From 10L Rs. each has been allotted 1L Units. On 364th day, the NAV of the fund for both option is 12 Rs.

Div. pay out option – The fund announces a div. pay out of 10% per Unit i.e. 1 Rs. per unit.
A. Div. Amount = 1*No. of Units = 1*100000 = 100000 Rs.
B. Total amount withdrawn from fund including Div. Distribution Tax = 100000/0.8584 = 116496 Rs.
C. Hence DDT = B-A = 16496
D. Per Unit of fund, the impact of Div. = 116496/100000 = 1.165 Rs.
E. Post Div. NAV of fund = 12-1.165 = 10.835 Rs.
F. Value of investment after Div. distribution = E* 100000 = 1083500

Growth Option – In parallel to Div. amount of 1L Rs., Mr. Kapoor decides to book STCG. Here is his calculation

A. No. of UNITs redeemed for STCG = 8833.8
B. Redeemed amount = Per Unit NAV*A = 12*8833.8 = 106005.6
C. Per UNIT STCG = 12-10 = 2 Rs.
D. Tax on C @ 33.99% = 0.6798 Rs.
E. Total STCG Tax = A*D = 6005.6
F. Redeemed amount net of STCG Tax = B-E = 100000 (Equal to Div. Received under Div. pay out option)
G. Total No. of Units remain = 100000 – A = 91166.2
H. Value of investment post STCG = G*NAV of UNIT = 1093994.4

Now all of us can look, DDT (@ 14.16% ) is higher than STCG Tax (@ 33.99%) due to which the value of investment is higher for Mr. KAPOOR.
So it’s now for all of U guys to decide what to do in case of investment in Debt funds.
The above calculation once again proves that don’t look at the nos. for what they appear at first glance, just dig deep & u ‘ll see another truth.

Thanks

Ashal

Health Saver Plan - New Plan from ICICI Prudential Life Insurance Company

Hi, There is a new plan "ICICI Pru Health Saver" in market. This is being called as ULIP and which boast of availing tax benefits u/s 80D for the entire amount invested. Being a ULIP, Because of benefits u/s 80D It looks attractive. Please analyze this plan and give your expert opinion about it. Many Thanks for your time. Regds Vivek Answer -  Dear Vivek, earlier the combo of Health Plan & ULIP was available from LIC as well as Reliance but in both these policies, the 80D benefit was not available on investment part. So ICICI Prudential Life Ins. cos. has moved with this cleverly drafted policy. Here the investment part of ur prem. or in other words fund value can only be redeemed against medical treatment/expenses. This policy is a combo of usual mediclaim policy & ULIP. Just dig deep into the skin of this policy & u `l come to know the real truth. First understand what this policy offers? apart from a normal mediclaim benefit, due to investment component from 3rd policy years onwards u can claim more than ur standard Sum assured with a ceiling set by company. Say ur original SA is 3L Rs, after completing 3 policy years u can claim a normal claim of 3L rs. under mediclaim benefit & another 20% of ur accumulated fund value. In other words u can redeem ur fund upto 20% value of fund. This fund value ceiling `ll increase with the years pass & after 10 policy years u can claim 100% of fund value. As per the product brochure of this plan, This policy can be taken as individual plan as well as family floater plan. For individual Plan - Min. entry age is 25 years completed & max. age is 55 years. For family floater Plan - Min. entry age is 90 days & max. age is 55 years. In each of the above policy the maturity age is common i.e. 75 years. Here r the negative aspects of this plan. 1. High Prem. allocation charges - 20% for 1st year, 2 & 3 year 9%, 4-10 years 2% & Nil from 11 year onwards. 2. In case of family floater option, in case of death of primary insured (the eldest member of family), the policy `ll be terminated immediately. 3. Regular prem. pmt. is compulsory for first 5 years for cover continuance option i.e if u don`t want to pay prem. in future to keep policy in force u `ll have to pay prem. for first 5 years. 4. No surrender of policy is allowed except the first 15 day free look period window. 5. Ins. charges for general mediclaim policy as well as policy admin charges `ll be recovered by cancellation of UNITs which `ll impact u severely in prolong bearish phases like the current one. 6. For individual plan option the mly. policy admin charge is 60 Rs. where as for family floater option the same is 90 Rs. 7. A long list of exclusion, which i can`t post here in this limited space of MMB. 8. Actually the health saving option of this policy is similar to our general practice of dipping into our savings to sat off the medical bills. 9. Plz. note the prem. for general mediclaim benefit (known as Hospital insurance benefit in this policy) `ll be charged on ur actual age every month by cancellation of ur UNITs. this is not the case in normal mediclaim policies of Gen. ins. cos. where u pay prem. as per age band of say 31-35, 36-40...... Again this monthly cancellation of UNITs `l impact more in case of bear phases as more UNITs `ll be cancelled to pay insurance prem. per month. In my view - The same effect of mediclaim & saving can be achieved by purchasing a cheaper mediclaim policy as well as investing the surplus amount as per our comfort level in Eq. or Debt funds or anywhere else. So this policy should be avoided. Thanks Ashal

Closure of Insurance Company

If the insurance compnay from which i ahve taken a policy closes down, what will happen to my policy? Is there any policy from the government which will protect my policy?

Answer - Dear Friend, I can't tell u about future as no one knows what lies in future but we can certainly get an indication from history. Some 4 years back there was a Life Ins. co. in India named AMP SANMAR, which was a joint venture between AMP Life insurance Co. of Australia & Sanmar Group from South India. Due to several reasons, both co. decided to part ways & intimated IRDA for their willingness of exiting the business. IRDA intervened & asked Reliance Life Insurance Co. to Take over the business of AMP Sanmar Life Ins. Co. & here comes the most customer friendly act of IRDA in favor of policy holders. Reliance was told to keep older policies run as per the previous Terms & conditions as agreed upon by AMP Sanmar & rel. can't changed these midway.

Another example - Earlier the Gen. ins. business of HDFC was a JV of HDFC & Chubb, later on chubb decided to exit the JV, IRDA allowed HDFC to run the Co. solo till it find another partner & now this co. is known as HDFC ERGO, where ERGO is the new JV partner.

I hope the above examples 'll clear ur doubts. Yes failure of Ins. co. due to extra ordinary high claims or consecutive losses on its investment portfolio (this is not on ULIP but for traditional policies) AIG's case is an example. 

Thanks

Ashal