Category Archives: Insurance

Who is Right?

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Dear Friends,

                            Navratri wishes to all of you!

In this titbit, I am presenting a real-life case of Life Insurance and leave it open to you for response as who is right!

Mr. Mayur, aged 32, IT professional lives in a newly purchased property along with his wife Shilpa, homemaker and 1-year old daughter Niveda. Mayur has taken a home loan of Rs. 90,00,000/- to be paid over 20 years resulting in a monthly EMI of 84,000/-. He does not have any other assets and both Mayur and Shilpa will not be beneficiaries of any inheritance.

One of Mayur’s colleagues, who knows his background, suggests that Mayur should meet a professional investment advisor and seek his help to plan his finances. In the initial meeting with the advisor (Manish), which was brief and more like an icebreaker session, Manish suggests that Mayur needs to buy a life cover as any contingency to his life will be a huge burden on his family. Based on the evaluation of Mayur’s human life value (HLV) by both Income Replacement and Expenses & Liability approach, Manish determines that Mayur would need a cover of atleast 2 Crores. Manish recommends Mayur to buy a 1 Crore term cover from 2 Life Insurers totalling 2 Crores of Sum Assured (SA). The total premium for 2 Crores sum assured would cost approx. Rs. 20,000/- per year

Mayur feels happy that this insurer is going the extra mile to service him.  The representative from Insurance company 2, meets Mayur and asks him the background of the Insurance requirement. Once he understands the requirement, he makes a different pitch to Mayur. Mayur has anyway bought a 1 Crore term insurance which will not provide him anything in return and the entire money paid to the insurer will go waste. Instead he proposes a ULIP cover with a premium or Rs. 12,000/- per annum that will provide a small SA of 1 Lakhs or the value of the investment, whichever is higher.

He convinces Mayur by showing him different scenarios of the return potential of the ULIP, with 100% equity investment. The Equity market soared that year and the ULIP bought by Mayur attained a value of 16,000/- for an initial investment of 12,000/- Mayur continues to pay for both the Term Cover and ULIP and at the end of 5 years finds the value of his ULIP to be about 1.25 Lakhs while the 10,000/- premium that he pays for the Term Cover has gone down the drain leaving him confused and thinking whether the decision of taking a Term Cover was right.

< PenguWIN TITBIT # 102 – Who is Right?>

Business Ethics of Insurers

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Hello Friends,

           Last weekend (Feb 25/26) I watched a movie called “Rainmaker” directed by Francis Ford Coppola, rated as one of the best directors and has movies like Godfather to his credit. The movie is based on a book written by John Grisham, Lawyer and acclaimed writer of legal thrillers.

Matt Damon, plays the role of an Attorney, very enthusiastic and fresh out of college. He signs up the case of a poor family with their son, about 20 years old, suffering from Leukemia, which can be treated through bone marrow transplant. But their Insurance Company rejects the claim multiple times (saying treatment is very high and chances of survival is low) and Matt files a lawsuit against the Insurance Company. The insurance company is ruthless and as a protocol rejects every claim, atleast the first time, without going into merits of the case (their operational manual say “reject” the claim). The diseased victim dies during the trial, as the time frame to start the surgery got delayed. The parents of the victim pledge the entire money to social cause, if they get the verdict in their favour, as their son is dead and don’t intend to use that money for themselves.

Finally, the Jury gives the verdict in favour of the victim and his poor family and asks the Insurance Company to pay a huge amount as punitive damages, resulting in the Insurance Company going bankrupt. 

Before you start thinking that why PenguWIN has shifted lanes from writing about “Financial Topics” to “Movie Reviews”, let me assure that this is a personal finance blog and I am not a movie buff to demonstrate my competency in Reviewing Movies!

On the 2nd March (Last Thursday), I read an article on consumer protection by Jehangir in Business Standard. When I read the article, I was really shocked. It relates to a life insurance claim of a person for a Sum Assured of 2 Lakhs, who was hospitalised in Amritsar and died. The Insurance Company repudiated the claim made by the victim’s wife on grounds that the victim was suffering from chronic liver disease for 18 months and the same was not revealed when the insurance policy was taken. I don’t want to name the Insurer, which is what is frightening more so for the claim amount (I have attached the paper cutting in the link). 

http://penguwin.com/insurance-rejection-v02/

The Insurance Company lost the case in Gurdaspur district forum but went ahead to appeal in Punjab State Commission. The Insurer relied on Medical Certificates obtained from 3 doctors that claimed the victim was an alcoholic and had suffered cirrhosis of the liver (an abnormal liver condition in which there is irreversible scarring of the liver, resulting in failure).

The state commission upheld the Insurer’s stand and set aside the district forums award. The victim’s wife approached the National Commission and contended that her husband was a school teacher, used to go for regular health check-ups and the reason for death was an accident which had nothing to do with alcoholic Cirrhosis of Liver and produced the relevant records. This is where you will see another twist..

The national commission, on reviewing the medical certificates that the insurer produced from 3 doctors, found several loopholes – 1 is not even a allopathic doctor and the handwritten certificate did not have the date and reference. Similar observations were made on the other 2 certificates and the medical record of the hospital showed that it was uncertain whether the liver problem was associated with alcoholism. The National Commission indicted the insurer for their fraudulent practices and decided the verdict in favour of the victim.

Apparently, a claim cannot be declined on assumptions or on basis of medical certificates which are vague. The name of the Insurer and the way they had conducted themselves to decline a small sum of 2 Lakhs is definitely worrisome.  

Does the lawsuit ring a bell with a similar one which caught the attention of the entire the country?

 

<Blog # PenguWIN 1050 – Business Ethics of Insurers>

Don’t Mix Insurance and Investment

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Dear Friends,

                       Hope you had a delightful and safe Diwali!

When I do Financial Planning for my clients, there is one common phenomenon that I observed which I wanted to share with you. Almost everyone (including me, I bought a LIC Jeevan Shree policy in 2000 when my financial prowess was relatively less) has been persuaded to purchase either a whole life or money back or endowment policy from LIC. There are a few who escaped the clutches of LIC agents only to be trapped by agents of other private players.

Interestingly a high proportion of these insurance policies have been sold by either friends, relatives or close acquaintances of the investors. Rather than the product being understood and bought by the investor, they have been thrust upon them. In several cases clients have confessed that “I was aware that the policy/product is not suitable for my requirements but had to oblige as the seller is known to me”. The concept of Insurance has been abused and misrepresented by clubbing it with savings, taking the charm away from the product.

Let’s say you buy an endowment policy for a Sum Assured of X Rs. for a term of Y years. The premium that you need to pay has 2 components – “Risk premium” and “other premium”. The risk premium is based on the actuarial calculation by the Insurance company taking into account factors like age, health condition, whether you are a smoker or not etc. The “risk premium” is the actual amount charged to provide the insurance cover and the “other premium” is invested by the company and returned back to you at the end of the policy term.

The reason why I am critical about these endowment or whole life or money back policies is that they offer a paltry return of a maximum of 6%, way below rate of  inflation. I had evaluated multiple polices from both the Public sector and Private Insurance providers and the returns including the risk premium charges works out to less than 6% (It will be lesser if you exclude risk premium). Not only is the Return on Investment (ROI) low in these policies but the coverage offered (Sum Assured in case of eventuality) is also abysmally low. Insurance covers of 1 crore and above are quite common these days and if you need to buy an endowment policy with a sum assured of 1 crore, the premium that you have to pay will be an astronomical figure.

For example, LICs Jeevan Anand endowment policy for a 30 year old person for a term of 30 years and Sum Assured of Rs. 1 Crore has a yearly premium of Rs. 3.44 Lakhs. The ROI of this policy works out to approximately 4.5%

I want to make it clear that I am not against buying a Life Insurance policy. Insurance is essential but you need to go for the right solution.

So, what is the solution for this?

Buy a traditional Term Insurance policy for your Life Cover. You just need to pay the first component, “Risk Premium”, to buy this cover and use other options like Mutual Funds, PPF, Bank Deposits etc. for Investments and get a better ROI!

I am appending the yearly Term Policy Premium Rates for 30 year old healthy person, non-smoker for a term of 30 years that I sourced from websites for you to get an idea. Remember that you will get these rates only when you buy the policy online directly, without going through an Insurance Agent or Broker.

Company and Product Yearly Premium
LIC eTerm ₹ 16,405
HDFC Click2Protect ₹ 11,910
ICICI Pru iCare ₹ 15,506
SBI eShield ₹ 13,135
Kotak eTerm ₹ 12,921

 

<Blog # PenguWIN 1015 – Dont Mix Insurance and Investment>

Category: Insurance