A lowdown on insurance sector

What is the reason behind foreign companies making a beeline to enter the insurance business in the country. It's pretty obvious: Insurance in India is only 3.14 per cent of its GDP compared with the global average of 7.52 per cent.

And this is expected to rise to only 4 per cent. This means a vast majority of Indian population is left to be covered by insurance. At present, there are 16 companies providing life insurance in the country.

In India, insurance is seen with an improper perspective. Insurance products are sold rather than bought, as most people do not realise that insurance is for the security and benefits of their dependants.

While the objective of life insurance is to provide a lump sum amount in the eventuality of untimely death of the insured, most Indians buy insurance to save taxes.

This is evident from that around 40 per cent of the insurance business of any insurer takes place in March, which marks the deadline for submission of investment details for computation of income-tax liabilities.

Now the question is: What if the government withdraws the exemptions on insurance? Are you not going to buy insurance then? The government is currently considering the EET (exempt, exempt, tax) system even for insurance, and in that case, should you stop buying insurance? People must understand that they should buy insurance in their own interests or benefits (of their dependants) and not only as a tax-saving instrument.

Types of insurance
There are five main types of life insurance policies available in the domestic market. The first is the term insurance, which is a pure risk cover and the cheapest among all categories. In this case, the insured gets the sum assured in case of death only.

The second one is whole life policies, where sum assured is payable either in case of death or maturity, whichever is earlier. The third type includes endowment policies where the sum assured is paid either at the end of the term or in case of death, during the term.

The fourth category is moneyback policies, where the sum assured is paid periodically, say, after five years or 10 years and so on. The last one is ULIP, where besides the life cover you get returns linked with the markets.

How much to buy
There was time when an insurance policy worth even a few lakh rupees was sufficient, but this is not the case today. With income levels increasing substantially and costs of living too shooting up, one needs to buy large-size insurance cover. The insured amount should be sufficient to satisfy the needs of the dependants and cover loan amounts.

Term insurance "� the cheapest
Term insurance is cheaper than any other kind of insurance. For a 30-year-old male, the premium for Rs 10 lakh cover is around Rs 3,500. There is misconception among some that there might be certain limitation on the coverage. But this is not case, the premium are low because it gives benefits only in the case of death.

With profits vs without profits
There are with profits policies and without profits policies. In the former, the insured participates in the profit of the insurance company. The company declares bonus every year and the insured gets the accumulated bonus at the end of the term. But there are no free lunches, as the premium for with profits policies is higher than that of without profits policies.

Insurance and investment
One should keep insurance and investment separate. Take a term insurance and invest the balance amount as per your risk profile. Never mix insurance and investment, in such case the returns are less. In case of endowment insurance, returns are 3-4 per cent, while the returns from small saving schemes are double of that at 8 per cent.

ULIP versus mutual funds
If you think money invested in ULIP gets fully invested in equities, you are wrong. There is a loading factor that varies from company to company and policy to policy. It is 5 per cent to 70 per cent of the first premium.

Thereafter the loading factor decreases to, say, 2-3 per cent. Besides the loading factor, there are mortality charges, administration charges. Again equity exposure depends upon the scheme you choose.

Riders
Riders are the strings attached to a main policy. There are various riders such as accident benefit, critical illness, disability benefit etc. But for each rider you have to shell out an extra amount. And keep in mind, you can opt for the riders only at the time of taking the insurance policy.

Critical illness vs mediclaim
The critical illness (illness such as bypass surgery and blood cancer) rider pays a lump sum amount when a critical illness is detected. And after the claim, the rider subsists. In case of a mediclaim policy, you get pre- and post-hospitalisation benefits, apart from the medical cover.