1 March An individual suffers from the risk of dying early and the risk of living too long. A term assurance plan covers the risk of dying.

Transcription

1 1 March 2006 Term Plans: A Comprehensive Research Report An individual suffers from the risk of dying early and the risk of living too long. A covers the risk of dying. A can also be used as a cover against outstanding loan and other liabilities. I. Conceptual overview of a Term Plan Term assurance is one of the simplest varieties of insurance policy. As it has been mentioned in the earlier reports, the main purpose of taking up an insurance policy is to provide suitable risk cover. A provides just this. A is a conventional insurance product that essentially covers the risk during the selected period (term). In the event of death of the policyholder, the policy provides payment of the sum assured. However, since such s provide pure risk cover, there is no maturity and they do not offer any amount at the end of the term. II Benefits of a The main reason for taking an insurance is to provide a suitable financial buffer against contingencies. The existence of s is governed by this utility. Term assurance s offer the following 2 important advantages: Contents I Conceptual 1 overview II. Benefits of Term 1 III. Tax benefits of taking term 1 insurance IV. How to select a 2? V. Karvy s Picks 3 VI Comparison 4 VII. A final word 5 1. Death benefit In case of unfortunate death of the policyholder these s provide the payment of the sum assured to the nominee. Hence, such s provide financial protection for the family in case of death of the insured person during the term. 2. Low cost risk cover A term is the cheapest product available in the insurance industry today. Cost wise, it is the most effective of all insurance s. 3. Cover against outstanding loans Any term can also be used as a cover against outstanding loans and liabilities. In case the person has taken a large number of loans, then the person can take a equal to the amount of the loan so that in case of his death, the insurance company will clear the outstanding liabilities helping the family to become free from the financial burden.

2 Investor s Corner Are you one of those who are interested in a low cost insurance cover? Are you prepared for any eventuality that could befall you? Do you have loans and other outstanding debt that need to be paid? Do you want to your family to have a financially sound and secure life incase of your premature departure? You are the ideal candidate for a term assurance policy- which is a low cost insurance cover, a must in a person s financial portfolio! III IV. Tax benefits of a p lan Premiums paid towards a are eligible for a deduction under section 80C up to a maximum of Rs.1,00,000. The death benefit that will be received under such a policy will also be exempt from tax under section 10(10D) of the Income Tax Act. How to select a? The main feature of a is that they only cover the risk of the policyholder during the term of the. Such s do not provide any maturity benefits. While selecting a, it is important for the policyholder to carry out a close introspection of his needs and requirements. Based on the extent of the liabilities of the policyholder and his financial commitments, the sum assured should be selected. The most important aspect of taking up a is the cost attached with the. It is important for the policyholder to take up that policy that provides the maximum risk cover for a given cost. Though s do not provide any maturity benefits, there are some term s which pay back the premiums to the insured at the end of the term. Such term s are commonly referred to as term s with return of premium. ICICI Prudential and Bajaj Allianz are the common examples of insurance companies which offer term s with a return of premium. V. KARVY s Picks Term assurance can be broadly classified into two categories Conventional s and Term Plans which offer a return of premium. Based on the research undertaken by KARVY Insurance Research Desk, the following products have been short listed for analysis: 2

3 Ever searching for a low cost cover for your loans and financial commit ments? A is what you should consider! Tax Corner Premiums payable towards an insurance will be eligible for a deduction under section 80C up to Rs.1,00,000. Conventional Term Plans: These s include: Kotak Preferred Term Plan from Kotak Life Insurance Company Anmol Jeevan I from Life Insurance Corporation of India Level Term Plan from Max New York Life Insurance Company Term Plan from HDFC Standard Life Insurance Company Life Guard Plan from ICICI Prudential Life Insurance Company (Without return of premium option) Term Plans with return of premium The following s have been taken into consideration: Term Care from Bajaj Allianz Life Insurance Company Life Guard Plan from ICICI Prudential Life Insurance Company (With return of premium option) Under both the s, the insured can opt for riders like accidental death benefit rider, waiver of premium rider and other such benefits by paying an extra premium. In the case of conventional term s, the premium becomes a profit to the insurance company in case the insured person survives the policy term. At this juncture we would like to reiterate the fact that term s which offer return of premium pay the premiums on maturity. This benefit comes at an additional cost. Hence, term s which offer the premium on maturity are more expensive than the traditional insurance s. Any proceeds from an insurance will be exempt from tax u/s 10(10D) of Income Tax Act. 3

4 VI. Comparison between s without return of premium S.No Kotak LIC MNYL HDFC I-Pru. Name of the Key features Age at entry (minimum & maximum) Maximum age at maturity Minimum and maximum term Preferred Term Plan term assurance Anmol Jeevan I 18 years 60 years 18 years 55 years Level Term term assurance 18 years 55 years Term Plan term assurance 18 years 60 years / 18 years 55 years (if optional benefits are taken) Life Guard 70 years 65 years 60 years 65 years 65 years 10 yrs - 30 yrs for Regular Premium. 5 yrs - 30 yrs for Single Premium. 5 yrs yrs. 5,10,15,20 or 25 yrs. 5 yrs yrs. For Single Premium - 2 yrs. To 15 yrs. 18 years - 55 years 5yrs - 30 yrs, For Level term without Return of Premium. 10yrs - 30 yrs, For Level with Return of Premium. 3 yrs - 15 yrs, for single Premium. Min. and maximum SA OPEN-subject to Mini. Yly. Premium Rs.2000 & Single Premium Rs Rs.5 lakhs to Rs.3 crores Mini. 2.5 lacs Max. 5 crores. OPEN-subject to Mini. Yly. Premium of Rs Mini. S.A. for Single Premium Policy 2.5 lacs.for other schemes S.A. is open subject to Mini. A.P. of Rs The following table presents the cost structure a 30 year old male for a sum assured of Rs.10,00,000 for 10 years. Comparative costs of term s without return of premium Kotak Preferred Term Plan Anmol Jeevan I Term Plan of HDFC I-Prudential Life Guard MNYL Level Term Rs.2,645 and Single premium is Rs.16,640 Rs.2,564 and Single premium is Rs.17,120 Rs.2,670 and Single premium is Rs.19,380 Without return of premium Annual premium is Rs.3,032 and single premium is Rs.20,167. Rs.2,280 and Single premium is Rs.14,940 4

5 The comparison of the premiums involved in the case of term s which retur n the premium on maturity is given below. The figures are taken for a 30 year old male for a policy cover of Rs.10,00,000 for a period of 10 years. Bajaj Allianz Life Insurance Company Term Care Plan with return of premium This comes with a combination of 4 different packages i.e. Basic with regular and single premium, Protect which 3 built-in covers like ADB, Disability and WOP and Health variant which comes with CI benefit and hospital cash benefit and a Total variety which comes with a combination of all the above. For the basic the annual premium is Rs.13,990 and the single premium will be Rs.67,720. In case the policyholder wants to opt for the other features then the premium will be correspondingly higher. ICICI Prudential Life Insurance Company Life Guard with return of premium This has 3 different varieties of s level term assurance with return of premium, level without return of premium, level single premium without the return of premium. When level with return of Premium is opted for there is additional benefit of extended life cover for 5 yrs after the maturity of the policy for 50 % S.A. This gives Additional protection even after Premium paying term. Annual premium with return of premium is Rs.32,523. Single premium option with return of premium is not available with ICICI Prudential. VII. A Final Word Research report by: Karvy Insurance Broking Limited For mo re information on insurance contact insurancebroking@karvy.com The above table throws a lucid light on the salient features of s and the premiums that are associated with the term s. Before taking up any term it is necessary to understand the various nuances and then the necessary decision should be taken. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments di scussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessar y. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to 5