14 December 2005, Report I. I. Conceptual overview of a Whole Life Plan. An individual is exposed to 2 types of risks:

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1 14 December 2005, Report I Whole Life Insurance Plans A Comprehensive Research Report I II. An individual is exposed to 2 types of risks: Risk of living too long AND Risk of dying early A whole life policy covers both the risk of living too long and the risk dying early. Contents Conceptual overview Benefits of a Whole Life Plan III. Suitability analysis of a 2 Whole Life Plan IV. How to select a whole life plan? 2 V. KARVY s Picks 3 VI. Jeevan Anand Plan 5 VII Tata AIG 8 Mahalife VIII. MNYL Whole 11 Life Plan IX. A Final Word I. Conceptual overview of a Whole Life Plan A Whole Life Insurance plan is a typical insurance product that provides risk co ver throughout the life of the individual. A whole life insurance plan runs as long as the individual policyholder is alive. Since such policies cover the policyholder throughout his life, they are called whole life plans. There are two types of whole life plans. One type of a whole life plan functions like a typical term plan and provides the sum assured only on the death of the policyholder. Another variant of the whole life plan is a whole life endowment / money back plan. The whole life endowment plan provides maturity benefits to the policyholder on the expiry of the stipulated term and provides risk cover throughout the life of the policyholder. In the case of a whole life money back plan, as the name suggests, the policy provides inflow of cash at regular intervals, apart from providing a risk cover for the entire life. Thus, the common thread that permeates through all whole life plans is that the individual s life is covered as long as he/she lives. II Benefits of a whole Life Plan The main reason for taking an insurance policy is to provide a suitable risk cover. The returns that the policy provides, the tax benefit that such policies offer etc are all added advantages. These features should not form the primary consideration for taking any insurance policy. Considering the fact that risk cover is the main purpose of an insurance policy, whole life plans fit the bill perfectly as they cover the risk throughout the life of the individual. Hence, the individual can expect a comprehensive cover from a whole life plan (provided he has taken up one whole life plan offering him an optimal insurance cover.) It is this feature which makes such plans an ideal product for insurance.

2 Investor s Corner Interested in a plan that provides a risk cover as long as you live? Are you employed and do not have enough time to revisit your insurance needs from time to time? Interested in planning for your retirement without compromising on your risk cover? You are the ideal candidate for a whole life plan III. Suitability analysis of a whole life plan A whole life plan which covers the individual throughout his life may be highly appropriate in the following cases: A young person who is interested in getting a cover for rest of his life A working executive who wants to take advantage of getting a life long insurance cover A person who understands the importance of insurance and believes in securing his future against losses A person who does not believe in taking up a host of insurance products, but believes in a one product which provides a comprehensive risk cover, lasting as long as he lives. Some of the common whole life plans are Mahalife Plan of Tata AIG Life Insurance Company, and Whole Life Plan of Max New York Life Insurance Company. IV. How to select a whole life p lan? A whole life plan covers both the risk of dying early and the risk of living too long. Hence, there are a lot of whole life plans that are being offered by a number of insurance companies. Amidst such a plethora of whole life plans, it is necessary to select a plan that best fits an individual s unique needs and requirements. In this context, it is necessary to evolve a suitable methodology for selecting a whole life insurance plan. Some of the broad parameters that need to be considered before selecting a whole life plan are: Risk cover The primary objective of taking an insurance policy is to have a risk cover. Hence, it is important that the sum assured is commensurate with the changing needs and requirements of the individual. Survival benefits A whole life plan is said to be an insurance policy which provides a cover for living too long only because Cash inflows The inflows that the policyholder gets from the policy at regular intervals can be a determining factor while selecting a whole life plan. 2

3 An example that can be quoted is that Tata AIG s Mahalife pays cash every year in perpetuity from the 10 th year of the policy. Ever dreamt of a life cover till the age of 80 & beyond? Whole life plan provides just that! Cash benefits The bonuses that are payable on the plan are also another feature that needs to be taken into account. Some plans have pay guaranteed bonuses while some other plans provid e non-guaranteed bonus payouts after 6 years, while a few others provide such payouts only from the 10 th year. Hence, the individual should select that policy which starts the bonus payouts at the earliest so as to benefit from the power of compounding. Flexibility Ultimately, the policy belongs to the individual. Hence, the individual should have the flexibility to select the sum assured, the premium paying term etc. While some plans have the flexibility, some do not offer such flexibility to the indiv idual. Simplicity While flexibility is indeed important, in case too much of options are given to the policyholder it makes the product more complex. Hence, it is important to strike a via-media to ensure that the product is flexible and at the same time easy for the policyholder to understand. NOTE Whole life insurance plans can also be market linked in nature. Such plans are called unit linked whole life insurance plans. This section discusses conventional whole life plans. Market linked whole life plans have been discussed in detail in another section. V. KARVY s Picks Based on our research which covered various products in the insurance industry, we have short listed a few whole life plans which in our opinion are the best of the lot. The short listed whole life plans are: Tata AIG Mahalife Max New York Life Insurance Whole Life Plan LIC s Jeevan Anand In this context we wish to bring to your notice that the above short listed products are as per our analysis and interpretation. These views are subject to change from vendor to vendor. 3

4 Comparisons of Whole Life Plans S.No Features LIC MYNL Tata AIG 1 Name of the company Jeevan Anand Whole Life Plan Mahalife 2 Product Whole life insurance plan Whole life insurance plan Whole life insurance plan 3. Key features It offers life cover throughout the life of the policyholder. On It offers non reversionary bonus from the 3 rd year of Pays 5% from the 10 th year throughout the life of the policyholder. maturity the sum assured along with bonuses is paid to the policyholder. the policy. 4. Premium paying term PPT is for a maximum Flexible premium 12 years of 75 years. payment options 5. Minimum and maximum age at entry 18 years to 65 years 18 years to 55 years 30 days to 60 years 6 Mode of premium payment Yearly, Quarterly, Half yearly and Monthly or SP. Yearly, Quarterly, Half yearly and Monthly Yearly, Quarterly, Half yearly and Monthly 7. Guaranteed returns NA NA 5% from the 10 th year of the policy 8. Cash benefits Sum assured along with bonus is paid at the expiry of the stipulated term. Non guaranteed returns are paid in the nonreversionary 5% of the SA is paid every year from the 10 th for the rest of the person s life format 9. Maturity benefits Sum assured along with bonus is paid. SA plus bonuses SA plus bonuses 10. Death benefits Sum assured + bonus. (The earlier payouts will not be deducted) Sum assured + bonus. (The earlier payouts will not be deducted) 11. Riders available Accident benefit rider WOP, CIR, Term Rider, Dreaded disease rider 12 Rating as per Karvy Insurance Research Sum assured + bonus. (The earlier payouts will not be deducted) Disability, term, WOP accidental death rider 4/5 4.5/ /5 4

5 VI. - The Jeevan Anand Plan of LIC A Detailed Analysis Customer profile for Jeevan Anand A young working executive interested in an endowment plan reinforced with a risk cover for the rest of his life. A person who is interested in corpus accumulation over a period of time A person who requires a lump sum corpus for his child s marriage or higher education as the case may be VI A. Jeevan Anand in a capsule A Whole Life Insurance plan is a typical insurance product that provides risk cover throughout the life of the individual. A typical whole life insurance plan runs as long as the individual policyholder is alive. Since such policies cover the policyholder throughout his life, they are called whole life plans. There are two types of whole life plans. One type of a whole life plan functions like a typical term plan and provides the sum assured only on the death of the policyholder. Another variant of the whole life plan is a whole life endowment / money back plan. The whole life endowment plan provides maturity benefits to the policyholder on the expiry of the stipulated term and provides risk cover throughout the life of the policyholder. Jeevan Anand is a endowment type of a whole life plan. The policyholder selects the term of the policy and pays the premiums which are commensurate with the age of the policyholder; sum assured and selected term of the policy. At the end of the stipulated term the policyholder receives the sum assured along with the bonuses, while the risk cover continues in perpetuity. 5

6 Product highlights Jeevan Anand of LIC is an endowment whole life plan from the stable of LIC India. The premiums need to be paid for a maximum of 75 years. The minimum age at entry is 18 years, while the maximum age is 65 years. The minimum sum assured is Rs.1 Lakh while there is no maximum limit, The minimum term is 5 years while the maximum term is 57 years. The premium can be paid on a quarterly, half-yearly or yearly basis. This is a with profits plan which pays reversionary non-guaranteed bonuses at the end of every financial year. VI B. Product Description The Jeevan Anand plan is a participative endowment plan from the stable of Life Insurance Corporation of India. Unlike other money back whole life plans which provide a stream of cash at regular intervals, the Jeevan Anand plans returns the sum assured along with the bonuses on maturity, but the risk cover continues till death of the policyholder. In other words, the Jeevan Anand plan provides financial protection against death throughout the lifetime of the policyholder with the provision of payment of a lump sum at the end of the selected term in case of his survival. (The sum assured is topped with bonuses as the may be declared by the Corporation from time to time.) In the event of the unfortunate death of the policyholder, the sum assured along with the bonuses is paid in a lump sum at the time of the death. In case the individual survives the policy term, then the entire sum assured along with the bonuses is paid. In case death occurs after the stipulated policy term, only the sum assured is paid without the bonus. Hence, bonus payouts will be applicable only in the event of a death before the expiry of the stipulated policy period. The policy may be surrendered after it has been in force for 3 years or more. The guaranteed surrender value is 30% of the basic premiums paid excluding the first year s premium. Any extra premium(s) paid and premium(s) towards Accident Benefit are also excluded. Analysing the unique features of the Jeevan Anand plan in toto, one can conclude that the Jeevan Anand is ideal for the following persons: Individuals who are not interested regular cash flows, but in a lump sum maturity benefit with life long risk cover. Any person who is interested in planning for his retirement without compromising on the risk cover Any person who is interested in creating a lump sum (tax free) corpus after n years which can be used for financing his child s higher education or marriage as the case may be. 6

7 /5 Interpretation 5 Fantastic Above 4 Excellent Very Good Good Average Less than 2.5 Poor The following factors have been broadly considered to arrive at the rating of the product cash flows, death benefit, maturity benefit, simplicity and flexibility VI C. Performance analysis of the Jeevan Anand plan of LIC Jeevan Anand provides reversionary bonuses to the policyholder at the end of every year. The bonuses declared will depend upon the performance of the Corporation and are not guaranteed. The bonus rates for the Jeevan Anand plan are given in the following table: Term Bonus (Rates per thousand SA) 6 years to 10 years Rs years to 15 years Rs years to 20 years Rs years Rs.59 Source However, it needs to be noted that the above figures are indicative of future bonus payouts. They simply indicate the past record of the bonus paid by the Corporation. VI D - Analyst s View After analysis of the plan the following points come to light: The Jeevan Anand plan is a participative endowment whole life plan. Hence, in case the person is interested in getting regular cash flows from the policy, this may not be idea as the sum assured along with bonus is paid only on maturity of the term. This policy is ideal for long term financial commitment like higher studies abroad or conducting the marriage of the daughter, repayment of housing loans etc which arise over a period of time. Life most other plans, these bonuses declared under this plan are not guaranteed. The overall structure of the plan is simple and easy for the common investor to understand. On the flip side the following other points need to be noted: This plan does not offer inflows in perpetuity. The only returns that this plan offers is the return of the sum assured (along with bonuses) on maturity. In case death offers outside the stipulated time period, the only the sum assured is paid and not the bonuses. On the whole, KARVY Research gives the Jeevan Anand 4/5 7

8 VII. - The Mahalife Plan of Tata AIG Life Insurance Company - A detailed analysis VII A. The Mahalife plan of Tata AIG in a capsule Product profile of the The Mahalife A young working executive interested in building a retirement corpus A person who is interested in a stream of income for perpetuity A person who does not mind paying high premiums for perpetual cash inflows The Mahalife plan is a whole life plan from the stable of Tata Life Insurance Industry. The unique selling proposition of the plan is that from the 10 th year onwards, this plan offers guaranteed returns to the policyholder. This is in addition to the non-guaranteed returns that the plan offers. This plan comes with a limited premium paying term after which the policy pays yearly cash flows to the policyholder throughout his life. These cash flows can be invested in a number of other avenues to gene rate required returns to help the individual reach his financial goal. Here it needs to be mentioned that the cash flows that accrue under the policy are completely exempt from tax (under the current provisions of the Income Tax Law.) However, since the premiums have to be paid over a limited period of time, the cash outflows tend to be quite high in the initial years. Overall, this is a plan that the policyholders can consider among the basked of whole life plans. 8

9 Product highlights The Mahalife Plan of Tata AIG is a whole life plan which covers the risk of the individual for the entire life. The premiums need to be paid only for the first 12 years. From the 12th year of the policy, a guaranteed annual amount is payable for the rest of the life of the policyholder. Additional cash dividend from the 6th year of the policy (non guaranteed) On death or maturity at the age of 100 years, the entire sum assured will be paid. Age limit for this plan is between 30 days and 55 years. (without medical examination) VII B. Product Description The Mahalife plan is a whole life plan from the stable of Tata Life Insurance Industry. This plan is perhaps the only plan in the insurance industry which offers guaranteed returns to the policyholder (in addition to non-guaranteed payouts.) The premiums in a Mahalife Plan need to be paid for a limited period of 12 years. From the 12 th year, this plan provides guaranteed 5% per annum (as a proportion of the sum assured) for the rest of the life of the policyholder. Due to its unique feature, this plan can be used to build a retirement corpus (as a pension plan with a risk cover) or the same plan can be taken to build a corpus for your child s future (as a child plan where the life assured is that of the parent). This plan offers a choice of 4 levels of cover: Rs.1,00,000, Rs.2,00,000, Rs.3,00,000 and Rs.4,00,000. It is also possible for gift this plan to your child as long as your child is within the age of 30 days and 17 years. In case of the unfortunate death of the parent, all the future premiums will be borne by Tata AIG till the child turns 21 years of age or the deceased parent would have attained the age of 60years whichever is earlier. Hence, this plan can be used both as a pension plan for building a retirement corpus and as a child plan to leave a secure future for your child. The premiums payable under the Mahalife is given below: Age / SA Rs.1L Rs.2L Rs.3L Rs.4L 30 days to 17 years 8,156 15,332 22,509 30, years to 35 years 7,865 14,830 21,795 29, years to 45 years 8,115 15,330 22,545 30, years to 50 years 8,475 16,050 23,625 31, years to 55 y ears 9,155 17,410 13,089 34,220 Note The above table shows the annual premiums chargeable under the plan. 9

10 /5 Interpretation 5 Fantastic Above 4 Excellent Very Good Good Average Less than 2.5 Poor VII C. Performance analysis of the Mahalife Plan of Tata AIG The Mahalife Plan of Tata AIF provides guaranteed returns from the 12 th year of the policy. In addition to the guaranteed returns, this plan also provides non-guaranteed cash dividends from the 6 th year of the policy. However, this policy has been in existence only for 4 years. Hence, the track record for dividend payouts is not available. However, the main highlight of the plan is that it offers guaranteed returns. But this benefit commences only after the 10 th year of the policy. The following factors have been broadly considered to arrive at the rating of the product cash flows, death benefit, maturity benefit, simplicity and flexibility VII D - Analyst s View After analysis of the plan the following points come to light: Tata AIG Mahalife plan is perhaps the only plan offering guaranteed returns in the insurance industry. This plan offers guaranteed payouts throughout the life of the policy from the 10 th year of the policy. This is in addition to the non-guaranteed returns which will be paid from the 6 th year of the policy. The overall structure of the plan is simple and easy for the common investor to understand. On the flip side the following other points need to be noted: The limited premium option (for 12 years) may prove to be quite expensive for some policyholder as the premiums a re quite high. This plan does not offer any flexibility for its policyholder, I n terms of the premium paying terms, fixing of the sum assured etc. The non-guaranteed returns start only from Year 6, while MYNL starts from year 3. On the whole, KARVY Research gives the Mahalife 4.25/5 10

11 VIII. The Whole Life Plan of Max New York Life Insurance Company A detailed analysis Customer profile for Whole Life Plan of MNYL A person who is interested in a policy giving increased sum assured over the long time frame A person who is comfortable with flexibility and autonomy in deciding the parameters of the policy (comfortable with its inherent flexibility) VIII A. MYNL s Whole Life plan in a capsule A Whole Life Insurance plan is a typical insurance product that provides risk cover throughout the life of the individual. A typical whole life insurance plan runs as long as the individual policyholder is alive. Since such policies cover the policyholder throughout his life, they are called whole life plans. Max New York Life s whole life plan offers the last word in flexibility and autonomy. It is completely the investor s plan. This policy offers reversionary bonuses to the policyholder which can be used by him either for paying his premiums or can be used for enhancing his sum assured or can be withdrawn. Thus, this plan provides a way of increasing his sum assured over a period of time. This plan also provides the flexibility of withdrawing the money as and when the individual desires by opting for the bonus withdrawal option. On the whole, this plan is rather unconventional for an insurance policy. Its novel approach and flexibility may make it rather complicated for the average investor. 11

12 Product highlights The Mahalife Plan of Tata AIG is a whole life plan which covers the risk of the individual for the entire life. The premiums need to be paid only for the first 12 years. From the 12th year of the policy, a guaranteed annual amount is payable for the rest of the life of the policyholder. Additional cash dividend from the 6th year of the policy (non guaranteed) On death or maturity at the age of 100 years, the entire sum assured will be paid. Age limit for this plan is between 30 days and 55 years. (without medical examination) VIII B. Product Description The Whole Life Plan offered by Max New York Life Insurance Company is a novel product which offers non-reversionary bonuses to the policyholder. This means that the bonuses do not revert back to the policy, but can be withdrawn by the policyholder or used for buying additional sum assured or can be used to pay the premium. Thus, the Whole Life plan of MNYL brings with it host of flexibility and also has its share of complexities that need to be unraveled. The main features of MNYL s Whole Life Plan are: Provides insurance for long tenors. Providing protection at very affordable prices. Providing for high value assets. The Whole Life Plan presents the last word in flexibility. The policyholder can choose his premium paying term, the tenure of the policy, what he/she wants to do with the bonus that is paid etc. This policy offers customers the freedom to increase/ decrease/ maintain the sum assured which is unprecedented in the insurance industry. (Most insurance plans have a fixed sum assured.) In case the policyholder chooses to reinvest the bonus to buy additional sum assured, then his sum assured increases at a systematic manner. Thus, when the policyholder s insurance needs increase, his/her sum assured would have also increased, thereby eliminating the need for revisiting his/her insurance needs. This Who le Life Plan gives a new perspective to insurance by providing a suitable financial solution in three conditions: Inflow in case the individual survives through bonuses (which can be withdrawn by the policyholder) In case the individual dies, the entire sum assured along with the bonuses is paid to the policyholder In case the individual is in need of money, he can choose to withdraw the cash value of the policy or choose to withdraw his bonuses without compromising on the risk cover. 12

13 Investor s corner Are you interested in a cover which will last as long as you last? Do you believe that your insurance needs will not remain the same throughout the life? Will you be interested in a plan which will not only provide you with a death benefit but also with cash benefit and a maturity benefit? Are you comfortable with a highly flexible product that can be molded to suit your own unique tastes and preferences? Are you interested in a product were you can stop making premium contribution and let the plan pay for itself? Max New York Life s Whole Life Insurance Plan is ideal for you! In case the individual is not in a position to pay his premiums, then the bonuses may be used to pay the premiums (known as premium offset By virtue of the bonuses declared by the Whole Life Plan of MNYL, it helps in the creation of the asset over the long term. This in itself acts as an inducement for individuals to remain invested for the long term. Thus, it facilitates the creation of an asset worth lacs by paying thousands today only. MNYL invests the premiums primarily in long term debt instruments and high quality credit paper of companies (which enjoy a triple A credit rating by CRISIL) Thus, there is the premiums which are collected are not invested in the market but in high quality debt paper where the probability of capital erosion is highly remote. However, even though the main investment is in high quality debt paper, MNYL has shown annualized returns of 15% for the year ended ad 12.5% for the year Hence, the past performance seems to be satisfactory as far as bonus payouts are concerned. Also, it needs to be mentioned that MNYL is the only ISO certified company in the context of claims processing. However, considering the fact that MNYL is a new entrant in the insurance industry, the veracity of the claims processing mechanism are issues which can be answered only with time. VIII C. Performance Analysis of the Whole Life Plan of MNYL The returns provided by Max New York Life Insurance Company are not guaranteed. Hence, under adverse conditions there is a possibility that the company may not pay any bonus to the policyholder. This is quite similar to hoards of other products which offer non-guaranteed bonuses to the policyholder. In this context however, it is necessary to note that the bonus record of MNYL for the whole life plan has been quite commendable. Before coming to the actual bonus % provided by MNYL under this plan it is necessary to understand the investment portfolio of the company. 13

14 Rating by KARVY Insurance Research The following factors have been broadly considered to ar rive at the rating of the product cash flows, death benefit, maturity benefit, simplicity and flexibility /5 VIII D. Analyst s View After analysis of the plan the following points come to light: Max New York Life s Whole Life Plan comes with a host of flexible and innovative features which are rather unconventional for an insurance product. It is this feature which sets apart MNYL fom the others The insurance needs of an individual can be traced as a bell shaped curve: i.e it increases initially, reaches a high and then declines. Max New York Life offers a system whereby the policyholder can buy additional sum assured by investing the bonuses paid. One the policyholder feels that he needs to reduce his risk cover; he can opt to en-cash his bonuses or can surrender the topped-up portion of the sum assured, leaving the balance intact, which is again unprecedented in the insurance industry. It is this facility that makes MNYL s Whole Life Plan a one time solution to an individual s life insurance needs and requirements. The premium paying term can be decided by the policyholder. In case the person does not have adequate cash flow he can opt for a higher premium paying term. In case a person has adequate cash flow he can opt for a premium paying term as low as 10 years. No hidden charges under this plan. On the flip side, the following points need to be noted: This product is highly complex and has a lot of permutations and combinations that need to be understood. Hence, this policy in its entirety may be too much for the average investor to digest. Investors who are used to a conventional insurance product may not be comfortable with so much of flexibility that is present in the product. All the returns are non-guaranteed. All the other principles of increasing sum assured hinges on the bonus payouts which is non-guaranteed. In case bonuses are not paid, then there is likely to be a set back for the policyholder. On the whole, KARVY Research gives MNYL s Whole Life Plan 4.5/5 14

15 IX. A final word Whole life plans ideal for: Young working executive Persons planning for retirement Persons interested in creating a corpus for their children As it has been mentioned before, an insurance policy should be taken up mainly for the risk cover. Other accessories like returns, tax sops etc are secondary. Considering this fact, whole life plans fit the bill perfectly as they are the only plans in the insurance industry which provide a risk cover for the entire life of the individual. While some plans are pure risk whole life plans while some plans offer guaranteed returns in addition to providing a risk cover for the entire life. Under such circumstances, it is very critical for every person to understand the nuances and pros and cons of the various whole life plans that are currently flooding the insurance market. We hope that our series of reports will facilitate this process and assist you in making a more informed decision. Research Report By: S.Krishnamoorthy, 304 Sundaram M,277 V.V.N. Murthy,277 VijaiKumar Madhira,369 For more information on insurance contact insurancebroking@karvy.com Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information containedherein 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 discussed 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 necessary. 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 time. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities. 15