HLV – Key to an optimum insurance cover

Life is unpredictable. Though you may commit yourself to planning each and every rupee of your financial life, you never know what is round the corner. An unfortunate and unexpected event may lead to a life cut short, a financial plan cut short and a family not only in an emotional but also a financial turmoil. This is where life insurance comes in. Purchasing a life insurance cover in any form (term, endowment, etc.) ensures that your family is financially secure even when you are no longer there to provide for them.

Importance of HLV

The key to ensuring your family’s financial security lies in the quantum of insurance cover you wish to purchase. So, how do you arrive at this magic figure? Well, by knowing your Human Life Value (HLV). The HLV provides an indication of the insurance cover required to ensure the financial security of your dependents after taking into account your life’s existing and future financial situation.

Factors impacting your HLV

Factors such as your age, annual income, age of retirement, goals, assets and liabilities, current and future expenses and of course, the existing insurance cover, if any, are considered.

  Annual Income- Your average annual income is computed for a given number of years, beginning from your present age to the age of retirement, adjusting for increments. All expenses such as taxes, EMIs, household expenses, etc. are deducted from the annual income.

Sources of Income other than Salary- Over and above your salary, you may have other sources of income such as rental income, investment income, dividend income, pension received by your parent(s) if any, etc. All these are also considered as annual cash inflows. 

Inflation - If you maintain the existing pattern of household expenses, the same will increase year on year due to inflation. 

Existing Investment Portfolio - The present value of future streams of income derived from current investments is taken into account after adjusting for inflation. 

Financial Goals - All future goals too need to be accounted to ensure its fulfilment even in your aftermath. 

Time Period- The corpus (i.e. the sum assured available from the insurance policy) needs to cover the financial needs of your dependants for a specified period of time. Identify this time frame and multiply all annual expenses with this figure to compute total expenses.

Outstanding Loans -Existing loans need to be repaid. Compute the present value of all outstandings – car loan, home loan, personal loan, etc. This will ensure that your family does not have to carry the additional burden of repayment of loans that may have been taken by you.

Existing Life Insurance Cover -You may have already purchased some insurance cover. This value needs to be deducted from the recommended insurance cover

Computing your HLV

All the above factors, individually and collectively lead to a suitable HLV figure… What formula should you use? Don’t get into that, unless you really want to. These days, there are many HLV calculators available on the internet. All you need to do is be ready with the above information, fill it in and voila...your HLV figure is returned to you. Remember, while an under insurance may lead to financial insecurity, an over insurance may lead to a commitment of resources that could have been utilised elsewhere.

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Safeguard the financial security of those who shall be dependent on you in the future by availing life insurance today…
We all know the benefit of investing early - a longer investment term combined with the practice of reinvesting your investment income speeds up the wealth creation process. This principle of investing early also holds true for buying insurance, traditional as well as unit linked…

How? Read on to know the answer…

Getting life insurance at a young age is beneficial in many ways such as:

Getting An Easy Approval: For young applicants of life insurance, the approval process is often simple and easy. This is because conventionally the young are often less prone to health risks compared to the old. In most cases, you may be granted life insurance without going through any medical checkups.

Lower Cost: Insurance premiums are calculated on the basis of the underlying risk. In case of life insurance, the risk covered is related to death or severe physical disability. With average life expectancy at more than 60 years, life insurance companies foresee an unlikely chance of the underlying risk materialising in the near time in case of the young. Hence, keeping all other aspects same, a younger applicant will have to pay a lower premium vis-à-vis an older applicant.

‘Right’ benchmark for the correct picture

Is your investment a performer or an under-performer? Compare its performance with its benchmark to know the answer…

Taking investment decisions is not easy. It involves a lot of comparison, analysis and interpretation. When comparing the past performance of two investment products, it is very important to compare apples with apples and oranges with oranges. For instance, it is incorrect to compare the performance of a balanced mutual fund with an equity diversified fund or a mid cap fund with a large cap fund.

A valid comparison is one between products with similar features and risk profiles. Another simpler way of comparing investment avenues is simply comparing products with their respective benchmarks.

What is a benchmark?

As per Investopedia, a benchmark is ‘a standard against which the performance of a security, mutual fund or investment manager can be measured’. Thus a benchmark can be an index, a combination of an index or even a price of a commodity in the spot (i.e. cash) market. For instance, indices such as the BSE Sensex, BSE Midcap and CRISIL Balanced Fund Index or the spot price of gold can be used as effective benchmarks for an index fund, midcap fund, balanced fund and gold ETF, respectively.

How does benchmarking help?

Many a times, considering the standalone performance of an investment avenue may be misleading. For instance, an investment which may have given a 1-year return of 20 percent may seem to be a performer. However, that would be true only if its benchmark has delivered a lower return than that. But, if the return from the benchmark is higher, then, it can be safely concluded that the performance is not at par.

 

Remember…

Generally,  every  investment plans  has  its  own  pre-defined  benchmark.Investors also can create their own benchmarks for comparison as long as they have similar features and risk profiles as the investment option. There might be occasions where investment firms use inappropriate benchmarks for comparison just to highlight their performance. In such a situation, investors can compare them with the correct benchmark or with the category average. This will help investors to get a clear picture about the investment’s relative performance with the benchmark.

Buy the right insurance policy after knowing the charges involved

When you purchase an insurance policy, are you aware of the various charges? If not, then read on to ensure you buy the right plan with your eyes wide open …

Irrespective of the type of insurance that you purchase, although the premium that you pay appears to be a single amount, it is a combination of different charges. While some are levied across all policy types, some are applicable to market linked policies, where fund management is involved. Still other charges are levied when you opt for additional services within a given basic policy…. Here’s a quick look at the various charges involved -

Mortality charge: The insurance company uses part of the premium that you pay to provide for the sum assured. This could be in the form of death or maturity benefit, as the case may be. Factors that have any impact on this charge include your age, desired sum assured, health, occupation, lifestyle, etc.

Fund management charge: This charge is applicable when a part of the premium amount is invested in different types of capital market funds, as is the case with Ulip plans.

Policy administration charge: An insurance company’s administrative expenses - such as documentation, etc. - are met through this charge. This charge may either be a fixed amount or a certain percentage of the premium amount or sum assured. However, it is over and above the basic policy premium. In case of ULIPs, it is collected by cancelling certain allocated units per month.

Rider premium charge: Riders are optional benefits that you can add to your existing policy to enjoy a higher coverage. For these additional benefits, you are charged an amount over and above the basic policy premium.

The ABC of India First Group Credit Life

Intro: In this month's issue, we turn our focus to group insurance cover, a concept that is rapidly gaining popularity with consumers.  Read on to know about it.

Group insurance is an insurance policy that covers a group of people, usually the members of societies, employees of a common employer or professionals in a common group. These individuals are covered under a single policy called the ‘master policy’.

The insurance contract is with the body that represents this group of individuals such as the employer, who becomes the policyholder with the employees as the beneficiaries. The amount and terms of insurance are negotiated by the policyholder and not by the individual beneficiaries.

Broad plan details

Minimum age at entry    18 years
Maximum age at entry    65 years
Maximum age at maturity    70 years
Minimum group size    50 members
Maximum group size    No limit
Minimum cover    INR 5,000
Maximum cover    INR 5 crore

Group cover not only provides the members of the group with a life insurance plan but also covers any outstanding loan liabilities so that the group's interests are protected at an affordable cost in the event of death. All loans such as home loans, car loans, education loans, personal loans, etc. may be covered under the plan.

The member's family will not be burdened with the outstanding loan repayment, in the unfortunate event of the member's demise. The insurer will pay a lump sum amount to the family and any excess amount over the outstanding loan amount to the nominee appointed by the group member.

The premium is paid to the insurer by the policyholder who may or may not collect the same from the individual members of the group. The premium, if paid by the individual can be deducted straight from the salary.

Members have the flexibility to choose between a level term cover and a reducing term cover. In case of the former, the cover remains equal to the initial loan amount throughout the policy term. In case of the latter, the cover reduces to match the falling outstanding loan amount throughout the policy term. 

Depending on the cover option chosen (level cover or reducing cover), the members have the choice of regular, limited and single premium options.

Which Policy Type Should You Choose?

Intro: With multiple categories of insurance plans available, choosing a category that matches your needs will allow you to realise the policy benefits to the maximum.  Read on to know how you can match your need with an ideal category.

Consider this scenario: You wish to buy an insurance policy that will give you a large cover at minimal costs. Or, you wish to secure your child’s future. Or, you wish to build long term savings through market linked returns with an insurance cover. Bearing in mind such different needs, life insurance companies offer multiple products, each designed to meet a specific need.

Benefit Of Choosing A Tailored Product

By choosing a product category that matches your need, you can be rest assured that your need will enjoy the safety net offered by life insurance, and, therefore, will be met in case of all eventualities.

Broad Insurance Categories

Though each product category has multiple policies, all policies can be broadly categorised as follows:

Term plans

• Enjoy a large insurance cover at minimal costs.
• In case of death during the term policy, your dependents will receive the policy sum assured.
• If you outlive the policy term, you are not entitled to receive anything.

Endowment plans

• Enjoy protection and savings.
• On maturity or death, the policy pays out the sum assured plus accumulated bonuses.

Whole life plans

• Enjoy life cover throughout your lifetime.
• On death, your dependents will receive the policy sum assured plus accumulated bonuses.

Money-back plans

• Receive periodic payouts for meeting financial commitments at key stages in life.
• On death during the policy term, your dependents will receive the policy sum assured plus bonuses. Remember, earlier payouts received are not deducted.

 Unit Linked Insurance Plans (ULIPs)

• Enjoy market linked returns and speed up the wealth creation process.
• A portion of the premium paid is towards the insurance cover while the remaining is invested in an investment fund of your choice.
• On death or maturity, depending on the plan features, the payout includes higher of the policy sum assured and fund value or both.

Pension plans

• Build a corpus for your retirement that will allow you to enjoy financial independence.
• Based on the frequency of your choice, receive a regular stream of income from the same.

Child plans

• Secure your child’s future even in your absence.
• Receive periodic payments that will give you financial support when your child reaches his/her milestones.
• On death of the parent, in most cases the basic sum assured is paid, future premiums waived and the periodic payments continued to be made as per the plan.

Loan protection plans

• Secure your loan liabilities under all circumstances.
• On completion of the loan repayment, the insurance cover ceases or can be easily surrendered, depending on the plan terms.
• In case of death/total and permanent disability during the policy term, the policy proceeds can be utilised to settle the outstanding loan amount.

 End note

Before you buy any plan…

1) Ask yourself do you need insurance?

2) If “Yes”, how much cover? The cover will depend on your needs and your premium paying capacity. Choose a premium amount that you can comfortably pay over the policy term.

3) Finally, ask why you need insurance? Once the specific need is clear, pick a category that best serves your need.

4) The policies available within the chosen category will be the right policy for you.