Calculating life insurance coverage

The fundamental concept in assessing whether you have adequate life coverage is to check that, should something unfortunate happen to the bread winner, your family continues to ideally get the current annual income. To get this amount right, you would therefore need to calculate the insurance payout that is required to get you current annual income when invested in relatively safe instruments.

An easy way to calculate this amount is to take the bread winner's current annual income, divide this number by current 1 year bank fixed deposit rate and multiply the result by 100. For example:

1. If current annual income is Rs 3,00,000
2. Current 1 year bank fixed deposit rate = 8%
3. The amount of life cover you may want the bread winner to seek = (300000/8)*100 = Rs 37,50,000
4. Amount could be lower if you feel that actual living expenses (after paying off all debts) are lower than Rs 3,00,000 - in which case, substitute that number for Rs 3,00,000 is the above calculation.

Is your family adequately insured ?

India Insurance: ULIP

Unit Linked Insurance Policies (ULIPs) are insurance policies that combine risk coverage with investing in the stock/debt markets. In effect, they are designed to behave as normal insurance policies plus mutual funds.

An investor contribution to ULIPs gets invested in specific types of portfolios that he/she chooses. The policy typically pays back based on market returns on investments at the end of the insured period. Therefore, it forms an interesting savings instrument that can get good risk cover.

Features of ULIPs include:

1. Units allotted under ULIP schemes have Net Asset Values (NAV) declared regularly, like a mutual fund

2. Investors can invest across types of portfolios similar to mutual funds - growth equity, balanced, debt funds, etc. Investors can move across portfolios, typically at nominal costs

3. Investors can invest as a lump sum (single premium) or make premium payments on an annual, half-yearly, quarterly or monthly basis. Premium amounts can be changed over the course of ULIP's life

4. Investments qualify under Section 80C of the Income Tax Act. Maturity proceeds from ULIPs are tax free. There are no long term capital gains tax and 10% short term capital gains tax on equity portfolios within ULIP. For debt funds, long term capital gains tax is 10% while short term is at the investor's marginal tax rate.

5. However, charges charged by insurance companies can be quite confusing - therefore, investors should compare them with similar mutual funds to see if charges quoted are reasonable.

Despite their interesting structure and potential benefits, investors are better off clearly understanding portfolio types offered, performance of fund managers and expenses/fees before investing in ULIPs.

India medical insurance premiums under check

IRDA (The Insurance Regulatory and Development Authority, India), has directed insurers that the premium in any year should not be more than 75% than what was paid last year. Following deregulation of general insurance tariffs, medical insurance premiums were in some cases revised by 200% +. This led to many people discontinuing medical insurance and lodging complaints with the regulator.

While the price increase cap is good for consumers (compared to a 200% + increase !), it would be be detrimental to insurers who have been facing significant claims, especially in medical insurance.

India property (land) title guarantee

Mint, the new Indian finance newspaper, reports that land title guarantee schemes are being considered in three states: Rajasthan, Andhra Pradesh and Karnataka. This is being done to clean up 'title' issues which often hold up new developments as also lead to numerous court battles. In some cases today, a developer has to secure close to 40 year history of land ownership before he can be sure of the cleanliness of the title. As most of such developed land tends to have been occupied by farmers, there is generally an issue of lack of records and dispute in ownership and possession.

State guarantee of land titles can go a long way in cleaning up this mess. The guarantee is sought to be given by the state directly or indirectly through a land title insurance product offered by a general insurer. Backing this up is the proposed automation of land records (for example in Karnataka) that will make land transactions that much cleaner and efficient.

What does all this mean to you, the retail investor ? It could mean:

• quicker development of projects
• clean and guaranteed titles should you be buying into layouts converted from agricultural use
• higher prices in the short to medium term as developers vie aggressively for the initial tranches of 'guaranteed' land
• higher prices in the short to medium term as foreign and domestic private equity funds get more aggressive in buying the clean land
• overtime, a demat type land record system where you and I can go to the land title office and get as much information on the land as required before doing a deal - similar to the developed world
• greater transparency in pricing of real estate deals with automation.

The direction is definitely good, lets wait and see how well the implementation goes !

Insurance (car, home) in India to become cheaper

Insurance in India is set to become more price competitive, thereby taking less out of your financial planning budget.

IRDA, the insurance regulator had freed the pricing regime for general insurance products (car, home, fire etc) on 1 Jan 2007. This led to massive discounts by insurance firms. The regulator then stepped in and capped discounts at 51%.

Cap is being removed wef 15 November 2007, which should see massive price competition reducing premiums steeply. Competition is good !

Health insurance in India: more from your pocket

January 2007 saw the introduction of free pricing regime in the Indian insurance sector. This has meant that insurers are starting to 'price' risk more actively, particularly in health insurance. In practical terms, this impacts individuals who are covered by health insurance policies in the following ways:

• Premiums could have gone up by 30-100 %
• Larger portion on the medical costs need to be paid by the individual, before insurance kicks in
• Approved hospital lists are getting shorter as insurers try to reduce costs.

It is therefore advisable to read your health insurance policy in detail now to avoid surprises when you need the money !