Saving through Protection Plans

First of all, let me put What insurance is :
•“insurance” refers to a financial service that uses risk-pooling to provide compensation to individuals or groups that are adversely affected by a specified risk or event.
•Risk-pooling involves collecting large groups (or pools) of individuals or groups to share the losses resulting from the occurrence of a risky event.
•Persons affected by a negative event benefit from the contributions of the many others that are not affected and, as a result, they receive compensation that is greater than the amount they have invested in the insurance policy.
•Thus, products that allow an affected individual to receive only up to the amount they have contributed are considered as savings products, not insurance.

Basic principles that should be observed by insurance providers are universal to insurance and risk management. They include:
1.Similar units are exposed to risk. Insurers require that risks in a particular class or group of policies be similar. Insurers also require that the group insured (or the "risk pool") includes a large number of these similar risks, relative to the total population. Large numbers of policyholders reduce the potential for adverse selection (a situation where claims are higher than expected because only high-risk households purchase the insurance) and increase the likelihood that the variance of actual claims will be closer to the expected mean used in calculating premiums.
2.There is limited policy holder control over the insured event. Insurance protection cannot be offered if policyholders can control whether an insured event will occur. Selling an insured truck and claiming it as stolen; setting fire to an old, insured home to build a new one with the insurance settlement; and failing to properly care for an insured goat thereby increasing the chance it will die of disease—all of these behaviors (called “moral hazards”) take advantage of the insurer by increasing their claims experience above expectations.
3.Insurable interest exists. Insurance cannot be provided to policyholders who have a vested interest in a loss occurring. A property insurance policy, for example, on a home cannot be sold to anyone other than the residents of the home.
4.Losses are determinable and measurable. Insurance providers must have a mechanism for verifying the occurrence of a loss and identifying its cause and value.
5.Losses should not be catastrophic. The risk-pooling mechanism of insurance breaks down against risks that cause large losses for a substantial portion of the risk pool at the same time.
6.Chance of loss can be calculated. Setting insurance premiums requires estimating the size of expected losses and the chance of loss.
7.Premiums are economically affordable. In general, for an insurance policy to be an attractive purchase, the cost of premiums must be substantially less than the benefit offered by the policy.
Source: Warren Brown and Craig F. Churchill, Insurance Provision in Low-Income Communities, Part II, Initial Lessons from Micro-Insurance Experiments for the Poor (Bethesda, Md., USA: DAI, 2000).
Terminologies:
The Concise Oxford Dictionary brings out the subtle difference between the two terms 'Assurance '& 'Insurance'. Assurance refers to those insurance policies which guarantee payment on death of the person whose life is insured or on expiry of the prescribed period, whereas insurance refers to those policies where payment would be made only in the prescribed circumstances — death or accident happening within a specified period.
You have heard of Bancussurance?
Banks sell the same Insurance products to you & they take their Commission from the insurance company. As a customer you have the satisfaction of not taking trouble to find out another agent who will give you protection product.
Types of Insurance Plans
Broadly, the products offered by different compnaies can be grouped into Term Insurance and Endowment Plans.

Under the Term Insurance, a lump sum amount is paid to the nominee on the death of the insured. The amount is paid if and only if death occurs and not other-wise. If the insured survives the plan period, nothing is payable. Whole life insurance plans are Term Insurance for the Longest Term;

Under the Endowment Plan, accumulated savings amount is given to the nominee in addition the lumpsum amount payable.

Obviously the premiums will be high for Endowment plans. The premium you paid or the Value of the Fund Accumulated get deducted for the following charges among others depending upon the product and the provider:
1. Premium allocation charge:
2. Policy administration Charges :
3. Fund Management Charges:
4. Guarantee charges:
5. Switching Charges:
6. Surrender Charges:
7. Partial withdrawal charges
8. Mortality charges
9. Miscellaneous charges


One will find numerous ULIP products with differing terms and Endowments now a days. A large part of a ULIP `premium' is divided into units and invested in equities and debt instruments, the mix varying according to each policy-holders' risk appetite. The units are akin to mutual fund units and the investor can redeem them at maturity at net asset value. However, since the maturity date is predetermined, ULIP act more like a closed-ended fund. And it was directly positioned in the market place against Mutual Funds upto 2009.

IRDA had capped the difference between gross and net yield to customers at 3 per cent for 10-year policies and at 2.25 per cent for policies of more than 10 years, effective from 1 October 2009.

That being the case for Insurance, what rate of return is possible from such hybrids of protection and investments?
In any case, long term endowment plans offer some thing similar to the yield on Long Term Zero Coupon GOI Bonds. ULIPs may offer good rate of return in an year of growth in the Capital Market ; but then you must be willing to shoulder it when the market goes down as well.

Sweeteners are avilable in terms of tax savings under Section 80 C of IT Act 1961.

Middle class may look at the ULIPs from Mutual Funds which charges relatively low premiums. BPL families get covered Rs30,000 under Rashtriya Swasthya Bima Yojana as per GOI budget 2008-2009. However, BPL and Lower middle class may look at Endowment policies. ULIPS are for the knowledgable and Risk savvy of any income class. For HNI, it is better to have Term Plans for Insurance and other products for Investments.

Always remember that savings are different investments are different, although we use them in daily life interchangably. Savings is out of thrift. But investment is essentially about surplus being deferred for future consumption.

Why should you compare Insurance Companies?

The following considerations should be kept in mind before choosing a Insurance Company.
· The background of the promoters and its joint venture partners.
· Number of years into Insurance.
· How good is the company in claim settlement.
· Service and friendly work force.
· Use of technology.

Why should you compare the Products from different companies?

· You can choose the best suited product according to your own needs.
· Chances are that you get the best pricing for the product you choose which can bring down your cost.
· By comparing offers from different companies you insure that you have not bought a inferior product from the market place.
· You get a clear idea of past performance such as bonus declared or returns given in case of Unit Linked Plans (ULIP's).