Insurance cover should be 20 times one's current income

Insurance cover should be 20 times one's current income24 Aug, 2007, 0000 hrs IST,Haresh Soneji, TNN

Insurance products are dime a dozen. Choosing an insurer over another is not easy with little track record of performance to compare. Bharti AXA Life Insurance CEO Nitin Chopra , in an interview to ET , advises individuals to keep an eye on product charges, investment returns & service capability of insurers.

What are the factors to be kept in mind while choosing a policy and an insurance company?

While choosing an insurance product, it is important for an individual to identify the core need. While most seek a combination of financial protection as well as investment needs to achieve long-term goals like child’s higher education or buying a house, there are customers who require only financial protection.

Such individuals have already taken care of their investment needs and have identified a need to protect his/her family financially from undesirable eventualities such as mortgage liability or sustenance of lifestyle, in the unfortunate event of his death. A term insurance product would be appropriate for them, as it provides his family a lumpsum amount on his death.

However, there are other customers whose needs vary (saving to retirement planning to simple tax planning)?

The need for buying an insurance policy not only differs among individuals, but also varies with people’s lifestage. The insurance needs of a working executive when he is in his early days of employment (and not yet married) are different from his needs when he is middle-aged and married with children. It is, therefore, important that the individual evaluates his insurance need, considering his lifestage, following which he can arrive at a suitable protection and investment mix, and tenure.

Having arrived at the insurance product requirement that best suits his need and existing financial portfolio, the customer can choose from a number of insurance companies. Some of the factors that will help him select the insurance company are product charges, net return on investments, additional benefits of the product such as loyalty bonus and the service capability of the company.

The customer may compare the charges for similar products across different companies and the net return on investments. Also, in case of ULIPs (Unit-Linked Insurance Plans), the customer can also consider the track record of funds performance. Market knowledge and the quality of advice offered by agents of insurance companies can also help with the choice of the company.

How much of an individual’s savings do you think should be invested in life insurance? Is there a thumb rule that applies for various age groups?

Although there is no defined thumb rule for life insurance investments, the insurance cover required for future financial protection of an individual is typically said to range from 10 to 20 times his/her current annual income. In India, it has been estimated that around 15% of the gross domestic savings of a household is invested in life insurance.

How much of an individual’s portfolio need to be invested in ULIPs? Given the current market scenario, do you think investment in ULIPs is advisable?

It is advisable to invest in ULIPs primarily because of their transparent charge structure and the potential to achieve good investment returns over a longer period (generally five years or more), given the choice of different investment funds. Even in a volatile market, Unit-Linked Insurance Plans can be a reasonable investment option as the customer can switch funds from high equity to high debt or money market funds, without any switching charges. This protects the customer from market volatility

However, it is important that the customer understands that ULIPs, by nature, would require reasonable decision-making to achieve optimum investment returns. Also, ULIPs are tax-efficient and have typically low-fund management charges.

Are Indians underinsured? What accordingly to you are the challenges faced by the insurance industry?

Life insurance penetration in India is estimated at 4.1% of GDP, with per capita life premium at $33, both of which are low compared with the Asian and global average. The penetration and premium for Asian countries stands at 5% and $154, while the global average is 4.5% and $330.

That the Indian customer base is so diverse it can be described as several countries rolled into one is a challenge and opportunity for insurers. The challenge is meeting the expectations of this diverse market while the opportunity lies in bringing the best of international product design to cater to this demand.

Segmented approach to product design and delivery, especially for the vastly-untapped rural market will help insurance penetration in India. It is equally important to reach these products out to the target markets through innovative distribution techniques and channels as awareness on the need for financial protection and disciplined long-term financial planning is still in its nascent stages in small towns. For customers in urban centres, the quality of service delivery is a key differentiator.