Wednesday, July 25, 2012

Is Buying Insurance from Private Insurance Co.’s in India a Good Idea?

It has been just over a decade (Year 2000 to be exact) since the Government of India allowed Private players to enter the Insurance Market in India. In this short span of 12 years the growth in the Insurance Industry in India has just exploded in terms of growth and in fact, it is the fastest growing sector in India. So, at this crucial time, the most relevant question would be “Can I buy Insurance Products from Private Insurance Company’s?”

Well, the purpose of this article is to analyze the Pro’s and Cons of buying Insurance Products from Private Co.’s…

Background as to “Why” this Article came up!!!

A couple of days ago, one of our blog readers had dropped me a personal email asking if it is a good idea to buy Life Insurance policies from a Private Company. He also mentioned that his dad and uncle are strongly urging him to go with LIC since it is owned by the Government and not put his hard earned money in a private insurance company. It brought back memories from about 8 years ago when I bought my first insurance policy and what my dad told me. So, I thought, it would be a good idea to write an article for the benefit of all those younger generation of Indian Citizens who are being advised by their parents to forget private Insurance companies and believe that “LIC” is the only Insurance Company in India…

Why are our Parents Afraid of Private Insurance Companies?

The last generation of people in India grew up with LIC as the only Insurance Company. In fact, until 2000, there were no private players in the Indian Insurance Industry. Another important aspect is “Safety” and as per their belief, if something is owned by the Government, there is no way they will lose their money. What if the Private Company goes bankrupt? What will happen to our hard earned money in that case?

This fear is what predominantly drives their decision in favor of LIC.

Is their Fear Valid?

To be brutally honest, the answer is NO IT IS NOT VALID.

This whole article is about explaining WHY.

Things We Must Check About a Private Insurance Company

There are many things that we must check about a Private Insurance Co before taking or rather buying Insurance from them. They are:
a. The Company’s Financial Strength & Stability
b. Claim Settlement Track Record

Financial Strength & Stability

How will we check a company’s financial strength and stability? By checking its balance sheet, profit and loss statement etc. But, a majority of us either don’t have the time or the know-how to understand such financial statements. So, what is the easy way out?

Who Owns this Insurance Company? Are they a well-established and profitable group?
For ex: TATA AIG Life Insurance is a joint venture between TATA Group (From India) and American International Group (AIG). Both of these groups have a strong track record of successful performance and profit making. So, if they both partner and have created an Insurance company, the chances of the company being financially sound are Pretty High. Isn’t it?

However, this easy way out isn’t fool proof. What more can we check, as a quicker or rather easier way to find out if an insurance company is financially sound?

The answer is: Check the Solvency Margin

What is Solvency Margin?

The solvency Margin tells us how solvent a company is. In other words, how much cash it has as reserves in order to meet unforeseen expenses/circumstances.
Basically, it is the amount the insurer has to stash away in order to pay the claims during emergency. IRDA requires the insurance companies to maintain a particular level of solvency margin for their smooth functioning.

Why does a company need to maintain a Solvency Margin?

During the Economic Crisis a few years ago, AIG, the largest Insurance Company in USA was on the brink of a painful collapse. Had the US government not intervened, millions of US Citizens would’ve been left without Life or Medical Insurance, driving the whole US Economy into a dark hole. Thankfully it did not happen.

It is for such unplanned or unexpected situations that we keep a solid Solvency Margin. What if an Earthquake happens in some part of India and hundreds or thousands of innocent people are hurt or killed? Will the company have enough funds to pay all of the insured people? This is exactly why we have a Solvency Margin. If we keep away enough money to pay all insurance policies we are bound to pay, even in severe situations, we can manage and meet our commitments. Isn’t it?

Do you want to know what the number is in India?

IRDA Mandates that Insurance Co.’s operating out of India maintain a Solvency Margin of 150%. It means that, for every Rs. 1000/- insured by XYZ Insurance Co in India, they have to keep Rs. 1500/- with IRDA.

Now, Go back and ask yourselves, is the fear that our parents have with respect to Private life insurance cos in India, is justified?

Now, the Million Dollar Question – Does this mean that we are Totally Safe?

The whole purpose of having a solvency margin is to meet unexpected events whose chances are very very slim. And even if such events like a Terrorist Attack or an Earthquake occur, the solvency margin can take care of it. However, there is still a very small % chance that a company could fail and unfortunately we have no choice but to live with it.

The fact is, this very small % chance holds good for LIC Too. What if the Top Management of LIC elopes out of India with lakhs of Crores of LIC’s assets? Can the Government of India offset such a huge loss immediately?

You may be quick to defend LIC saying, the chances of something like that happening are very very slim. Well my friend, the same is the case with any other Private Player. The chances of them declaring bankruptcy are very very slim and even in that case, IRDA will have enough assets to settle the people who have bought insurance policies from them.

I am not trying to scare you but, did anyone even remotely think that Satyam Computers would be involved in a scandal of the magnitude that happened a few years back? Everyone trusted Satyam but the unfortunate event happened. As with all monetary decisions, we can only hope for the best, but as smart individuals we must always be prepared for the worst and plan for it…

Claim Settlement Track Record

The Claim Settlement Ratio of the Insurance Company can tell us as to how much % of Legit Insurance Claims have been settled by the Insurance Co. So, what is the Claim Settlement Ratio (CSR) of the Top Insurance Co.’s in India???

As of end of 2011 – the Claim Settlement Ratios are as follows. Note that only the top 8 are available here. The others have a Claim Settlement Ratio of less than 75%.
1. LIC of India – 97.5%
2. HDFC Life – 96%
3. Birla Sun Life – 94.6%
4. ICICI Prudential – 94.4%
5. India First Life – 90.6%
6. Aviva Life – 87.1%
7. SBI Life – 82.2%
8. Max New York Life – 78%
9. Etc.

As Expected LIC of India has the best Claims Settlement Ratio is India but as you can see, the next 3 are very close in terms of % and have equally impressive CSR.


The Verdict is “Yes” buying Insurance Products from Private Cos is a good idea, provided the product you are buying is good and cost-effective. It is always a good idea to compare similar products from more than one company before choosing one.

For ex: If I were to buy Term Insurance for say 50 lakhs, I will do the following:
a. Get Quotations for my age for half my planned amount (25 lakhs) from the Top 5 companies in terms of Solvency Ratio and Claims Settlement Ratio
b. Select the 2 cheapest quotes and buy 25 lakhs worth of Term Insurance Policies from both the companies
This way, I am getting not only the best deal, but also diversifying my risk. Even in the very rare scenario that one of those insurance co.’s goes bankrupt, the other will still be around to settle me. The chances of both of them going bankrupt simultaneously are literally impossible isn’t it?

Happy Insuring Yourselves!!!

Other Insurance Related Articles that may be useful to you:

1. Insurance & Indian Income Tax
2. Life Insurance Cover – Policy Lapse & Revival
3. Insurance Claims Process – Simplified
4. Insurance

Sunday, July 22, 2012

Have you Written your WILL?

In the last article in this blog titled Is your Wife Aware of Your Financial Status? I had suggested that we created a Will. One of my long time friends Rajesh had asked in the comments section about the “How To” part of creating a Will. Though I am no Legal Expert, from an individuals perspective, did some research on the internet and have come up with the below article. If you find any information below incorrect, please feel free to leave a comment and I will be glad to correct it. At the end of the day, we don’t want to be doing something incorrect…

Why Create a Will?

This is a pretty straightforward question. Just think of this
After our time, do we want our loved ones to fight with one another on who gets what from our property?
If you feel, my family is not the typical movie type family and such petty fights over assets or property will not come up, then think again. Your opinion is based on the current state of affairs in your family. Are you sure that 30 or 40 years down the lane, when the time comes to split your property, will your survivors still be what they are today? Let us hope and pray that our family members don’t end up fighting with one another, but to be on the safer side, it is always a good idea to write down a WILL that says who gets what. This way, they don’t have a choice but to accept your decision. After all, it is your wealth and you have all the rights in the world to decide who gets what.

Another important reason on the “Why” part is that, a friend or a close associate could have been instrumental in your growth and success and to thank them or their survivors you may want to leave a portion of your wealth to them. Or maybe you have a loyal and faithful servant who has served you for many years and you want to reward them for their loyalty by leaving them some cash. All this will not happen if you don’t create a formal WILL. You may orally instruct your family members to carry out your wishes, but what is the guarantee that they will do it? So, the best thing for us to do is, create our WILL while we are alive.

Are you thinking, I am no Tata or Birla or Ambani. All I own is my humble home, some jewels and some cash in the bank. Should I still write a WILL?
The answer is a resounding Yes my friend. No matter how big or small your assets are, it is always a good idea to write down a WILL.

So, the next logical question - What is a Will?

A will can be made by anyone above 21 years of age in India. You can make the will even on plain paper in India. It is not legally mandatory to make-out ones will only on Stamp Paper. However, it is advisable to write our will in our own hand writing, as the same can be verified by experts at a later point in time (After us of course) in case any of our family members or relatives raise any doubts.
WILL – A Taboo Topic in India
Unfortunately in India, the word WILL is extremely sensitive and in many cases taboo. There is a widespread misconception that if someone tells us to make a will, the person is indirectly hinting us that our end is near or that the person is indirectly eying our property.
The fact is, creating a WILL is a must for every individual who wishes to decide what portion or % from his wealth will be inherited by which family member.

What happens if we do not Make a WILL?

Simple, CHAOS!!!

First and foremost, if an individual dies without preparing a WILL, his/her wealth is distributed as per the “Laws of Succession” in India. There are dozens of government rules (As per the law) on how wealth must be distributed among the family members. The laws of inheritance and succession are complicated and diverse in nature and more importantly are different for Hindus and Muslims. Unless lawyers are involved, there is no amicable way of settling the situation.

Second of all, think of the inconvenience this will cause to your family members. In the worst case scenario, one of your family members could sue the others for incorrect distribution of wealth and kick start legal proceedings using a Lawyer. Imagine the chaos this will create. All your family members will be at the mercy of lawyers. Not to forget the time, energy and money that will be wasted for them to go through the Indian legal system.

To summarize, if you spend some time and write up a WILL, you can save your survivors a lot and I really mean a lot of headache.

Creating a WILL

A will has several parts and all of them have to be duly completed in order to create a complete and valid will. Actually speaking, there is no standard legal format for WILL’s that are created by individuals themselves. However, there is a template which has been used widely. It is simple, logical and mostly common-sense. It will contain the following:

Section 1: Declaration

This will be the first section of your WILL. Here you write down your details like name, age, address etc. and then mention that you are making this will in your full senses and free from any sort of external influence.

Section 2: Details of Assets

The next section should contain the list of all your assets like your house, any land, bank accounts and the amounts in it, investments, shares, mutual funds, jewelry, etc and etc. We must also mention the location where the documentary proof like original land documents, bank receipts/pass book etc are stored by you. In fact, your WILL too must be kept safely preferably in the same safety deposit box along with all other valuable documents.

Make sure that you personally share details like the Bank Manager’s name, how to contact him and gain access to the safe deposit box in case of your demise to the Executor of your WILL. Also, make sure that you introduce the Executor to the Bank so that they know who it is and allow him access to your property after your time.

Section 3: Details of Sharing

Now, we are talking business, this is the section that outlines the most important aspect of the WILL.

“Who Gets What”

A point to note here is that, if the person to whom you are leaving some wealth is a minor, say your grand child, make sure you appoint a custodian for the assets until the individual you have selected reaches adulthood (18 years). Should I even mention here that the custodian must be a trustworthy and reliable individual who really cares about the welfare of the minor under consideration here?

Section 4: Sign the WILL

So now, we are the last step. Once we have completed writing our will, the next step is to Sign the WILL in the presence of at least two witnesses. These witnesses will have to sign the will after you sign it, certifying the fact that you signed the will in their presence.

Important Points to Remember:

1. Make sure that the Date and Place, where all this is happening is clearly indicated in the WILL
2. Make sure that both you and the witnesses sign in all pages of the WILL (In case it actually runs to multiple pages)
3. The Witnesses cannot be a direct beneficiary of your WILL. It can be friends, neighbors, colleagues anybody as long as they don’t gain anything from your WILL

Last Step:
The last step in the process is that, after you finish everything, place the WILL inside an envelope and seal it. The Seal must bear your Signature and the date it was Sealed. The Witnesses need not sign on the Seal or the Envelope.
For everyone's benefit, below is a sample will based on the template that was just outlined above:

What is the Role of the Executor?

Did you note the fact that, in the WILL we have appointed somebody as the “Trustee & Executor”. Do you know what his role or responsibility is?

He is the individual who is responsible for dividing your wealth among the beneficiaries indicated in your WILL. He will take possession of all your assets including the WILL from the “Safety Deposit Box” and then distribute them to the beneficiaries one by one.

It is not legally required to get the WILL executed in a court in the presence of a Judicial Magistrate. However, if you wish, the will can be executed in the presence of a Court Magistrate or any Public Notary nominated by the Government Authorities.

Changing the WILL

Have you heard of the old saying “The Only thing Permanent in Life is the Change”?
Your life changes every day, you could buy or sell assets, your relationship with your family members may improve or deteriorate etc. All this may warrant a need to alter the WILL.

Did you note that in the first section of the WILL we mentioned that our current WILL supersedes all the prior ones? The whole purpose of that statement is to ensure that your latest WILL is the one that is executed.

But, do remember to note the Date correctly in your WILL and add this Supersede/Revoke clause. Otherwise, you will be actually complicating things because the sharing ratio could be different in two versions of the WILL and the benefactors could take things to the Court and you know what will happen that, don’t you?

Do We Need a Lawyer to Make the WILL?

Actually speaking, the simple answer to this question is “NO” but it would be a good idea to involve a lawyer. This is because, many of the “I did it myself” kind of WILLs often miss some key components as required by Law. For ex: Missing witness signatures, or no reference to nullify the prior wills, not mentioning all assets etc and etc.

How many movies in Hindi, Tamil, Telugu or whatever your local language in India is, have been made where sons and daughters fight over access to their dead father/mothers property? Have we forgotten the fact that this is perfectly and realistically possible even in our family?

Involving a Lawyer can minimize many of the common mistakes in the “I did it myself” kind of WILLs.

Let us say you have a son named Ramesh and a cousin with the same name and your WILL states the below:

“My 2004 Mercedes S-Class car must be handed over to Ramesh”.

As owner of the car, you thought that by default it refers to your Son but your cousin being a devious person realizes the mistake and stakes a claim on your car. Obviously your WILL is ambiguous and so, there is going to be a lengthy legal battle and god only knows whose side will win the case. God forbid, what if your cousin gets possession of the car even though you wanted your Son to get your Car?
Had a Lawyer been present, he would’ve pointed out this flaw and suggested to you that you mentioned the fact that, the Ramesh here refers to your own Son.

Getting the Probate

The Probate is nothing but a copy of your WILL that is certified under the seal of the Court. The Executor, has to file a probate petition in the court of Law and get it. Practically speaking, getting a Probate under the current timelines as per the Indian Law works to somewhere around 1 year.

You might be wondering, do you need a Probate?

Of course yes. The executor cannot perform his duty of distributing your wealth unless he has been granted the Probate. The Probate will be granted only to the executor appointed in the WILL. The cost of getting the Probate includes legal fees along with stamp duty on the value of the property being distributed per the WILL. A point to note here is that the stamp duty varies from state to state.

Another important point reg. the Probate is that, in case of land or house party, the property will not be transferred to the name of the person inheriting it without the Probate and the Tax Paid certificate. This will create problems especially in cases where our next generation tries to sell the property that they inherited. Without the correct Probate, the prospective buyer may not be willing to buy the property because they may be suspicious about the properties origins or ownership.

Some Last Words about Making the WILL before we Wrap up:

• It would be a good idea to involve one doctor and one lawyer as your two witness. The idea is simple – a doctor signing as a witness means that you were mentally sound when you wrote the WILL and the Lawyer will verify the document and make sure you don’t make silly mistakes (Remember the Ramesh – Mercedes Car example from a little bit before?)
• None of the witnesses or their family members must be beneficiaries from your WILL. For ex: If your doctor is a witness and his son is like your son and you left him your bike, that will be illegal.
• Use good quality paper and pen to write your WILL. The document has to last the test of time, at least a few years.
• Keep your original WILL in a safe place like a bank safety deposit box. You can also make copies and store them separately. However don’t make many copies. One or two copies should be more than sufficient.
• Make sure you mention the date in the WILL. Without this, nobody will know which version of your WILL is the latest.
• Cleary mention the % share that each of your family members must get instead of the value. For ex: The cost of your house could be 10 lakhs today and could be worth 50 lakhs 25 years from now. So, you can’t say my sons must get 5 lakhs each. What about the remaining 40 lakhs?? Instead you must mention that my sons must get 50% of my house’s sold value
• Usually property that you inherited can be inherited by the direct descendants of the person writing the WILL. For ex: If you got your ancestral house from your father, who in turn got it from his dad, you can only leave it to your sons or daughters. No other family member or outsider can stake a claim on this property. Remember that Rights on inherited property is acquired by birth and not by WILL. So, your dads house can go only to your son and not to your favorite cousin.

I think we have covered almost everything you need to create your WILL. However, I am no Lawyer. So, if any of the points mentioned above is incorrect, please feel free to leave a comment and I will correct it.

Happy Writing your WILL!!!

Thursday, July 12, 2012

Is your Wife Aware of Your Financial Status?

That is a stupid question, don’t you think so? I know you are mumbling, oh sure my wife knows about my financial status. After all, she is my wife…

Well my friend, I am not talking about your overall financial status as in whether you are rich, poor, in trouble etc. I am talking about certain details which I am sure your better half doesn’t know about you. Did I catch you by surprise??? Read on to find more!!!

Why this Article?

I was talking to a good friend of mine, a couple of days back when he was telling me something that hit me hard on the head. His colleague’s husband had met with an accident and was hospitalized. The poor lady (I am going to call her Mrs. X) did not know how much money her husband had in his account. Even worse was the fact that, she did not know what investments he had made or what his ATM PIN number was. The hospital was demanding a hefty sum for the treatment and even though the couple was well off financially, she was not in a comfortable position to handle the situation. All she could say ways

My Husband handled all financial matters.

Like most families, Mrs. X too entrusted the responsibility of running the home’s finances to her husband and she concentrated on the more difficult task of running the family.

Well, Mrs. X somehow managed to borrow funds from her relatives and finished her husband’s treatment. Thankfully he recovered within weeks and they were able to repay all the money they borrowed in one shot because, her husband had saved up some money as Fixed Deposits for a rainy day. The day came but he never told his wife that he has saved up for a rainy day. So, she was left to suffer all alone, trying to come up with money for her husband’s medical treatment.

Imagine how good it would’ve been if she knew that he had fixed deposits that could easily cover for his medical expenses? She could’ve happily close those and paid for her husband’s treatment instead of having to borrow from friends or relatives. Imagine the mental agony she could’ve been spared, had she known it?

Now, get the picture???

What must we share with our Better Half?

A lot of women are not so good at dealing with finances (Or so they think) and so entrust the responsibility to the men in their lives. All this is well and good. But, they must ensure that they are aware of the investments that their husband is making so that they are not caught by surprise like Mrs. X was.

Men & Women Both of you can keep a common notebook or a journal where you write down the following details so that, either of you are aware of the financial status of one another and can take decisions at times of crisis.

1. Property Held – This is something 99% of couples know because if a husband is buying a property, there is no way the wife doesn’t know it. But, for the 1% this was a surprise kind of husbands, it would still be a good idea to note down the details somewhere so that the wife can know when she needs to
2. Bank Accounts – Note down your bank account numbers, fixed deposit account numbers along with amounts invested etc. Don’t write down PIN Numbers but make sure your wife/husband knows what your PIN is
3. Credit Cards – Note down the list of all your credit card numbers along with the name of the bank that issued it.
4. Stock Market Investments – Note down your DEMAT account number and atleast the total value of your investments in your account. If you can maintain the nitty-gritty kind of details reg. each of your investments in the DEMAT account, that would be even better
5. Your Employee Provident Fund account information (If you work as a salaried employee for some company)
6. Your Public Provident Fund account information (If you have one)
7. Your National Savings Certificate information (If you have invested in them)
8. Any other loan amounts that you have lent to your friends or family members with details of when and how much along with when they are expected to repay them.
9. Details of Gold and other Jewelry you may own (This point is applicable in 99% cases for women because men usually don’t take care of handling jewelry or gold. It is usually the lady of the house who takes care of it. So, add this entry if this is applicable for you)
10. Details of your Insurance Policies, their numbers along with details like the maturity amount, surrender value etc (If you know them). As a bare minimum noting down which company issued your policy, the agent who sold you the policy and the policy number is required for our family member to use it if they need to.
11. Details of your liabilities – Note down the loans and amounts you have borrowed from others including the amount you owe in return, when you borrowed it, the amount borrowed, borrowing individual/institution etc. The last thing we need is some lender harassing our family members after we are gone on money we owe them. If we owe them money, the responsibility to repay falls on our family members. But, at least if they know how much we owe and to whom, they can plan accordingly and refute claims from bogus individuals about money you owe them.

The list above is not exhaustive. For this week, try to remember all relevant information reg. your investment’s/assets/liabilities/insurance etc and write them down. Going forward, whenever you take any monetary decision, make sure you update the notebook so that you don’t have to spend time recollecting what you did…

It would be a good idea to include our life partner as a joint holder of all your accounts so that they can easily operate our accounts in our absence without much legal hassles.

Some Additional Things You Need To Do

Apart from writing down all this information, you need to do some additional things. They are:
a. If you have selected e-mail statements for your bank accounts/credit cards/DEMAT etc, make sure your life partner knows the password to access that mail account
b. All bank accounts/credit cards/DEMAT/Investments etc accept Nomination facilities when you open them. You can also update the Nominee details anytime you want. So, make sure that you update your wife/husband’s name as the Nominee in all your accounts.
c. Write a detailed WILL outlining what you wish to do with your assets after your life. This is something people don’t think of until they reach their 60’s or maybe even later. But, it is always a good idea to have your will created early. Another important thing is to re-assess your WILL once every 3-5 years to include details of new assets that you may acquire during the period or to add/remove people you may have included/missed in the previous version of your WILL.
d. Write down the contact details of important people so that our life partner can find them in one place easily. Some of these people could include:
a. Financial Advisor
b. Insurance Agent
c. Chartered Accountant
d. Doctor
e. Etc

Last but not least, make sure you leave all the relevant artifacts in a safe place and make it known to your life partner…

Some Last Words:
The whole idea behind this exercise is to make sure our life partner can handle everything even after our time. Think of the state Mrs. X was in when her husband met with an accident and she couldn’t arrange cash to pay for his medical treatment and then ask yourself this question, do I want my wife to go through this trauma in case anything happens to me? The idea or reason as to why I am asking you to do this will become clear and you will do it without any issues or hesitation…

Happy financial planning.
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