Facing uncomfortable realities

Updated: Nov 30 2008, 06:54am hrs
Akash Joshi & Abhay Rao Ye shall know the truth, and the truth shall make you mad.

Aldous Huxley

How confident you are that the people who love you will come home tonight, boomed Rakesh Jathar, an insurance executive, while making a presentation to a group of executives in Mumbai. The man who died on the street was sure that he would reach home to meet his loved ones. Life, is uncertain, and this is the reality and you need to prepare for this, he passionately exclaimed and closed his presentation.

The audience was moved by the delivery style, surprised, but only for a moment. How much of commission will he be getting, nudged a senior executive to his neighbour and they all smiled and went off. And these were very senior executives. What they forgot to ask was what was in it for them.

But then, this has been the attitude for Indians, we think that disaster will strike our neighbour and not us, says Jathar. The current siege of Mumbai is yet another grim reminder that death lurks around the corner all the time. It can come from any place, illness, accidents, floods and now terror.

And terror too, is now is getting different dimensions. Earlier, it was believed that terrorists usually target populated areas where there is minimum effort and maximum damage. So it could be local trains, shopping centres and parks. Now, terrorists have hit the elite as well. All are potential targets. And this is the truth that we all need to confront and the truth will make you mad. But as the Bible says, The truth shall set you free. Free to act and protect your near and dear ones.

Second reality

While there will be steps that you would want to take as a responsible citizen to address the tragic incident. This is also a time to look at how you could protect your near and dear ones, despite the poignant reality.

Most Indians, even the affluent, are not bothered about preparing themselves for tragedy, say financial planners. It's not that you are going to die tomorrow, but then you need to be prepared, says a wealth management executive with a leading European bank. We often get dismissed when we present this possibility while in discussions with clients. Han dekh lengeyyes we will look into this, is the general response from most of the affluent, who have the most to lose in such situations, he adds.

It is only in the South that they get listened to, say wealth managers. Little wonder then that more than half of the responses for a free anti-terrorism cover of a lakh offered by a website along with New India Assurance were from south India.

Besides, there is a general apathy when it comes to protecting and safe guarding against risks. And there could be several reasons for this. The moot point therefore is to get ready to tackle these uncertainties. And the strategy is clear - be prepared.

Insure well

Indian insurance companies are already offering several schemes that offer significant cover against terrorism and other calamities. We have seen that people wanting to take terrorism cover has increased in the past few months, says a general insurance executive.

People are becoming aware, he says, but only a few. Personal accident plans now have terrorism riders and the cover is rather inexpensive. Jaideep Tamal, a sales manager with Reliance General Insurance says, Personal accident can be rather inexpensive. This would barely cost Rs 75 per lakh as premium for someone working in the service industry and depending on the job description and risk group, the premium may vary. This insurance covers personal accident, accidental deaths and even disability.

This is irrespective of the circumstances in which the calamity occurs, unless the policy is bought by ones company, in which case, the insurance will cover you on working premises or as per the tailor-made plan the company has opted for. Thus, individual insurance should be taken if one is not fully covered under the group policy taken by ones company. Essentially, for around Rs 12,000, you could have a cover for almost a crore. But, before entering into an agreement, it is always better to understand all the riders and to read between the lines.

As far as insuring ones property goes, Tamal says, There are household polices for protection against the 12 perils, including theft, essential policies to protect ones restraints, buildings, factories, etc. One can also take SRCC coverage under the policy, which covers you against strikes, riots, civil commotion and even war. As far as terrorism goes, there is the option of earthquake and terrorism cover as well. This costs an additional 0.22% of your coverage and if taken in bulk, a group discount may be available. However, the caveat here is that you should include the terrorism clause before you enter into the agreement. Inserting it at a later date might prove to be expensive, even if you could.

As far as life insurance for people goes, Nishant Quazi financial services manager with ICIC Prudential tells us, While deciding how much of coverage to take for life insurance, the most important thing to take in to account is HLV (human life value). This needs people to consider their earnings, future earnings, dependents, expenditure, debts, amongst other things, while deciding on a cover. A rough formula for HLV would be, income generation + future expected earnings - expenses - debt + inflation.

He concludes by reminding us, You can never know what can happen to you now-a-days. We advice all to be substantially insured, as that is the only monetary compensation one can have for life.

Receivables and payables

And while there will be a rush towards insuring your life, there are other commitments that you have, usually debt-related that are not covered. In India, we have facilities that enable us to protect against these, that is receivables and also payables -- your debt as well as the loans you have made out. And this is known as mortgage insurance.

Mortgage insurance guarantees repayment of a mortgage loan in the event of death or disability of the person who had borrowed the mortgage. The tenure of payment of such mortgage insurance is usually of 12 months and in some cases it goes higher up.

Furthermore, if you have made any business or personal loans, you can also protect your capital through these special types of insurance instruments. This type of specialised mortgage life insurance products are of two types -- private mortgage insurance and mortgage insurance premium.

In the case of private mortgage insurance, they protect the borrower from the lender in the event of default, which generally covers a substantial portion of the capital borrowed. And, mortgage insurance premium, essentially are mortgage life insurance products that also protect the lender in the event of non-payment due to some unfortunate event. These life insurance products are generally offered by government insurance companies.

There are two types of rates prevalent in the Indian mortgage insurance market. Under the fixed mortgage rate, the rate of interest remains fixed throughout the loan term.

The mortgage rate does not vary according to market conditions. In other words, the rate of interest is pre-fixed during the process of borrowing and it generally varies between 12.5 to 25%. In the case of flexible mortgage rates, the interest rate varies according to market movements. The risk factor is high in this type of interest rates, say experts.

Near the end

And while there is ample protection that is being created for your families, one of the biggest mistakes most do is not preparing a will. Not only that, small formalities like not filling up nominations in your bank account or even beneficiaries in the case of insurance products can cost you a lot, reckon financial planners. I had to run from pillar to post, after my elder brother's demise in an accident, just to have his wife get access to his bank account and get the provident fund claims, says a senior executive with a multinational firm in Kolkota.

And then there is the aspect of estate planning or simply preparing a will. Not preparing a proper will could get your relatives into a spot after your demise and this could be extremely painful for them.

And there is no right age to make a will. I think the right time could well be the mid-thirties, says Gururaj Raghav, a financial planner. In fact, making a will at an early age can actually have some of the arguments like a will made by an old person (senile) get thrown out of the court, in case of a dispute.

While making a will, it is advised to be exact in the shares that you want to allocate to your relatives and also cover all the resources that you have. It could be a good idea to discuss with your lawyer when you draft a will. Also, it is pertinent to remember that you can make changes to your will at a later date as well.

However, each time you make a will, it is a good practice to date it and even number the pages. Moreover, it is also a good practice to sign your will in the in presence of two other witnesses who should sign in presence of each other and you. Please remember that a witness cannot be a beneficiary under the will. Similarly, the executor of the will can also not be a witness to the will.

Experts reckon that it is important to decide about the executor of your will. And choosing the right executor is of pertinence, as is registering it. While registration is not legally required, it adds authenticity to your will and prevents subsequent complications.

And lastly, it is important to note that the will supersedes nominations. Legally, a nominee is only a trustee and he need not necessarily be a beneficiary to a will. It therefore means that the nominee will hold the assets till they are handed over to the rightful beneficiary. And these could be two different people.

Many people tend to forget this and cause pain for relatives. Therefore, it works if you have the nominee as the beneficiary under the will to ensure smooth distribution.

More importantly, distribution of wealth is one of the important aspects of wealth management that most tend to ignore. The good news is that there are several service providers that are offering them. It would work if you could ask for them when you speak with your private banker next. It's never to late.

The Terror Shield

* Check your insurance policies for exclusions in the document about terrorism. Have your agent or relationship officer build those in

* Make a realistic assessment of the money your family would require in case of an accident or attack. Do consult your financial planner or insurance agent while doing this. Indians are known to under-insure

* Do a round-up of all your accounts and see where your wealth is placed. And simply check if there are nominations along with these accounts and assets. If not, prepare a list and also consult your lawyer. This could also be a good time to prepare your will

* Remember, nominees are merely trustees, the will beneficiary is the final owner of your assets. Dont mix them and in the list, be clear about who the nominee is and who the beneficiary. Keep it simple, have the beneficiary and the nominee be the same person

* Please consult with your wealth managers for estate planning services and be ready with all documents when you meet them

* Do a tally of all your outstanding loans and also the lent out money. If there are critical assets that are mortgage backed, then work on getting a mortgage insurance scheme. Also, for critical loans that you have made out, you could have insurance on that as well

* When getting a new insurance policy for your property, have the terror clause included upfront. Getting it added later on can become expensive

* Communicate with your family on the asset allocations and also have a reliable will executor in place. Usually, the wealth manager also offers you this service