FOR a majority of Indians, life insurance remains a tax-saving tool when, in reality, its core purpose is to compensate the family for the loss of income due to the unforseen death of the breadwinner.
Often, some policies give a return on investment if the life insured survives or chooses to withdraw midway during the term. The tax benefit under Section 80C is, indeed, a secondary factor.
Unfortunately, policy holders neither check the relevance of life cover once it is purchased nor track the internal rate
of return (IRR) generated by these plans.
There has to be a simple process to evaluate whether the plans taken in the past are relevant today and, more importantly, will they be useful for future financial needs? This process is called insurance audit.
There are three core reasons that call for an audit of insurance policies:
* Dynamics of life stage;
* Regulatory changes; and
* The objective that the plan was expected to achieve.
Dynamics of life stage
Life insurance needs are dynamic in nature and tend to change almost in line with our age group, increased responsibilities, increased income, future financial goals, etc. But, normally, we don’t review the relevance of our insurance policies.
For example, a R25-lakh life cover for a college graduate in 1998 would be quite relevant then. However, in 2015, when the same person is 38 years old and earning, say, about R50 lakh per annum, this plan does not fit into the scheme of things anymore.
A lot of regulatory changes have happened in the life insurance industry over the past few years. Also, attractive plans have been introduced in the market at much lower costs.
For example, a R1-crore life cover for a male aged 35 and with a plan term 30 years costing around R25,000 in 2010 may now be available for a annual premium of R15,000.
Also, the objective that the plan was expected to achieve needs to be questioned. Many- a-times, a plan may have been purchased to save taxes, or because of an obligation to a relative, or worse, miss-sold by an advisor. So, should you continue putting your hard-earned money into these plans?
In short, an insurance audit should do two things:
(a) Look at the relevance and cost of the life cover and recommend whether to continue, or exit, or suggest a replacement;
(b) Look at the IRR of plans held by you today and calculate the expected IRR to decide whether you may be better off with some other investment avenue.
* Usually, policy holders neither check the relevance of the life cover once purchased, nor track the internal rate of return generated by the plan
* An insurance audit helps one evaluate whether plans taken in the past are relevant today and, more importantly, whether they be useful for future financial needs
* Three core reasons call for an audit of life covers — life stage dynamics, regulatory changes and the scheme’s objective
The writer is executive director, Investment Products, Anand Rathi Private Wealth Management