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  1. With guarantee or bonus: How do you like your life cover?

With guarantee or bonus: How do you like your life cover?

Going by returns, life insurance products fall under various categories.

Updated: February 3, 2015 2:40 PM

Going by returns, life insurance products fall under various categories. With-profit products give returns in the form of various bonuses at the time of claim payments while there are products that give loyalty additions if the policy runs for a minimum number of years. Some products give returns in the form of guaranteed additions. Let’s see what these guaranteed-return products are and whether they are superior to with-profit products.

What guaranteed-return products are

In these products, a certain amount per thousand of sum assured is added every year. If the sum assured is R1 lakh and the insurer offers a guaranteed return of R40 per thousand, at the end of three years, the total guaranteed amount accrued is R12,000. If a death claim occurs at this point, the claimant gets R1.12 lakh. If the policy matures after 20 years, the life assured gets R1.8 lakh.

Many people think these products are great since they know the exact amount they will get at the end of the term. They thank the insurers for the ‘certainty’ factor — there is no such surety in endowment or whole life products.

The question is, does the insurer give any return for such products? The insurer collects a premium that enables him to pay the guaranteed sums at various points during the term. The insurer is not doing the life assured a favour with the guaranteed additions. Again, the insurer
rarely guarantees a high return for such products.

Do they score over with-profit products?

With-profit products work under a completely different mechanism. They declare bonuses based on the valuations of the insurer’s assets and liabilities. The contribution made by the policyholder, who has purchased a specific product, is taken into consideration while declaring the bonus. This is scientific and, at the same time, transparent for all. Insurers all over the world declare bonuses on the basis of annual valuations.

What fits your bill?

It depends on the valuations of a particular class of product. In guaranteed-return products, the life assured knows what he will get. He pays the requisite money for that guarantee. In a with-profit plan, that’s not the case. According to the Insurance Regulatory and Development Authority’s (Irda) regulations, each insurer has to declare bonus product-wise. The favourable performance of one product line can not subsidise the poor performance of others.

Insurers have prudent underwriting procedures. They know how to select and classify risk. They charge extra premium from those with a greater mortality risk. The management expenses of such insurers are not very high. They are disciplined while investing the policyholder’s money, making desired changes in the premium structure. They advise field officials to select lives carefully. They also take action against agents who bring bad lives repeatedly.

People should not buy a product just on the basis of a company’s advertisements and the agent’s assurances. They must research about the product. According to Irda’s instructions, each insurer has to disclose information on the bonus declared, persistency ratio and incidence of early claims, among other things. A lot of valuable information is available on the regulator’s website, which customers must go through to take an informed decision.

Cover all bases
* Don’t buy a product based just on the company’s advertisements and the agent’s assurances. Research the product
* Insurer need to disclose information on the bonus declared, persistency ratio and incidence of early claims, among other things. A lot of valuable information is available on the regulator’s website, which customers must go through

Nirjhar Majumdar

The writer is research associate, ZTC, Kolkata.
The views are personal

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