Symbiosis Institute Of Management Studies

(For-(MBA programme only)-Defence Personnel and Their

Dependants) Constituent of Symbiosis International University

ASSIGNMENT
Wealth Management

Role Of Insurance In Wealth Management

Submitted to: Mr. Aneesh Day Submitted By:

Menaka Samant C-58
Sadaf Sultana C-59
Mayank Desai C-60
Damini Ohrie C-62
Sumit Roundhal C-63
Tejasvini Augustya C-64
John James Clinton C-65
Sajin Sunny C-66
Insurance:

Insurance is a contract, represented by a policy, in which an individual or entity receives

financial protection or reimbursement against losses from an insurance company. The company
pools clients' risks to make payments more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses, both big and small, that
may result from damage to the insured or her property, or from liability for damage or injury
caused to a third party

TYPES OF INSURANCE:

Life Insurance
Life Insurance is different from other insurance in the sense that, here, the subject matter of
insurance is the life of human being.
The insurer will pay the fixed amount of insurance at the time of death or at the expiry of the
certain period.
At present, life insurance enjoys maximum scope because the life is the most important
property of an individual.
Each and every person requires the insurance.
This insurance provides protection to the family at the premature death or gives an adequate
amount at the old age when earning capacities are reduced.
Under personal insurance, a payment is made at the accident.
The insurance is not only a protection but is a sort of investment because a certain sum is
returnable to the insured at the death or the expiry of a period.

General Insurance
The general insurance includes Property Insurance, Liability Insurance, and Other Forms of
Insurance.
Fire and Marine Insurances are strictly called Property Insurance. Motor, Theft, Fidelity and
Machine Insurances include the extent of liability insurance to a certain extent.
The strictest form of liability insurance is fidelity insurance, whereby the insurer compensates
the loss to the insured when he is under the liability of payment to the third party.

Property Insurance
Under the property insurance property of person/persons are insured against a certain
specified risk. The risk may be fire or marine perils, theft of property or goods damage to
property at the accident.

Marine Insurance
Marine insurance provides protection against loss of marine perils.The marine perils are a
collision with a rock, or ship, attacks by enemies, fire, and captured by pirates, etc. these perils
cause damage, destruction or disappearance o’ the ship and cargo and non-payment of freight.
So, marine insurance insures ship (Hull), cargo and freight.
Previously only certain nominal risks were insured but now the scope of marine insurance had
been divided into two parts; Ocean Marine Insurance and Inland Marine Insurance.
The former insures only the marine perils while the latter covers inland perils which may arise
with the delivery of cargo (gods) from the go-down of the insured and may extend up to the
receipt of the cargo by the buyer (importer) at his go- down.

Fire Insurance
Fire Insurance covers the risk of fire. In the absence of fire insurance, the fire waste will
increase not only to the individual but to the society as well.
With the help of fire insurance, the losses arising due to fire are compensated and the society is
not losing much.
The individual is preferred from such losses and his property or business or industry will remain
approximately in the same position in which it was before the loss.
The fire insurance does not protect only losses but it provides certain consequential losses also
war risk, turmoil, riots, etc. can be insured under this insurance, too.

Liability Insurance
The general Insurance also includes liability insurance whereby the insured is liable to pay the
damage of property or to compensate the loss of persona; injury or death.
This insurance is seen in the form of fidelity insurance, automobile insurance, and machine
insurance, etc.

Social Insurance
The social Insurance is to provide protection to the weaker sections of the society who are
unable to pay the premium for adequate insurance.
Pension plans, disability benefits, unemployment benefits, sickness insurance and industrial
insurance are the various forms of social insurance.
Insurance can be classified into four categories from the risk point of view.

Personal Insurance
The personal insurance includes insurance of human life which may suffer loss due to death,
accident, and disease
Therefore, the personal insurance is further sub-classified into life insurance, personal accident
insurance, and health insurance.

Property Insurance
The property of an individual and of the society is insured against loss of fire and marine perils,
the crop is insured against an unexpected decline in deduction, unexpected death of the
animals engaged in business, break-down of machines and theft of the property and goods.

Guarantee Insurance
The guarantee insurance covers the loss arising due to dishonesty, disappearance, and
disloyalty of the employees or second party. The party must be a party of the contract.
His failure causes loss to the first party. For example, in export insurance, the insurer will
compensate the loss at the failure of the importers to pay the amount of debt.

Other Forms of Insurance

Beside the property and liability insurances, there are other insurances which are included in
general insurance.
The examples of such insurances are export-credit insurances, State employees insurance, etc.
whereby the insurer guarantees to pay a certain amount at the certain events.
This insurance is extending rapidly these days.

Miscellaneous Insurance
The property, goods, machine, Furniture, automobiles, valuable articles, etc. can be insured
against the damage or destruction due to accident or disappearance due to theft.
There are different forms insurances for each type of the said property whereby not only
property insurance exists but liability insurance and personal injuries are also insurer.

The role of insurance in your financial plan

Insurance is an important element of any sound financial plan. Different kinds of insurance help
protect you and your loved ones in different ways against the cost of accidents, illness,
disability, and death. The insurance decisions one makes should be based on your family, age,
and economic situation. There are many forms of insurance and, unfortunately, no one-size-
fits-all policy. Life insurance, for example, can be a virtual necessity, especially if you have a
spouse and children. Disability insurance, which provides an income stream if you are unable to
work, is important for everyone.

Most people require some amount of all of these categories of insurance.

● Auto insurance: Auto insurance helps in protecting from damage to the often-
considerable investment in a car and/or from liability for damage or injury caused by you or
someone driving your vehicle. It can also help cover expenses one may incur as a result of an
accident with an uninsured motorist.Auto liability coverage is necessary for anyone who owns a
car. Many states require you to have liability insurance before you can register a vehicle. State-
required minimum coverage, however, is often too skimpy to provide adequate protection. Of
course, these figures will vary depending on your individual situation and requirements.
Collision, fire, and theft coverage is also advisable for a vehicle having more than minimal value.
You can cut costs, however, by choosing a higher deductible -- the amount of loss that must be
exceeded before you are compensated. The cost of auto insurance varies greatly, depending on
the company and agent offering it, your choice of coverage and deductible, where you live, the
kind of vehicle, and the ages of drivers in the family. Substantial discounts are often available to
safe drivers, nonsmokers, and those who commute to work via public transportation.

● Homeowners insurance, for renters and owners: Homeowners insurance should allow
you to rebuild and refurnish your home after a catastrophe and help cover to costs of lawsuits if
someone is injured on your property. Coverage of at least 80% of your home's replacement
value, minus the value of land and foundation, is necessary for you to be covered for the cost of
repairs. There are several grades of policies, ranging from HO-1 to HO-8, with increasingly
comprehensive coverage and cost. Unless you increase coverage, most homeowners policies
cover the contents of the house for 50% to 75% of the amount for which the house is insured.
The liability coverage in many homeowners policies is $300,000. This figure will vary depending
on your individual situation and requirements.

● Liability insurance: Often called umbrella liability coverage, this takes effect when the
personal liability and lawsuit coverage in other policies is exhausted. The cost for $1 million
worth of protection -- especially necessary for high-income individuals and those with
considerable assets -- may be only a few hundred dollars a year.

● Life insurance: Life insurance, payable when you die, can provide a surviving spouse,
children, and other dependents the funds necessary to help maintain their standards of living,
can help repay debt, and can help fund education tuition costs. The amount you need depends
on your situation. If you make $100,000 a year, have a sizable mortgage, and two kids headed
to a good (read: expensive) college, you could need as much as $1 million in coverage. Value-
accumulating whole life or universal insurance is often offered as death benefit protection with
a cash value component that you can borrow against or eventually cash in by surrendering the
policy. Term insurance costs less, but may remain in effect only for a specified term of years.
For many families, a combination of whole life and term insurance may provide for current and
future needs. Your financial professional can help you assess your needs to determine the kinds
and amounts of life insurance that are right for you and your family.

● Disability insurance: A long-term disability policy is activated, replacing a portion of

your lost income, when you are unable to work for an extended period. Employers cover
approximately 40% of all workers with some form of company-paid disability insurance. If you
buy it on your own, you may have to pay up to 40 cents per $100 of monthly coverage. If you're
buying, you should generally try to get a noncancelable policy with benefits for life, or at least
to age 65, and as much salary coverage as you can afford. Insurers will generally cover up to
65% of your salary. Generally, you should have total coverage equal to two-thirds of your
current pre-tax income. If your company provides disability insurance, check to see whether it's
enough for your needs. Group disability insurance policies may be capped at six months and
provide benefits that won't cover your expenses.

● Health insurance: Most people enjoy medical insurance as an employee benefit, often
with their employers paying all or part of the premiums. Many employers offer a choice
between HMOs (health maintenance organizations) and traditional fee-for-service care. Rates
for HMOs are usually cheaper but have more constraints. Privately purchased health insurance
is much more expensive - often by several hundred dollars a month - depending on such things
as deductibles, coverage choices, and location.

● Long-term care insurance: With an aging population and uncertainty about the future
of Social Security, insurance to cover the high cost of nursing home or at-home health care is
the focus of increased concern. Medicare pays very little of the cost of long-term care in the
United States. Medicaid will pay for the care, but only for patients who meet strict income
eligibility requirements. With Congress always debating the future funding of these programs,
financial planning for long-term care is more crucial than ever. So-called Medigap insurance can
help pay medical expenses of the elderly not covered by the Medicare system, including long-
term hospital care. But Medigap policies are expensive and complex. And, it doesn't cover
custodial nursing home costs. In fact, about half of all nursing home residents pay for the care
with personal savings, according to Medicare. Senior organizations, such as the AARP (formerly
known as the American Association of Retired Persons), can provide information on long-term
care insurance. Insurance policies contain exclusions, limitations, reductions of benefits, and
terms for keeping them in force. Because your financial professional understands your needs as
well as the role of the various kinds of insurance within an individual financial picture, he or she
can help you with the policies that are most appropriate for you. Your financial professional can
provide you with costs and complete details.

Types of health insurance plans: There are two basic types of health insurance:

1. Mediclaim Plans: Mediclaim or hospitalisation plans are the most basic type of health
insurance plans. They cover the cost of treatment when you are admitted in the hospital. The
payout is made on actual expenses incurred in the hospital by submitting original bills. Most of
these plans cover the entire family up to a certain limit.
2. Critical Illness Insurance Plans: Critical Illness Insurance Plans cover specific life threatening
diseases. These diseases could require prolonged treatment or even change in lifestyle. Unlike
hospitalisation plans, the payout is made on Critical Illness cover chosen by the customer and
not on actual expenses incurred in the hospital, thereby giving flexibility to use the monies for
changing lifestyle, medicines and as a substitute for income for the time you could not resume
work due to illness. Payout under these plans are made on diagnosis of the disease for which
the original medical bills are not required.

Life Insurance Planning and products

Buying a life insurance policy may not sound as cool as buying a OnePlus 6 or booking a holiday
to London. In most cases, you buy them either because your parents force you to or because a
relative, who is an insurance agent, is selling it. In the process, it’s possible that you may not
pay attention to the details and end up buying the wrong product. There are four broader life
insurance products in the market—term plan, unit-linked insurance plan (Ulip), endowment
plan and money back plan. Life insurance products aim to fulfill four needs- Protection,
Savings, Investment and Tax benefit

Term Plan
Term insurance is a protection plan, which means it has no investment component. The money
you pay as premium (the cost to buy the product) will give you a life cover. Term plan is the
cheapest life insurance product that will give you a higher sum assured and claim settlement
percentage of Term Insurance has been more than 90%.

Ulip:
Ulip is an investment-cum-insurance product. It allows you to choose where you want to park
the money meant for investment — equity, debt or balanced. The cost structure in Ulip is more
efficient than the traditional plans. Also, the returns are likely to be lower than mutual funds

Endowment plan
It is a bundled insurance plan where you are forced to save money. In this plan, you keep
putting in money and get something back when your policy matures. However, the returns are
very low, ranging from 4% to 6% an annum.
Money back plan
A money back policy is similar to endowment the only difference is that in a money back plan,
you start getting the benefits during the duration of the policy itself. The returns are even lower
because you are getting money upfront the returns are in the range of 2-4%

How big should your life insurance cover be?

Whenever people are buying a cover that they are mentally comfortable with Rs 1 crore is a
popular number. But many buy without doing the basic math. To be fair, the eight-figure sum
certainly seems very large. If a family puts Rs 1 crore in a bank deposit that earns 7% interest, it
will get a monthly income of Rs 58,333. That money can sustain the expenses of an average
middle class Indian household. Or can it? This calculation seems fine on paper, but won’t work
when you consider the outstanding loans taken by the policyholder, the relentless march of
inflation and the impact of income tax. Also, one needs to put aside a corpus for certain one-
time expenses, such as children’s education and marriage and the retirement needs of the
spouse. Our calculations show that if the individual has a home loan and two children, the Rs 1
crore received as insurance money will not sustain the family for more than 12-13 years.

How much insurance do you need

The person in the example below needs a life cover of Rs 1.97 crore and the worksheet is being
used to calculate his insurance needs.
Many Indians are underinsured. Though pure protection term plans have become popular in
recent years with the advent of online policies, the average Indian household is very vulnerable
to financial disruption in case the breadwinner dies. A Swiss Re study conducted in 2014 found
the shortfall in mortality protection in India to be as high as 92%. In other words, the average
Indian was insured for Rs 8 lakh though he required an insurance cover of Rs 1 crore. This can
be attributed to poor awareness about insurance as well as the general fixation with insurance-
cum-investment products.

Calculating insurance needs

Some experts suggest that the cover should be based on the life stage of the individual. “An
earning individual up to the age of 40 should purchase a term plan with a life cover of
approximately 20 times the annual income, a person in his 40s should buy a cover 10-20 times,
and an individual in his 50s should opt for a life cover of 5-10 times the annual income. The
term insurance plan should continue till retirement age,” says Puneet Nanda, Deputy Managing
Director, ICICI Prudential Life Insurance. Expenses, too, can form the basis of sum assured
estimation.
Yet another thumb rule says it should be at least 8-10 times your annual income. But all these
are rudimentary calculations, and do not consider the liabilities of the individual, his existing
investments and the needs of the family. In reality, the financial situation of every individual is
unique and a one-size-fits all approach may not yield an accurate result. Experts recommend a
thorough analysis of one’s expenses, liabilities, investments and requirement while arriving at
the ideal cover amount.

Retirement kitty for spouse

The insurance cover should also cover your spouse’s future requirement, particularly if she is
not earning. The cover must be capable of protecting your spouse’s old age requirements to
enable a life of dignity and comfort and potential medical, living and help-related expenses
should be considered.
However, every individual and family’s needs are unique. If the only dependent is a wife, for
instance, a term cover of Rs 1 crore may be sufficient. If two children are dependents as well, it
is possible that a larger sum may be required.

Cover accidents and illnesses

The incapacitation of the breadwinner due to an accident or illness can also plunge the family
into a financial crisis. It is important that you protect yourself not just against death, but also
outcomes where you lose your capacity to earn.
To guard against such situations, it makes sense to buy accidental death and disability as well as
critical illness covers. All life insurers offer such plans in the form of rider benefits, or add-ons
that can be purchased with life policies upon payment of additional premium. They are linked
to the base life cover throughout the tenure.

Riders vs standalone covers

You also have the option of availing of independent covers not linked to your life cover. They
function much like riders, but with more flexibilities. To start with, you are not tied to your life
insurer and can compare and choose from policies offered by several life and non-life insurers.
With riders, there may be limitations on the coverage level and premium paid vis-a-vis the base
plan. In such situations, working out a bespoke critical illness and disability cover is very
important.
Riders ease the procedure of buying and managing a policy. Even from a cost perspective, in
most cases, adding a rider is less expensive than buying a standalone policy. Buying riders cuts
down on documentation and renewal hassles as they can be purchased with the base life cover.

Motor Insurance:
Car ownership involves several risks. In a car accident, people may be injured and vehicles or
other property damaged. Liability claims against you can put your assets at risk. Loss can also
occur through theft, vandalism, or natural disasters. Auto insurance protects you against these
risks. A personal auto policy is a contract between you and your insurer that specifies each
party's rights and obligations. State law and/or your lender may require you to purchase at
least a minimum amount of auto insurance coverage. Depending on your circumstances, you
may wish to purchase additional protection. You can compare auto insurance policies in terms
of price, coverage, exclusions, and reputation of insurer. Also, vehicle is a depreciating asset,
and hence loses value.
There are various factors that determine the premium paid for motor insurance.
For own damage cover different insurance companies charge different premiums for similar
coverage. These insurance companies charge different deductibles, coverage and IDV’s
(Insured Declared Value is the maximum Sum Assured fixed by the insurer which is provided
on theft or total loss of vehicle. Basically, IDV is the current market value of the vehicle) as
premium may be lesser of one insurer but with higher deductibles, lower coverage and lower
IDV, which will adversely impact in the event of claim settlement.
Vehicle registration details with Engine No., Chasis no., Class of vehicle, cubic capacity, seating
capacity, etc are certain details used to decide premium for the insurance along with details of
tax paid; Certificate of fitness, Driver details - age, gender, qualifications, licence validity
Previous insurance history, if any.
The Own Damage coverage is left to be rated by individual insurance companies after duly
filing rates with the Insurance Regulatory and Development Authority. The same is determined
on following factors amongst others -- Age of vehicle; Discounts / loadings- Appropriate Bonus
/ loading/ discounts along with past claims experience are taken into account while calculating
premium. IDV (Insured Declared Value).
Third Party Liability Premium rates are laid down by IRDA.
In case of break in insurance, vehicle inspection would be required and extra charges will have
to be incurred for the same.
Insurers calculate car insurance mainly by the following factors:

· Age and type of car:

The more aged your vehicle, lesser is the amount you need to pay for it. This is because the
value of the vehicle depreciates with time. High-end models fetch higher premiums .
· Geography:

When you buy a car, the region from where you purchase it has an impact on the premium as
well. If you purchase your car in Mumbai, you pay a higher premium compared to say buying it
from Kanpur.

· Engine Capacity

If you purchase a car with a high-end engine and excellent capacity or one that runs on
diesel—you will end up paying a higher premium for the insurance. That’s because diesel cars
are expensive and so is their IDV.

· IDV

IDV stands for Insured Declared Value. The maximum amount the insurers will pay you in case
of total damage of your car. When the insurer calculates your IDV, if the value is low, your
premium is low and vice versa.

Fire Insurance
The term fire in a fire insurance is interpreted in the literal and popular sense. There is fire
when something burns. In other words fire means visible flames or actual ignition. Simmering/
smoldering is not considered fire in Fire Insurance. Fire produces heat and light but either of
them alone is not fire. Lightening is not a fire but if it ignites something, the damage may be
due to fire. Under section 2(6A) Insurance Act 1938, the fire insurance business is defined as
follows: “Fire insurance business means the business of effecting, otherwise than
independently to some other class of business, contracts of insurance against loss by or
incidental to fire or other occurrence customarily included among the risks insured against in
fire insurance policies”. Example: The following are the items which can be burnt/ damaged
through fire:
● Buildings
● Electrical installation in buildings
● Contents of buildings such as machinery, plant and equipments, accessories, etc.
● Goods (raw materials, in–process, semi–finished, finished, packing materials, etc.)
● Goods in the open
● Furniture, fixture and fittings
● Pipelines (including contents) located inside or outside the compound, etc.

FEATURES OF FIRE INSURANCE:

1) Offer & Acceptance : It is a prerequisite to any contract. Similarly, the property will be
insured under fire insurance policy after the offer is accepted by the insurance company.
Example: A proposal submitted to the insurance company along with premium on 1/1/2011 but
the insurance company accepted the proposal on 15/1/2011. The risk is covered from
15/1/2011 and any loss prior to this date will not be covered under fire insurance.

2) Payment of Premium: An owner must ensure that the premium is paid well in advance so
that the risk can be covered. If the payment is made through cheque and it is dishonored then
the coverage of risk will not exist. It is as per section 64VB of Insurance Act 1938. (Details under
insurance legislation Module).
3) Contract of Indemnity: Fire insurance is a contract of indemnity and the insurance company
is liable only to the extent of actual loss suffered. If there is no loss, there is no liability even if
there is fire. Example: If the property is insured for Rs 20 lakhs under fire insurance and it is
damaged by fire to the extent of Rs. 10 lakhs, then the insurance company will not pay more
than Rs. 10 lakhs.

4) Utmost Good Faith: The property owner must disclose all the relevant information to the
insurance company while insuring their property. The fire policy shall be voidable in the event
of misrepresentation, mis-description or non-disclosure of any material information. Example:
The use of building must be disclosed i.e whether the building is used for residential use or
manufacturing use, as in both the cases the premium rate will vary.

5) Insurable Interest: The fire insurance will be valid only if the person who is insuring the
property is owner or having insurable interest in that property. Such interest must exist at the
time when loss occurs. It is well known that insurable interest exists not only with the
ownership but also as a tenant or bailee or financier. Banks can also have the insurable interest.
Example: Mr. A is the owner of the building. He insured that building and later on sold the
building to Mr. B and the fire took place in the building. Mr. B will not get the compensation
from the insurance company because he has not taken the insurance policy being a owner of
the property. After selling to Mr. B, Mr. A has no insurable interest in the property.

6) Contribution: If a person insured his property with two insurance companies, then in case of
fire loss both the insurance companies will pay the loss to the owner proportionately. Example:
A property worth Rs. 50 lakhs was insured with two Insurance companies A and B. In case of
loss, both insurance companies will contribute equally.

7) Period of fire Insurance: The period of insurance is to be defined in the policy. Generally the
period of fire insurance will not exceed by one year. The period can be less than one year but
not more than one year except for the residential houses which can be insured for the period
exceeding one year also.

8) Deliberate Act: If a property is damaged or loss occurs due to fire because of deliberate act of
the owner, then that damage or loss will not be covered under the policy.
9) Claims: To get the compensation under fire insurance the owner must inform the insurance
company immediately so that the insurance company can take necessary steps to determine
the loss.
WEALTH MANAGEMENT STRATEGIES USING INSURANCE
Insurance strategies have gone from being mostly about security to being seen as extremely
flexible and versatile tools that may offer immediate tax, investment and income uses for you,
your family and your business. While the protection element of life insurance remains of critical
importance, modern insurance policies combine both protection and investment attributes and
can be used to provide policyholders with a variety of planning strategies and options for now
and later

Estate tax funding Insurance can be a cost-effective and tax-efficient means of satisfying future
tax obligations at death. Insurance can provide immediate and tax-free liquidity to satisfy estate
obligations including taxes, probate and estate settlement costs. These obligations can be
satisfied on either a single life or joint last-to-die basis, as circumstances may require.

Dependant support In the event of premature death, insurance proceeds can ensure that your
dependants (such as your spouse and children) are financially protected. Low-cost term
insurance may be the most appropriate type of insurance for this purpose.

Estate equalization for business-owner families Insurance can be useful in circumstances

where you operate a business and only one of your children is involved in the business but you
still wish to treat your heirs equitably. In these circumstances, the business often represents
your most significant asset. Here, insurance can solve the problem of treating your heirs
equitably. You can gift the business assets to your heirs working in the business and the
uninvolved heirs can receive cash proceeds from an insurance policy, tax-free, to equalize the
inheritance.

A tax-efficient alternative to fixed income Insurance can be seen as a separate asset class.
Estate-bound assets can be invested in a tax-efficient, taxsheltered insurance contract. On the
personal side, the insurance contract may offer the potential for asset protection (see below)
and can avoid probate. In the corporate context, a capital dividend account (CDA) credit creates
a conduit to take advantage of:
● Tax-sheltered growth
● Tax-free proceeds
● A conduit to distribute the proceeds tax free through CDA

Utilizing insurance assets for retirement One concern that some policyholders express is that
investments in the insurance policy are “gone” and beyond the reach of the owner. Through
strategies, such as Insured Retirement Plans (IRPs) and Corporate IRPs, funds accumulate on a
tax-sheltered basis inside a life insurance policy, and can be accessed in a tax-efficient manner
during your lifetime via loan strategies.
Insured annuities for retirees Insured annuities and corporate insured annuities are unique
vehicles for seniors, designed to provide policyholders with an alternative to traditional fixed-
income investments. By combining a life insurance policy and a life annuity, it is possible to
create a fixed-income investment with returns guaranteed for life, at rates that may be better
than those available through traditional fixedincome investments and with less tax payable, as
a portion of the income paid is a return of capital. Corporate insured annuities (available to
insurable seniors with a corporation) can do the same but provide additional post mortem
planning benefits through a Capital Dividend Account (CDA) credit and a reduction of corporate
values for purposes of the deemed disposition of capital property at death.

Buy-sell funding for business owners Shareholder agreements are fundamental for any
corporation with multiple owners. Most such agreements contain mandatory buysell
obligations in the event of the death or disability of a shareholder. Prudent planning requires
such agreements to be funded with life insurance so that, in the event of the death of a
shareholder, funds will be available to satisfy the buy-sell obligation. Structuring the buysell to
take maximum benefit of all available tax-relieving rules (including the capital gains exemption,
loss carryback planning, spousal rollover provisions, etc.) is critical to maximizing shareholder
value and minimizing disruption to surviving stakeholders.

Collateral insurance Normally, insurance premiums are non-deductible for tax purposes. The
major exception to this general rule is the collateral insurance deduction in the Income Tax Act
[Paragraph 20(1)(e.2)]. This provision allows a full or partial deduction of insurance premiums
where a policy is collateral for a loan and the specific requirements of the provision are
satisfied. In appropriate circumstances, this deduction can allow for reduced cost of funding an
insurance policy, satisfaction of significant debt obligations in the event of the death and, in the
corporate context, added postmortem planning benefits through a CDA credit.

Charitable insurance As part of estate planning, many individuals focus on philanthropy in

addition to providing for their families. The main strategies are either:
● Gifting insurance proceeds to charity by designating a charity as the beneficiary of a policy,
and receiving a charitable receipt for the year of death to reduce estate tax liabilities
● Gifting an insurance policy to charity and obtaining a receipt for the annual premium
payments to reduce ongoing tax liabilities. Either way, the charity will receive a significant
future gift. Variations to charitable insurance include estate replacement strategies and utilizing
corporate vehicles to enhance the tax benefits.

Asset protection Under provincial insurance legislation, personally-owned insurance policies

generally receive a special level of protection from creditor claims. For example, where there is
a named family class beneficiary, the insurance proceeds do not fall into the estate of the
deceased and are thus not subject to the deceased’s creditors. In the case of a preferred
beneficiary designation or an irrevocable designation, the insurance policy is generally beyond
the reach of the insured’s creditors during the insured’s lifetime. Note that it is essential that
you speak to a qualified legal advisor regarding any asset protection options available to you. At
one time, life insurance was viewed as a pure protection instrument, the sole purpose of which
was to provide funds at a particular point in time to satisfy certain liquidity needs that may arise
upon death.

Microinsurance in India
Micro and small entrepreneurs (MSEs) have a variety of financial needs. While some of these
needs can be predicted with a great degree of certainty, there are others that are uncertain.
Savings and credit products are better suited for the events that will occur with certainty such
as old age, marriage, education, purchase of income generating asset etc. The uncertain events
such as sickness, accident, theft, fire, flood, etc which make the poor incur irregular or
unplanned for costs, are better met by insurance especially where the amount required to
mitigate or cope with the event is high. The micro and small entrepreneurs, whether in urban
or rural area, are time and again choked by uncertain events, but they have not taken recourse
to buying insurance from formal insurers for a variety of reasons. The reasons for this include
lack of knowledge, the inaccessibility of the existing insurance schemes, inflexibility and
uncertainty about benefits. This has led some of the Microfinance Institutions( MFIs) to develop
in house microinsurance programmes and some others to act as facilitators between the formal
insurance companies and their clients. The present study focuses on the micro insurance
programmes of MFIs. Some of the micro and small entrepreneurs (predominantly clients of
MFIs) have also been surveyed to understand and estimate the risks they face, identify their risk
cover needs and propose actions to be taken by MFIs to address these needs.
The definition of a microinsurance product proposes two seemingly arbitrary products: a life
microinsurance product and a general microinsurance product with a specified minimum
amount of cover, term of cover, age of entry and age of exit. Unless the product sold by the
insurer meets these criteria, the product will not be classified as a ‘microinsurance product’ and
therefore will not be able to qualify for some of the exemptions. Some of these conditions are
out of sync with existing microinsurance product.They preferred less cover for a lower price.
The ‘Minimum Amount of Cover’ requirement would exclude a large segment of the poor from
the insurance market.
The Indian Insurance market is still not a mature one. A fatalistic attitude, stoic acceptance of
risks and a lack of faith in risk cover are some of the distinct cultural features of the people. The
low levels of literacy and high levels of superstitious beliefs create additional hazards in
marketing of insurance products. In the midst of such a culture, marketing insurance products
is a challenge. Premia paid for insurance are viewed more as an investment and wherever
possible returns on premia are sought. In fact life insurance has been driven by the tax rebates
on income tax offered by the government to the policy holders on the premia payments and to
a lesser extent by the insistence of lenders of term loans that the borrowers must assign life
insurance policies as collateral.

Insurance in rural India has significance since nearly 70% of the population lives in rural areas.
The non life insurance companies should increase their rural coverage, reaching a level of 5
percent of total policies written, over a three year period. Similarly, life insurance companies
should increase their rural business to reach a level of 15 percent of policies written over a five
year period. The stipulation seeks to enhance the coverage of rural population which presently
has a low access to insurance. The emphasis on number of policies alone would not provide
meaningful coverage in the rural areas.. Meaningful coverage could be ensured only by
stipulating a combination of minimum percentage of number of policies and amounts
underwritten.
The MFIs could take action to mitigate the risks that are covered and thus bring down the
claims. In the case of LEAD, for cattle insurance, LEAD realised that better cattle care and
health services would bring down the death rates and claims. The villagers are also in need of
cattle care facilities especially Artificial Insemination.(AI services) The cost of operating a basic
veterinary health service would be less than the claims eventually paid if cattle care is not in
place. Hence LEAD has introduced a comprehensive cattle health care programme, by
employing Vets and paravets, which has won the appreciation of the people. But to effect a
shift from risk cover to risk management, the organisation must be prepared to make
investments and have a concern for the people who are insurance clients.

From a legal point of view, insurance products cannot be offered by organisations that are not
licensed by IRDA. CDF has termed the insurance scheme as a welfare measure in its annual
reports. In case of LEAD, the nature of this scheme should change to reflect cattle health care,
rather than risk assurance. The IRDA norms might come in the way of the product being
offered to the general public; it will have to remain confined to the members of LEAD’s
programmes. The MFIs are not complying with any of the present norms of IRDA for minimum
capital, reserves and investment of income. The capital norms are much beyond the scope of
the MFIs. The legal experts these MFIs have consulted maintain that as long as the
organizations term the insurance schemes as welfare measures and do not use the term
insurance in the product title there may not be any serious violation of norms.

In case of partnering with formal insurance companies, MFIs would be facilitators, and
compensated for their services in providing product design support, potential client database,
support for claim application procedure, marketing campaign and awareness building. As the
IRDA regulations stand, MFIs who are not corporates/NGOs cannot be formal agents of
insurance companies. However individual staff of MFIs and NGOs could be certified as agents
after completion of examination procedures stipulated by IRDA. But the staff turnover of
certified agents could rise, as it is a coveted skill, having wide application even in mainline
insurance. Equity partnership does not seem likely on account of the high level of investment
needed. Given the charitable nature of NGOs and the small size of operations of MFIs, finding
even 10 % to 20 % of minimum equity required is unlikely

Several organizations have created movies that use a story format to explain the basic features
of insurance and their products (e.g., Activists for Social Alternatives and Tata-AIG). This is
followed up with personal interaction to provide more details on insurance in general and their
products in particular. While a movie is a useful introductory tool, it is not enough to clinch a
deal, and the sale requires much in-depth personal interaction. Insurers often underestimate
the extent of personal interaction required, especially to explain the basic principles of
insurance. If insurance is not adequately explained clients sometimes confuse it with savings.
This leads to low renewal rates when clients do not receive any payment at the end of their
insurance terms.
A major issue for potential customers in buying insurance is having a level of trust with the
company selling the required products and services . Tata-AIG claimed that making clients
aware of the Tata brand was a major help in engendering trust. Most low -income clients had
used or at least seen Tata’s products so they knew it was not a fly-by-night company. In
addition, because of the size of Tata (ironically though much smaller t han AIG) clients have
good reason to believe that the company is not likely to misappropriate their relatively small
premiums.

Child Plans:- Importance and Elaboration

Saving for children's education is one of the most important goals for the parents. It is every
parent's dream to ensure that their children get to pick the best possible educational institutes
or career options without any financial constraints. Other goals such as buying a home or a car
can be postponed or even compromised if we do not have the required funds. However, we
cannot postpone our child's education.

Hence, we have to make sure that as parents we would be financially ready to meet our child's
educational expenses in future. It is important to calculate the amount of fund needed for the
future education, the number of years for which cash flow is needed, and how far away we are
from achieving that goal today. Planning ahead and making investments towards child's
education at an early stage are the critical success factors in realizing this goal.

Following to options could be followed when choosing child protection plans:

Option 1: Investing in child plans from a reputed company which is reliable

Child plans are insurance policies which are either traditional policies or unit linked insurance
plans. Typically, in child insurance policies one parent is specified as the policy holder and the
child is specified as the nominee. If the policy holder survives the tenure of the policy, periodic
pay outs are made at predefined time intervals. However, in case of an unexpected death of
the policy holder, the proceedings are transferred to the nominee.

Option 2: Investing in a customized diversified portfolio and a term insurance plan

In diversified portfolios an individual can invest through monthly systematic investment plan
(SIPs). With the help of a financial advisor, one can select right SIPs based on risk appetite and
investment horizon. In order to have adequate insurance risk coverage, parents should include
the expected future cost of child's education in their total insurance calculation. It is advisable
to opt for term insurance policies which are cost efficient in comparison to traditional insurance
policies or ULIPs. This option yields much better financial rewards when parents maintain
financial discipline, stay invested and do not redeem money till the target date.
Comparison of both investment options:

Child plan Diversified portfolio + term insurance

Monthly payment Rs. 3000 Rs. 2900 (investment) + Rs.100 (term

insurance premium)

Tenure 15 years 15 years

Total insurance payments Rs.4,32,000 Rs. 18,000

Insurance coverage Rs.4,54,000 Rs. 6,00,000

Maximum benefits (if the Rs.6,50,000 Rs. 12,01,964 (at 10 per cent rate of return)
policy holder survives the
tenure) Rs. 14,48,783 (at 12 per cent rate of return)

Consider a monthly payment of Rs. 3,000 over 15 year tenure. The child plan option above is an
endowment insurance policy with a policy term of 15 years. Here payments are to be made for
12 years. This provides an insurance coverage of Rs. 4,54,000 for total premium payments of Rs.
4,32,000.

On the other hand, in diversified portfolio option, one invests Rs. 2900 in portfolio and makes a
payment of Rs. 100 towards term insurance coverage. This provides an insurance coverage of
Rs. 6,00,000 for total premium payments of Rs. 18,000 over 15 years. The maximum benefit an
individual can avail if he or she survives the policy tenure under child plan option would be Rs.
6,50,000 (assuming 6 per cent return). However, under diversified portfolio option, an
individual can accumulate Rs. 12,01,964 at 10 per cent rate of return (or Rs. 14,48,783 at 12 per
cent rate of return).

Conclusion: Most of the parents opt for the child plan due to the fear of lack of financial
discipline and or heavy marketing by financial product companies. Parents often fear that they
might redeem the investments and use the money elsewhere. This leads to sub-optimal
financial decision. As illustrated in the above example, if the parents maintain financial
discipline, diversified portfolio can reward them with greater benefits.