Insurance Samadhan

Insurance Industry faces a major challenge of insurance mis selling. 

More than often, Insurance companies are pressured to provide superior client services while controlling costs—particularly, for claim management. Owing to the simplification in the insurance process due to advancement in technology, more and more people are embracing digital technologies, and insurers are driven to amalgamate analytical technology and artificial intelligence into their processes.

With growing numbers  of technological integration into insurance operations, we can envision a smarter future of Insurance with considerably faster and efficient insurance claim management. Nowadays, technology makes it easier for insurers to process and settle claims although it can still be unnecessarily complicated and subject to human error.

Now imagine a future, where the claim process can be done without human intervention from start to finish.In the future, self-service or touchless claims will enable a customer to lodge minor claims online and submit at any point of time from almost anywhere. First, the Artificial intelligence system will require you to submit basic information, verify your identification and then analytics will take over to assess the situation, evaluate potential outcomes for insurance settlements and finally select the best possible outcome.

Automation can transform tedious claims procedures in the following ways:

Improve efficiency and dramatically control costs

Enable customers to file claims from anywhere, anytime

Artificial intelligence can aid in minimising fraud

Every Insurance Policy is of two types -

Traditional Participatory plans

With the guidelines of the IRDA, the money is invested and managed by the insurance provider. This allows your insurer to inform you about the amount and bonuses that you will receive on maturity.

In participating plans, the sum assured is guaranteed on death and survival during maturity.

For the money invested, you will receive bonuses that will increase with the payment of your premiums.  

For instance, you purchase a 10 lakh policy for 20 yrs. Hence in 20 years, you will get a sum assured + bonus

10 + !0 = Rs 20 lakhs on maturity or death

Non-participatory traditional plans

Non-participating traditional products imply that all the investments with your money will be at your own risk. Although, insurers would provide professional advice and fund management, which would be according to your risk profile/appetite (More risk gives more return)

The Sum assured is guaranteed at death but the investment will be put into different markets.

Mutual funds vs Unit-linked Plans

Mutual funds give good returns if you think long term basis whereas insurance by nature is also a long term contract, although ULIPs are more economical.

Expenses of ULIP

Fund management charge

The Fund Management Charge is for managing your investment to offer you potentially higher returns.

Approximate charges -

MF - 2.5% expense

ULIP - 1.35% expenses

Other service charges like -

Switching from one fund to another

(Sometimes the 3 to 4 switches are free in a year)

Premium Allocation charge

For ULIPs, when you pay a premium, you pay a premium allocation charge of 3 or 4%, (this is not a fund allocation money)

Example - Premium Rs 1 lakh, premium allocation charge - Rs 3000.

Although, IRDA is trying its best to decrease the allocation rate, in today’s time some companies have 0 to 3% premium charges.

Policy  administration charge

These charges are for the administration of policies. They are deducted every month, Approximately 50 Rs per month, 600 pa.

Mortality charge

Mortality expenses are charged towards providing you a Life Cover. These expenses increase with age and are deducted monthly.

Can you pay these expenses upfront or insurers charge it from the investments?

The biggest drawback is that you cannot pay these charges upfront.

And why is that a drawback?

For instance, you have a 1000 mortality rate and the NAV of 20

Now, 1000/20 = 50 units

These 50 units will be deducted from your total units.

In times of corona when the market is at its low, the NAV is somewhere around 16, and because of that15 units, extra will be deducted.

So if the market comes down, more units will be deducted

Pro Tip- Since ULIPs are less expensive, they are a good option to invest in

Insurance by nature is a long term contract so if you are prepared to not receive your money and consider it as an investment, it gives a good return.

In times of COVID19, people will get scared to settle their claims/money, but insurance companies offer a settlement option to postpone the settlement where they keep the mortality 0 although the fund will still be managed by them. So even at crisis times like this pandemic, ULIPs are quite flexible.

Benefits of ULIP Tax

Compared to other instruments, ULIP is a superior tax saving instrument.

There is an Exemption under 80C (only if your SA is 10 times your premium)

And at death or maturity, the claim is tax-free.

FYI - In MF, around 10% tax is deducted

Liquidity

Liquidity of ULIP is possible after 5 years where the Surrender cost is 0 and the Risk cover is 7 to 10 times