Life Insurence Policy Selection

Before choosing any life insurance product one must consider the following:

1. Adequacy of coverage
2. Cash outflow/ amount of premium
3. Duration of need
4. Expenses of the policy
5. Surrender charges

However there are several methods to evaluate the various life insurance policies.

Belth Method

The Belth yearly price of protection method enables to determine whether a given life insurance policy is competitively priced based on the annual cost per Rs. 1,000 of protection.

Simply put, it weighs costs against coverage.

The Belth yearly rate of return method allows to determine whether the rate of return on the investment component of a given policy is good, fair, or poor.

Try to solve above equation with following:

Post Tax Interest Rate   = 12%

Annual Premium  = Rs. 10000

Bonus   = Rs. 15000

Death Benefit   = Rs. 10 lacs

CSV   = Rs. 5,00,000

CVP   = Rs. 4,60,000

Internal Rate of Return

Commonly used for policy evaluation purposes in business purchases of life insurance 

Surrender-Based IRR

Solves for the IRR/interest rate/yield that causes accumulated premiums (less any bonus paid)to equal the policy CV at one or more pre-selected policy durations

Typically, highly negative (with a limit of a negative 100 percent) in early years (short durations) and becomes less negative, and increasingly positive, with longer durations

Death-Based IRR

Solves for the IRR/interest rate/yield that causes accumulated “net” premiums to equal the Face Amount at one or more selected policy durations

In early years (short durations), this IRR will be very large but declines with longer durations (i.e., the longer the insured lives).

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Linked Life Insurance

These plans have been of great success in recent years. It is a hybrid plan which gives an option of choosing the investment portion to the insured. It combines the benefit of life insurance as well as giving various options of participating in the growth of the capital market. The traditional plan of insurance companies never disclose to insured where his money is invested. This non transparency part is eliminated by the linked plans. The SA or death cover, payable in the event of death during the term, is related to the premium usually as multiple like 5 times the annual premium. IRDA guideline: SA has to be 1.25 times for single premium or 5 times in case of annual premium.

When we talk about transparency and facilities we should also consider the charges of linked plans. They are as follows:

1. Premium Allocation Charge
2. Mortality Charges
3. Fund Management Fees
4. Policy/ Administration Charges
5. Surrender Charges Service Tax Deductions

Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units.

Lets also understand the difference between the traditional plans and the linked plans