Life Insurance – some facts

The fact is, term plans are still not sold by insurance agents. That leaves it up to each one of us to seek protection. There are several commonly held misconceptions and myths about life insurance. Unfortunately, some get mistaken for facts. Let’s see which is which. Most people believe life insurance is good savings vehicle.
That is true only if an insured’s idea of good returns is 4% to 7%. Most people expect higher returns, then insurance may not be a right choice. A better option would be the Public Provident Fund (PPF), which gives 8% returns, tax free.
And that rate is fixed (unless, of course, the government decides to change it). If an investor’s priority is safety then he can consider alternatives like RBI bonds, National Savings Certificates (NSC), Kisan Vikas Patra, bank fixed deposits, all of which guarantee returns. Even post-tax (depending on the tax slab you fall into), they will still yield higher returns. Yet, for many people, insurance is the main saving. What makes this choice even more baffling is the myth of safety.
There is nothing safe or guaranteed about returns on an insurance plan—it depends on the performance of the funds invested. The bonus declared varies from year to year, and the post-tax return is less than the other options mentioned above.
That brings us to another reason why people buy life insurance—to save tax. For tax savings, insurance is a very good option but not the only one. There are several other ways to save tax. One could invest in PPF, NSC and ELSS (equity-linked savings scheme) mutual funds too. ELSS mutual funds have shown a mind boggling 44.88% compounded annual growth rate (CAGR) over five-year period.
The best performing fund, the Magnum Taxgain scheme, has fared even better: 63% CAGR over five years. PPF gives a clear 8% returns year on year, compounded.
The rebuttal would be that the insurance corpus goes into debt and that cannot be compared with mutual fund or equity returns. The insurance doyens would probably point to Unit-linked insurance plans for realistic comparison. To be sure, there’s some truth in the claim that unit linked insurance products ULIPs) can give good returns, like mutual funds. But insurance companies eat the premium in the first year and the following few years, leaving a reduced corpus for the actual investment.
The policy holder starts life with a disadvantage. ULIPs can make up in one situation. The mortality charges in a ULIP plan tend to be low. Hence, if you take a high insurance cover (like, say, Rs 50 lakh), the ULIP plan becomes comparable to a combination of mutual funds and term insurance, after about 12 years. This comparison is for some plans with low-charges.
That is, assuming that MFs and ULIPs are going to perform at the same return-levels. There is a concentration risk in ULIPs, as all the money goes to the fund of the insurance company, whereas a mutual fund corpus can be diversified across funds and schemes. Assuming that mutual funds and ULIPs will give the same returns. To date, mutual funds have been winning hands down. As of last week, six large-cap funds have given a five-year CAGR return of more than 50%, while the Sensex has returned 38.15%. The average five-year CAGR for the large-cap category is 44.6%.
ULIP returns are reported on the invested amount, after deducting all the charges, which are substantial. The actual returns are thus far less. The last reason for buying insurance is that it provides protection. At last, the real reason but unfortunately, agents don’t talk about it. No client wants to talk about it, either, since it involves their death (“eventuality”, in insurance lingo). When insurance agents seldom talk about protection and family security, but keep harping on tax breaks, tax free returns, and safety, it’s no wonder that they don’t help customers see the real need for life insurance.
The fact is that term plans are still not sold by insurance agents. The reasons are premiums and commissions are low. Secondly, many medical tests are required, which is a lot of work. And thirdly, policies may be declined, or may be issued at an extra premium. Extra work, lost commissions and that is why agents don’t talk about term insurance. That leaves it up to each potential insured seek protection, which is really the main purpose of insurance.



• Americans are underinsured. Only 47% of U.S. households own any individual life insurance, placing great importance on employer-sponsored life insurance programs (Conning & Company). Our complete portfolio of Group Life products provides comprehensive protection at affordable rates.
• In the U.S., Sun Life Assurance Company of Canada currently provides Group Life insurance solutions to nearly 5,000 employers covering nearly 1.5 million people (Sun Life Assurance Company of Canada).
• Unintentional injury deaths occur every six minutes (National Safety Council). We offer a broad range of Accidental Death & Dismemberment solutions to help mitigate the financial repercussions of accidental death and other qualifying injuries

Among employers offering Basic Life insurance, approximately 80% pay the entire cost and 20% share the cost with their employees (Conning & Company). Our affordable Basic Life/Optional Life combinations allow employers to provide an affordable base level of coverage to their employees, as well as the option for employees to purchase additional levels of coverage on their own.



Death Benefits of Life Insurance


A death benefit is the amount that is paid to the beneficiary of a life insurance policy upon the death of the policyholder. The amount may be a lump sum or annuity.
The IRS generally considers a death benefit to be nontaxable income. For variable annuities, a death benefit is paid to the beneficiary if the contract owner dies before annuity payments begin. If an annuity is received, the amount may be either a fixed or variable annuity. A death-benefit annuity may include a cost-of-living adjustment (COLA) to protect against inflation. In most cases, a death benefit is paid monthly. The amount of death benefit and period for which one receives it are explained in the terms and conditions of the life insurance policy.
In general, most of the death benefit is treated as nontaxable income. However, the portion that the IRS determines is interest income earned on the policy is considered taxable.
The Social Security Administration provides assistance to eligible survivors of an eligible beneficiary by way of a "lump sum death benefit" (currently $255). This death benefit is payable only to a spouse or minor children who were dependent on the deceased. The surviving spouse and minor children can also be entitled to monthly benefit checks.
The Veterans Benefits Counselor at the nearest VA regional office or a local veterans service organization representative should be contacted regarding survivor benefits and to secure a burial flag and/or burial in a national cemetery. If requested to do so, the funeral provider can alert the VA insurance division so that an insurance claim form is sent to the veteran's beneficiary without inquiry on the beneficiary's part. Veteran's mortuary benefits are available only if the veteran was:
• Receiving a pension or compensation for military service
• In a veterans hospital at the time of death
• Indigent at the time of death.
Three hundred dollars are available to an eligible surviving spouse or children. One hundred fifty dollars are available for a plot allowance and can be claimed by the family, funeral provider, or cemetery. If the death of the veteran was a direct result of injuries received while in service, then the veteran's survivors can be eligible to receive up to $1,100.
Some of the other Death Benefits are life or casualty insurance in which if death results from a motor vehicle accident, benefits might be provided under no-fault insurance provisions, employer’s payments which include severance pay and/or vacation time, credit unions, trade unions, and fraternal organizations, federal Government Railroad Retirement Board insurance which provides benefits to the survivors of railroad employees, either active or retired, but depending on length of service, state victims of crime statutes in which some states provide benefits to survivors of a crime victim, federal, state, or local government employees' benefit programs, state or local welfare allowances.