Knowledge Boosting Capsules. Knowledge Boosting Capsules K.B.C

Transcription

1 Knowledge Boosting Capsules Knowledge Boosting Capsules K.B.C Product Developement Compiled till 21 th January 2013

2 Knowledge Boosting Capsules KBC Manual (Compilation of all KB Capsules) By: Product Development Department

3 Knowledge Boosting Capsules Index Sr No 25 What are Participating Plans? 26 What is Keyman Insurance Policy? KBC Title

4 I bought an Insurance Policy with Sum Assured of Rs. 5 Lakh for an annual Premium of Rs. 50,000 Ha.. Ha.. I got a better deal than you. My policy with 5 Lakh Sum Assured cost me only Rs. 47,000 per year What are Participating Plans? Both Hurry Ram and Money Ram have bought Traditional Endowment Insurance Policies for Sum Assured of Rs. 5 Lakh for a policy term of 10 years. Both are of the same age; however there is a difference in the premium amounts paid by them. Money Ram will end up paying more than Hurry Ram. But to the surprise of Hurry Ram, Money Ram said he had made a better deal. But how is it possible? My premium is much discounted than yours! exclaimed Hurry Ram. That s because my policy is a Participating Plan and will give me bonus year on year replied Money Ram. Hurry Ram looked puzzled and asked quizzically Participating Plans? What is that? Understanding Hurry Ram s confusion, Money Ram explains the details about Participating Plans to Hurry Ram. Here is what Money Ram has to say about Participating Plans A life insurance policy may be with-profit or without profit so that it is participating or non-participating. Participating Plans are those which are entitled to a share in the distributable surplus. The Surplus would definitely depend upon the returns earned on the investments made by the insurer and also the expenses incurred. Under a Participating Plan, the premium is slightly higher than the premium under a non-participating plan. The policyholder purchases a right to have a share in the profits by paying this extra premium. Non- Participating Plans have the same benefit throughout the life of the policy and are not entitled to any bonus. With profit Plans are comparatively more popular, because: The policy remains entitled to bonus every year even after premium paying term, The bonuses are expected to be more than the additional premium paid, The difference of premium from that of nonparticipating plan is small. Most investors wait eagerly for bonus announcements from insurance companies. After all, a bonus does add, sometimes a higher amount than expected, to a policyholder's kitty. But, taking a Participating Plan alone is not sufficient. One has to look closely into the way of computing bonus. Not many realize this, but insurance firms follow two different ways of computing bonus: The two common types of Bonuses that are declared by the insurers are 1) Simple Reversionary Bonus (SRB) 2) Compounded Reversionary Bonus (CRB) In SRB, bonus is calculated (usually per 000- pronounced as per thousand- Sum Assured) on the Sum Assured only. In CRB, bonus is calculated as a percentage of 1) Sum Assured and 2) All previously accrued bonuses. Money Ram explains the above facts with the following example- Suppose, Plan A offered a CRB of 2.5% all through the policy term of 20 years while another Plan B offered SRB of Rs. 25 per 000 Sum Assured all through the Policy Term. Further, the premiums and Sum Assured (say 1 lac) for both the Plans are same. Which plan will give you a better Bonus amount?

5 CRB (A) SRB(B) 1 2, , , , , , , , , , CRB (A) SRB(B) 11 31, , , , , , , , , , The accrued bonus for Plan A and Plan B are shown in the table above. The following graphs would help us understand the same pictorially SRB at Rs.25 per 000 CRB at 2.5% B o n u s A m m o u n t CRB (A) SRB(B) Thus, it is clear that in this case, the plan A offers more Bonus amount than Plan B. Ok, it means that an insurance firm will pay you bonus after factoring in three things: expenses, investments and mortality risk. So, logically insurers who are able to control costs better and manage higher return on investments are in a better position to pay bonus to the policy-holders which will even mean choosing healthy and better lives for insurance. says a satisfied Hurry Ram. We must note that comparing insurance plans on the basis of the face values may often lead to ambiguous conclusions.

6 A Keyman Insurance Policy is an effective tool to safeguard your business. How can a Life Insurance Policy safeguard a business? What is Keyman Insurance Policy? A foreign deal was just a signature away and it all depended on the doctors as how soon they could cure Mr. Jaali Ram from the severe heart attack he had couple of days back. The deal will instantly guarantee the company, assured returns for the next 10 years! If you do not know who is Mr. Jaali Ram, please note that he is the uncle of our Hurry Ram who owns an export import business. Well, the good news is that- God has been great! Mr. Jaali Ram soon returned to his office with the same vigor and concluded the deal. I thought we had lost him! my Uncle Jaali Ram, and his business empire-both - exclaimed Hurry Ram as he turned the pages of the medical reports. Thanks to the doctors who did the right things at the right time, sighed Money Ram. But tell me one thing, what kind of contingency planning does your uncle have in place, god forbid, if something goes wrong?, asked Money Ram. Now frankly speaking, this sounded like Hebrew to Hurry Ram and Money Ram could guess that. What I meant was, your uncle-mr. Jaali Ram, seems to be the key person who is instrumental in running the business. In his absence do you see anyone else leading the business as efficiently as your uncle Jaali Ram is running the show?, explained Money Ram. I do not think there is anyone. We will have to rely on God, sighed Hurry Ram. God helps those who help themselves. You can definitely help your uncle by recommending him to take a Keyman Policy, said Money Ram. But he already has a number of policies in his name. How is Keyman policy different?, enquired Hurry Ram. Keyman Insurance is a Life Insurance cover under a suitable Plan of Assurance affected by the company to compensate for the Financial Loss suffered following the death of a Key Member or Staff of the Organization, explained Money Ram Hurry Ram curiously asked, So, do you mean to say that my uncle can be regarded as a Key Man? Yes. Keyman Insurance offers companies protection in the event of an untimely death or disability of the Keyman -who could be the owner, a partner, a majority stockholder, or someone with a high level of expertise and your uncle Mr. Jaali Ram, is definitely a person of high caliber, says Money Ram. But I do not understand, if you consider my uncle as a Key Man then why those policies for which my uncle is paying a huge premium every year be not considered as a Key- Man policy, countered Hurry Ram. Ok. Let me explain. Money Ram continues- An individual and his Business are two separate entities and should not be viewed as one. Personal life insurance policies are aimed at fulfilling one s various life stage requirements like child s education, retirement planning, wealth

7 accumulation, etc. Personal life insurance policies take care of the well being of one s family in their absence. A Keyman policy on the other hand, is aimed at protecting the possible losses that a business may suffer due to the loss of the expertise of a key person. Loss of these key human resources can sometimes prove to be potentially more loss making than the loss of machinery or goods. When you think of risks associated with the loss of a key person they could be- Loss of Business, Delay/Cancellation of a project, etc. Key man Insurance provides you with the unique opportunity to protect your business against the unfortunate loss of key people. The business typically owns the policy, pays the premiums, and is the beneficiary. Company purchases a term life insurance policy on the key employee, pays the premium and is the beneficiary of the policy. If that person (the keyman) dies unexpectedly, the company receives the insurance proceeds. A Keyman insurance policy helps the company survive the blow of losing people who make business happen. safeguard one s business from the financial losses caused by the unfortunate demise of the key person. I can now go and talk to uncle about it, said a satisfied Hurry Ram and he left. We must understand that, lenders and investors in a business generally require that the business makes sufficient provisions to protect their loans and investments in the company. Keyman insurance policy is one of the very effective tools which can keep the faith of the investors and lenders continued. Yes, that sounds really good. Can you please help me with other features of a Keyman policy so that I can have a word with my uncle about it, said a contended Hurry Ram. Sure Money Ram continues You should note that only term plans are allowed under a Keyman policy. Neither Term plans with return of premium nor Single premium term plan will qualify under a Keyman insurance policy. The Sum Assured under a Keyman is lower of following three amounts i) 10 times of the total annual compensation package for the Keyman which includes salary, bonus and all other perquisites ii) 2 times of the average gross profits of the company for the last 3 years (Gross profits mean profits before depreciation and taxation) and iii) 5 times the average net profit of the company for the last 3 years. That was really an eye-opener. A Keyman insurance plan is really an effective tool to