Buying Life Insurance in India By Suresh Agarwal
Executive Vice-President & Head, Distribution and Strategic Initiatives, Kotak Mahindra Old Mutual Life Insurance
Life Insurance is undoubtedly the most attractive long term savings and protection option today. While Life Insurance has traditionally been among the favorite investment options in India for NRIs, high economic growth in India combined with customer friendly regulatory atmosphere in the insurance space have significantly upped the ante. With every passing year, more and more NRIs and PIOs are buying Life Insurance products in India. However, Non-Residents by virtue of their being separated in space and time from fast evolving local realities need to bear in mind the following aspects while investing into this lucrative space.
I. Are you eligible?
II. Select a product that suits your needs III. Know the terms, rules and regulations IV. Select the right insurance company
V. Never hide or misstate facts
I. Are you eligible?
NRIs and Persons of Indian Origin (PIO) are allowed to buy Life Insurance in India, subject to fulfillment of certain conditions. While NRI refers to an Indian National Resident abroad for certain duration, PIO refers to a foreign national with an Indian root and this definition is important. FEMA notification No. 5/RB-2000 defines a PIO to mean a citizen of any country other than Bangladesh or Pakistan, if
(a) The individual has at any time held Indian passport; or
(b) The individual or either parents or grand- parents were a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or
Eligibility can also be based on age. Most insurance policies have a ceiling on the entry age and it is vital to know this, to avoid being mis-sold to. Besides, if one has already reached the maximum insurance limit which is calculated as a factor of net worth, one may not be eligible to buy additional insurance since this could lead to over-insurance of the individual where by the person’s worth after death becomes higher than during life time.
II. Select a product that suits your needs
Once you are eligible, the next step is to select a product. Depending on your investment objectives and risk appetite, you could select from traditional products, Unit linked Insurance Products (ULIPs) or Tem Plans. Each of these product categories fulfills different customer needs and requirements.
Unit Linked Insurance Plans (ULIPs)
ULIPs afford individuals professionally managed exposure to equity which as an asset class offers the highest return. They focus more around generating higher investment returns and transparency and are normally opted by more aware investors who are willing to take calculated risks. ULIPs offer a choice of funds to choose from based on one’s investment needs and risk appetite. In that sense the investor makes his own investment decisions. New regulations have made ULIPS even more transparent and today the customer can know where his money is being invested and what charges he is paying. However, since they invest in market instruments the risks they hold are higher.
Traditional Plans
Investors with conservative risk profiles could choose traditional plans. Traditional plans are feature based products that normally have a larger insurance component than ULIPs. They provide higher death benefits and conservative growth of investments over the policy term. In these plans, it is the insurer who, as per relevant regulations, makes the investment choices, which in the past have predominantly been in debt instruments.
Term Plans
Investors seeking only protection could opt for pure term plans. Since there is no investment component these are comparatively inexpensive and offer higher covers for lower premiums.
III. Know the rules and regulations
Purchase and Payments
Insurance companies are allowed to issue policies denominated in either Indian rupees or foreign currency to non-residents. If the policy is foreign currency denominated, the premiums are to be collected in foreign currency from abroad or out of NRE/FCNR accounts of the insured or insured’s family members in India. For rupee denominated policies issued to NRIs, funds held in NRO accounts are to be used to pay premiums. While one can purchase a policy from abroad, almost all insurers stipulate a medical examination of the insured for underwriting purposes. Insurance companies bear this expense if the examination is undertaken in India. Non-residents have the option to do it overseas and send the report to the insurance company in India. In such cases they would have to bear the cost, unless they are buying a policy targeted specifically at non-residents, in which case the insurer would have tied up with an overseas medical facility for the purpose.
Some insurers have also introduced non-medical policies, whereby a medical test is not mandatory, but the higher risk assumed on books results in loading of premiums. Loading of premiums, reflects the company’s assessment of the different risks surrounding the life insured. For instance, individuals living in high risk locations such as conflict zones are usually charged a higher premium.
Taxation
NRIs are advised to take into consideration tax laws in force both in India and the location where they are resident before buying a policy. Check for tax implications at all three stages of policy life cycle - investment, accumulation and maturity. While current tax laws in India exempt all three stages from tax, it could be different in your location. For instance, in some countries taxable income is calculated on the basis of gains and earnings globally and insurance gains are
not exempt. Currently, maturity or death proceeds are repatriable to the extent of premium paid in foreign currency in relation to the total premium paid.
IV. Select the right insurance company
There are over twenty three life insurance companies offering a wide range of products to choose from. However, product differentiation has narrowed and customers could get confused in the face of near similar products from competing companies. So the question that confronts the one is ‘Where should I buy from?’ Investors are advised to consider factors such as the pedigree of the management, company track record, company’s claim settlement ratio, parent group’s experience and demonstrated ability in the broader financial services sector since logic suggests that organisations which have a track record of managing monies successfully may be able to replicate that success in their insurance business too. At the product level, compare and contrast product and service features, historical performance if available and reduction in yield over policy term while taking the decision.
V. Never hide or misstate facts
An insurance contract is based on the principle of “Uberimae Fides” or “Utmost Good Faith” and underwriting decisions are based on the faith that disclosures made by the investor are true and correct. Selective disclosures or non-disclosures affect underwriting decisions. It not only undermines the very basis of the insurance contract but also alters the risks the insurer assumes on its books. Non disclosures, partial disclosures or wrongful disclosures of significant and material facts could result in claim rejection. When a claim is rejected on sound grounds, there is often little room for appeal.
In Conclusion
Insurance sector in India is extremely vibrant and offers a choice of products to suit every investment need and risk appetite. Insurance products of the traditional and unit linked variety invest varying portions of investment in market linked instruments which have benefited from India’s galloping growth and strong economic fundamentals. This makes Insurance purchase in India an attractive investment option for non-residents. However, non-residents being separated
in space and time from domestic realities in India, must review the antecedents of the insurance company they intend to buy from with apart from current policies surrounding insurance investment by non-residents. Needless to say, it is equally paramount to bear in mind relevant laws in their own location on overseas investment, to avoid any later day dis-appointment. Insurance an extremely attractive investment avenue since along with returns, investors get the shield of financial protection. Insurance products are designed to maximize benefit over the long term, and investors are advised to buy insurance with a long term investment time horizon. If properly planned, they can help address major expenditures one incurs during a lifetime.
