Life insurance in India was the monopoly of the Life Insurance Corporation of India (LIC) until recently, when the government opened the market to private players. A “without profits” policy purchased by an individual promises to pay a certain sum of money (the sum assured) to his survivor nominated by him in the event of his death within a specified period (the term of the policy). If the individual survives the term of the policy, he does not receive anything. A “with profits” policy not only pays the sum assured in the event of death during the policy term but also pays the bonus as declared by LIC from year to year. If the individual survives the term of the policy, he receives the sum assured plus the bonus accrued. Most policies require the individual to pay the fixed premium on a yearly basis. If the individual decides to discontinue the policy during its tenure, he would be entitled to the policy’s surrender value, which is a percent of the premium paid till date.
In India, life insurance is viewed more as an investment option than as a vehicle for risk protection. In fact, very few individuals evaluate the need for insurance. Instead, they tend to opt for it on account of tax benefits. Premiums paid on life insurance qualify for the deduction under Section 80C and proceeds at the time of death or maturity are exempt from tax. Certain investors prefer life insurance because it acts as a forced saving (the policy would lapse if the annual premium is not paid to the insurance company).
In spite of this situation, a recent phenomenon of “convergence“ between the mutual funds and insurance companies has been the development of the Unit Linked Insurance Plans offered by both insurance companies and the fund AMCs. These schemes combine the benefit of mutual fund investing with the added benefit of protection through insurance cover. In these schemes, investors have the option to choose from a variety of different investment plans with different asset allocation percentages between equities and debt. At the same time, life insurance cover is part of the plan.
By—Dr. Prof. Dr. Rajesh P. Ganatra
Ph.D., UGC NET, M.Com
