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FAQ | BGN Financial Consultants

FAQ

General Insurance

If there are problems with claims what can I do?

First you should write to the company and give them sufficient time to respond suitably. If they don’t respond, or it is not a response satisfactory to you, then you can approach the appropriate judicial channel. For complaints relating to personal insurance covers upto a value of Rs.20 lakh, you may approach the Insurance Ombudsman in your area.  

If I buy a policy and don’t make a claim, it is a loss. So, why should I buy insurance?

General insurance is not meant to be for savings or investment returns. It is meant for protection.  What you pay for is the protection against a risk. To approach it as something from which returns should be obtained is not the correct approach as there is a price to pay for protecting a property worth lakhs for a few hundred rupees.

Why do different people have different premiums?

The premium is calculated on the extent and nature of the cover you want. A higher sum insured means a higher rate of premium. Similarly a higher risk will be charged a higher premium. An example of this is that an older person will have to pay a higher premium for health insurance for the same sum insured. Sometimes the risk is higher depending on the location of risks – for example in motor insurance in areas where accidents are higher. So the premium will vary according to the nature and severity of the risk

What is the periodicity of premium payments?

Most general insurance policies are annual and the premium payment is in advance. No risk commences unless you have paid the premium. In some long term policies companies have the facility of collecting premiums periodically.

On what basis is claim paid?

In indemnity policies, the upper limit of a claim is the sum assured and this usually applies for the period of the policy. Certain policies, however, allow for reinstatement of the Sum Insured by payment of proportionate premium for the remaining period of the policy. The actual claim will be the actual extent of financial loss as validated by documents like bills. If the property is underinsured, the insured shall bear a rateable proportion of the loss. There can be more than one claim in the policy period but the sum assured is usually the limit for the policy period unless reinstated. Nowadays health insurance policies – which cover hospitalisation costs – have also a cashless settlement of claims. That is, you don’t have to pay for the treatment at the hospital and then make a claim for reimbursement of the expenses. The insurance company has a service provider called the third party administrator (TPA) health services, who liaises with the hospitals and directly makes the payment for your treatment as per the terms of your policy and coverage.

Can I take two policies and get claims under both of them?

 In case of an indemnity cover (one that seeks to compensate the actual loss )--for instance, a policy that covers property, if there are two  policies in vogue, the loss shall be shared by both the policies. In no case can an insured get more than the actual pecuniary loss he or she has incurred. On the other hand, in respect of benefit policies like the Personal Accident policy, where a fixed compensation is paid, no matter what the actual loss is , one may obtain more than one policy.

How much should I insure for?

The amount you insure for is called the sum assured. Normally a policy should cover the value of the asset – either the market value while insuring, or the cost of replacing the asset should it be lost or destroyed. The premium will depend on the sum assured.

What kinds of policies are there?

Most general insurance policies are annual – that is, they last for one year. Some policies are given for longer periods – like fire insurance for residences – and some for shorter periods – like insurance for goods transportation or for emergency medical treatment during foreign travel.

Who should buy general insurance?

Anyone who owns an asset can buy insurance to protect it against losses due to fire or theft and so on. Each one of us can insure our and our dependents’ health and well being through hospitalisation and personal accident policies. To buy a policy the person should be the one who will bear financial losses if they occur. This is called insurable interest.  

Why should one insure?

One of the main reasons one should insure is to protect one’s belongings and assets against financial loss. When one has earned and accumulated property, protecting it is prudent. The law also requires us to be insured against some liabilities. That is, in case we should cause a loss to another person, that person is entitled to compensation. To ensure that we can afford to pay that compensation, the law requires us to buy liability insurance so that the responsibility of paying the compensation is transferred to an insurance company

What is general insurance?

Insuring anything other than human life is called general insurance. Examples are insuring property like house and belongings against fire and theft or vehicles against accidental damage or theft. Injury due to accident or hospitalisation for illness and surgery can also be insured. Your liabilities to others arising out of the law can also be insured and is compulsory in some cases like motor third party insurance.

What is insurance?

We face a lot of risks in our daily lives. Some of these lead to financial losses. Insurance is a way of protecting against these financial losses. For a payment (premium), an insurance company will take the responsibility of compensating your financial losses

Life Insurance

Is there any option where I can restrict my premium payment for a lesser number of years than the duration of the policy?

Yes.

Is there any policy with which I can plan for my retirement?

Yes. There are many to chose from.

Are there any advantages in buying insurance at an early age?

Yes. The premium that you pay on your insurance policy is mainly dependent upon two things - your age and the tenure of the policy. The younger you are, the lower is your insurance premium amount. At younger age, you would be physically sound and may not be suffering from illnesses/ medical. This would entitle you to a lower premium on the policy. Therefore it is advisable to buy insurance at an early age to reduce the cost of insurance

What will I receive on maturity of my policy?

On maturity, you will receive the sum assured or the Accumulation Account whichever is higher. Lets understand how does this work….
  1. Every year you will pay premium on your policy.
  2. This premium will get credited to an Accumulation Account.
  3. The amount required towards your life cover expenses and any other expense would be deducted from this Account.
  4. The balance will be invested in sound financial securities (as per IRDA regulations) on your behalf.
  5. The bonuses declared each year by the company would be added to the Accumulation Account. Thus, every year the value in your Accumulation Account will get compounded.
  6. At the end of the policy tenure, you would receive the amount in the Accumulation Account or the sum assured, whichever is higher.

What will happen to my policy if I miss a premium payment due date?

Life Insurance offers a grace period of 30 days after the premium payment due date for paying the outstanding premium. If you fail to pay the premium on your policy within this grace period your policy will lapse. You can revive your lapsed policy by paying your outstanding premium and  handling charges

What are riders?

Riders are additional benefits that can be attached onto your basic life insurance policy. These riders give you the benefit of increasing your risk cover in case of certain events happening. For instance if you have taken an Accident Death Benefit rider and you die due to an accident then your beneficiaries can get upto a maximum of twice the basic sum assured. Similarly there are different riders addressing different contingencies like Critical Illness, Permanent Disability Benefit, etc. There are riders available that waive your future premiums in case of death or disability of the proposer. These riders come at a nominal cost. and can be availed of depending on the policy taken. These can only be taken at the beginning of the policy term

Can I buy insurance for my children too?

Yes. You can.

What are the different premium paying options available?

All policies provide yearly, half yearly and quarterly modes of premium payment.

Is there any policy where I can receive money during the tenure of the policy?

Yes, a MoneyBack Policy. This is an anticipated endowment policy with an additional feature of receiving a benefit at regular intervals during the tenure of the policy. The risk cover continues for the entire sum assured inspite of the installments already paid. If you outlive the policy, the balance sum assured along with accumulated bonus is paid back to you. For example,  This is suitable for you if you plan to coincide the funds received from the policy with your future anticipated needs like a car, an overseas holiday, children's educational needs, marriage expenses, etc

What is an Endowment Policy?

An Endowment Policy is a combination of savings along with risk cover. These policies are specifically designed to accumulate wealth and at the same time cover your life. In simple words, these polices are issued for specific time periods during which you pay a regular premium. If you die during the tenure of the policy, your beneficiaries will receive the sum assured along with the accumulated bonus additions and if you outlive the policy tenure you will receive the sum assured along with accumulated bonus additions (if any). For example, This is suitable for you if you want to accumulate capital for anticipated financial needs like buying an asset such as a home, providing for your old age, your children's education, marriage, etc

What is Term Insurance?

Term Insurance, also known as pure life cover, is the cheapest and the simplest form of insurance. Under this insurance policy, against payment of regular premium, the insurer agrees to pay your beneficiaries the sum assured in event of your premature death. However, if you survive till the end of the policy term, nothing is payable to you. This policy has no savings component and the premiums you pay are purely a cost to buy you life cover. For example, This is suitable for you if…
  • You are looking for a low cost life cover without any savings benefits attached. Or
  • You are at that stage in life where insurance cover is vital but you cannot afford high premium payment due to low income.
 

How much do I insure myself for?

One of the simplest rules is to assume that insurance is a replacement for your lost earning capacity. Calculate your total income for the years that you expect to work. Assuming that the prevailing interest rate is 8%, you need to insure your life for at least 12 times your current annual income. Assuming that a family needs Rs.100 annually for household expenditure and the rate of interest would be at 8%, then the breadwinner needs to have a life insurance policy of approximately Rs.1200. If the insurance amount were to be put in the bank by the family, the family would get a comfortable Rs.96 p.a., which would at least let the family maintain the current life style. However to calculate your insurance need more precisely, use the following steps:
  • Calculate Monthly Livable Income required (Post tax). This is the monthly amount that the survivors of the policyholder will need in the event of his death. This is taken at 70% of the current total family expenses. Denote this as "M".
  • Calculate Monthly Income required (Pre tax) as M/ (100-t)%. Denote this as "M1". Here t = Tax rate.
  • Calculate Annual Income (A) = M1*12.
  • Assume Estimated-earning rate on capital as 8%. Denote this as "r".
  • Calculate Capital livable income required (C ) as A/ r%.
  • Subtract Existing Insurance Cover amount (if any) from "C".
  • The final amount you arrive at is the amount for which you should buy insurance.

How else does life insurance help?

The primary need is buying financial security for your family. Other aspects that insurance helps fulfill are:

Tax benefits

The Tax exemption available under our insurance and pension policies are described below:
  • Under Sec.80C of the Income Tax Act Premiums paid upto maximum of Rs.1,00,000/-, subject to maximum of 20% of Sum Assured ,to effect or keep in force an insurance on the life of the individual, the spouse and any child of the individual.
  • Under Sec.80CCC of the Income Tax Act Premiums paid upto maximum of Rs. 1,00,000/- to effect or keep in force a contract of annuity plan for receiving pension. (However, u/s.80 CCE, the aggregate amount of deduction under section 80C, section 80CCC, and section 80CCD shall not, in any case exceed Rs. 1 lakh)
  • Under Sec.80 D of the Income Tax Act Premiums paid (other than through cash) towards Critical Illness Rider, subject to a total maximum of Rs.15,000/- (an additional Rs 5,000 for senior citizens) to effect or keep in force an insurance on the health of the individual, spouse and dependent parents or children.
  • Maturity Benefits are exempted Under Sec.10(10D) of the Income Tax Act. Maturity benefits are tax free. However in cases where premium exceeds 20% of Sum assured in any year, benefits paid in excess of premiums paid will be taxable.

As a tool of financial planning

Most insurance plans available today have a built in savings element. They allow you to meet your dual financial goals of life cover and Savings for the future. Collateral security for loans You may avail of a loan from the insurance company against certain plans. Your policy could also be pledged as a collateral to raise funds from banks and other financial institutions. In case of your unfortunate death the loans may be repaid from the proceeds of the life insurance policy. Savings Insurance promotes compulsory savings with regular premium payments and helps build up a corpus of funds along with financial security for the dependents in case of premature death. For your medical needs and that of your family.

How much does life insurance cost?

In order to buy a life insurance policy, you must pay premiums to the life insurance company. The amount of premiums payable depends upon the type of policy, term of policy contract, sum assured and your age. You could pay these premiums monthly/ half-yearly/ annually/ or as a single premiums.

Do I need life insurance?

If you have dependants and financial responsibilities towards them, then you certainly need insurance. Having a family means dependants, which, in turn means financial commitments. Financial commitments come in the form of loans, children's education, medical expenses etc. Imagine what would happen if you were to lose your life suddenly or become disabled and cannot earn. . Being insured in a situation like this is a necessity. When you insure your life, in effect what you are doing is insuring your earning capacity. This guarantees that your dependants will be able to continue living without financial hardships even in case of your demise. Most insurance plans available today come with a savings element built into it. These policies help you plan not only for protection against death but also for a financially independent future, which would enable you to have a comfortable retirement.

What is Life Insurance?

Life Insurance is a contract between you and a life insurance company, which provides your beneficiary with a predetermined amount in case of your death during the contract term. Buying insurance is extremely useful if you are the principal earning member in the family. In case of your unfortunate premature demise, your family can remain financially secure because of the life insurance policy that you have purchased. The primary purpose of life insurance is therefore protection of the family in the event of death. Today, insurance is also seen as a tool to plan effectively for your future years, your retirement, and for your children's future needs. Today, the market offers insurance plans that not just cover your life and but at the same time grow your wealth too

What is cash Surrender Value?

This term refers to the amount payable to the permanent life policy owner upon surrender of the policy. It is equal to the current Cash Value, less any surrender charges that may apply, any monthly contract charges, and any outstanding loans and accrued interest

How do I report a death?

This is the person or other party designed to receive life insurance or annuity proceeds upon the death of the insured. The beneficiary is named when a policy is taken out and can be changed at the request of the policy owner

How do I take out a loan on my policy?

Loan Value is the amount of cash value that can be borrowed on a policy. A policy owner may be able to make a loan against the cash value of the policy, based on the type of policy owned. A loan allows access to the cash value of the policy, while still maintaining the insurance coverage. When a loan is made against a policy, the death benefit is generally reduced by the amount of the loan plus any interest that is owed. Loan interest rates vary and specific provisions are generally explained in the policy itself.

Mutual Funds

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.

Which was the First Mutual Fund to be set up in India?

Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.

Who is the Regulatory Body for Mutual Funds?

Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.

What are the broad guidelines issued for a MF?

SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds : (1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs). (2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors. (3) The net worth of the AMCs should be at least Rs.5 crore. (4) AMCs and Trustees of a MF should be two separate and distinct legal entities. (5) The AMC or any of its companies cannot act as managers for any other fund. (6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. (7) All MF schemes should be registered with SEBI. (8) MFs should distribute minimum of 90% of their profits among the investors. (9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.

How do mutual funds diversify their risks?

According to basis financial theory, which states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.

Can mutual funds assumed to be risk-free investments?

No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.

What are the types risks involved in investing in mutual funds?

A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.

What are the different types of funds offered by fund house?

Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary.

What are the different types of plans that mutual fund offers?

That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.

What are open-ended and closed-ended mutual funds?

In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.

What is the investor’s exit route in case of a closed-ended fund?

According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.

Why should one choose to invest in a mutual fund?

For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because: (1) Mutual Funds provide the benefit of cheap access to expensive stocks (2) Mutual funds diversify the risk of the investor by investing in a basket of assets (3) A team of professional fund managers manages them with in-depth research inputs from investment analysts. (4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.

How investors invest in Mutual Funds?

One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.

What are the parameters on which a Mutual Fund scheme should be evaluated?

Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.

What is a Systematic Investment Plan and how does it operate?

A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.

What are the benefits of s Systematic Investment Plan?

A systematic investment plan (SIP) offers 2 major benefits to an investor: (1) It avoids lump sum investment at one point of time (2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that (3) at lower prices you end up getting more units for the same investment.

What is the difference between mutual funds and portfolio management schemes?

While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors

Is investor eligible for rebate on income tax by investing in a MF?

Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act.

Do investments in mutual funds offer tax benefit on capital gains?

Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act.

Do mutual fund investments attract wealth tax?

No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.

If I gift mutual fund units, does it attract gift tax?

No. With effect from 1st October 1998, units of a mutual fund gifted by unit holders are no longer chargeable to Gift Tax.

Is dividend earned from mutual funds exempt from income tax?

Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.

What are my major rights as a unit holder in a mutual fund?

Some important rights are mentioned below: (1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared. (2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend. (3) They are entitled to receive redemption cheques within 10 working days from the date of redemption. (4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund. (5) 75% of the unit holders can pass a resolution to wind-up the scheme.