Importance of Term Insurance Plans-VRK100-29Dec2013

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Insurance requirements are unique in the sense that a particular policy suitable to one may not be suitable to another person. However, there are some general norms applicable to term insurance policies. These pure term plans provide basic protection and are the cheapest policies. Every earning member of a family needs term insurance to provide financial protection to the dependants. The following are some common rules while opting for term insurance.

Common Rules of Term Insurance:

1. Term insurance plans are the cheapest of all life insurance plans

2. Of all the life insurance plans, they provide highest benefit of life protection

3. They are also known as protection plans or pure insurance plans

4. For these plans, the premium payable is the lowest and sum assured the highest

5. Sum assured is the amount of cover (protection) provided by the life insurance company

6. For pure term plans, sum assured is returned to the legal heirs or nominees in case of death of the insured. If the insured survives till the end of the selected period, no amount is payable by the insurer.

7. You should not see life insurance plan as some sort of investment that gives you return

8. You should never mix insurance and investment. Unfortunately, insurance is often seen as a savings plan by many Indians.

9. If you mix insurance and investment in one product, you will get very low returns

10. With term insurance, you are providing financial protection to your family

11. If you are a salaried person, you are likely to retire by 60. One thumb rule is that you don’t require life insurance protection beyond the age of 60 years.

12. The idea is that once you reach your retirement age, you’ve have accumulated some wealth and taken care of your loved ones. So beyond 60, your family’s dependence on you will be minimal and as such you don’t need any further insurance cover.

13. If you are 30 years old, you can go for a policy with a period of 25 or 30 years

14. If you start buying term insurance at an early age, the premiums are much lower. As you age, the premiums go on increasing at a faster rate.

15. So it’s better to start buying insurance polices at a young age as you start earning your salary or professional income

16. Suppose at age 30, you opted for a Rs 50 lakh term policy (that is, policy with a sum assured or life cover of Rs 50 lakh). After five years, you can consider to take an additional term policy—effectively increasing the original cover of Rs 50 lakh, because your income would have gone up after five years.

17. Whenever you opt for a life insurance policy, better to go for a medical check-up to avoid any complications in future while settling the claim

18. While filling in the policy application, provide all personal details correctly (don’t lie)

19. In the insurance industry, there are several instances of agents selling unsuitable or wrong policies. In general, agents tempt you to take policies that fetch them higher commission. So beware of agents’ marketing tricks and don’t fall prey to their tricks.

20. Always pay your annual/semi-annual premiums in time. Never allow a policy to lapse.

21. Some agents tell you to go for term insurance that offer return of premium. Don’t consider such plans. Because the life insurance company will return only the money paid by you.

22. When it comes to term insurance plans, Life Insurance Corporation of India’s (LIC) policies are the most expensive. Yes, LIC charges the highest premium of all. This is because LIC discourages term insurance policies.

23. LIC’s indicative premiums for term insurance polices are two and a half times costlier than the policies of HDFC Life, ICICI Prudential, or Kotak Life Insurance.

24. So, don’t buy LIC’s term insurance plans

25. Before buying a policy, study all the features of the policy that is suitable to your individual needs

Case for Online Term Insurance Plans:

1. You can buy term insurance plans online by visiting websites of insurance companies

2. The premium payable for online plans is much lower than that of offline plans

3. Offline plans are plans that you buy through a life insurance agent/broker

4. Offline plans are costlier because the life insurance company has to pay hefty commissions to agents or brokers

5. Some online policies come with additional benefits of critical illness and accidental death riders. Of course, you’ve to pay a litter higher premium for these add-on benefits.

6. Now several companies in India offer these online term plans. The prominent ones are HDFC Life Insurance, ICICI Prudential Life Insurance, Kotak Life Insurance and SBI Life Insurance. Please check their websites before buying.

7. These online term policies are no different from the ones you buy through offline, that is, through agents. If you need a total life cover of Rs 50 lakh, you can buy two policies of Rs 25 lakh each from two different companies.  

Illustration:

Let us take an example and compare some online term insurance plans:

                               

Consider a male who is married, non-smoker and healthy. The indicative premiums sourced from respective company websites (on 29Dec2013) are given in the above table.

As indicated above, the premiums range between Rs 6,400 and Rs 8,300 for these four companies. You better check these policies thoroughly for various features and suitability of the product. Other life insurance companies, like Aegon Religare, Aviva, Bharti Axa, PNB Metlife, Reliance Life and Tata AIA also provide online term policies.

Conclusion:

The choice is plenty for online term insurance policies now. As stated earlier, each individual needs are unique depending on their annual income, total wealth, number of dependants, lifecycle stage, marriage status and others. Online policies are equal to offline policies in terms of their features and service.

Online policies are much cheaper as compared to offline policies. For example, the premium for a HDFC’s offline term plan is more than two times that of an online term plan with similar features. So is the case with Bharti Axa term plans.

Ideally, your insurance needs are to be dovetailed into your total financial plan.

Related Articles:

How to Choose Insurance Wisely?

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Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

http://www.scribd.com/vrk100

Connect with him on twitter @vrk100

India's Q2 GDP Growth at 4.8%-VRK100-29Nov2013

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              Note: Base year 2004-05, Real GDP at factor cost at constant prices.

India’s second quarter GDP growth has grown by 4.8 percent as against 5.2 percent in the corresponding quarter of previous year. The second quarter growth during the July-September 2013 period has been led by economic activities, such as ‘finance, insurance, real estate & business services,’ ‘agriculture,’ ‘construction’ and ‘electricity, gas & water supply.’ The second quarter growth indicates a slight pick up in GDP growth rate as compared to 4.4 percent growth rate clocked in the first quarter of the financial year 2013-14.

As the above graph indicates the quarterly growth rates have slumped to less than 5 percent in the last four quarters. Such sub-5 percent growth rates are for the first time in more than a decade. Indian economy experienced very high growth rates of 7-9 percent between 2003-04 and 2010-11. Since the second quarter of 2011-12, the growth rates have been declining at a steady rate, caused by various factors, notably, dogged inflation pushing up interest rates, debacle in manufacturing sector following policy bottlenecks, fall in foreign investment, concerns about fiscal and current account deficits, and bungled investment climate. 

Now let us see what are the main contributors to the slight pick up in the GDP numbers and what the future holds for the Indian economy’s growth prospects.

Main Drivers for the 4.8 percent Growth:

Q2 growth rates (y-o-y) *	Jul-Sep          2012-13	Jul-Sep          2013-14
	% growth ^	% growth ^
A. Services	7.1	5.8
1. Construction	3.1	4.3
2. Trade, hotels, transport & communication	6.8	4.0
3. Finance, insurance, real estate & business services	8.3	10.0
4. Community, social & personal services	8.4	4.2
B. Industry	0.5	1.6
1. Mining & quarrying	1.7	-0.4
2. Manufacturing	0.1	1.0
3. Electricity, gas & water supply	3.2	7.7
C. Agriculture & Allied Activities	1.7	4.6
D.Total GDP (A + B + C)	5.2	4.8

   * Base year 2004-05, ^ Over corresponding quarter of previous year

1. Finance, insurance, real estate & business services: This activity has clocked a growth rate of 10 percent topping the list.

2. Agriculture: Led by robust monsoon this year, agriculture grew by 4.6 percent as against 1.7 percent last year. In this Kharif season, oilseeds grew by 14.9 percent, while coarse cereals and pulses grew by 4.9 and 1.9 percent respectively.

3. Construction: It has grown by 4.3 percent compared to 3.1 percent last year. Cement output registered a growth rate of 5.9 percent, while steel consumption grew by 1.3 percent.

4. Electricity, gas and water supply: Its growth has gone up by 7.7 percent as against 3.2 percent last year.

5. The worst performing contributors are ‘mining & quarrying’ and ‘manufacturing.’

6.  In the Services sectors: In Railways, cargo traffic grew by 3.7 percent, but passenger traffic contracted by 2.5 percent. Sale of commercial vehicles slumped by a massive 22.1 percent, while passengers handled by civil aviation grew by 12.6 percent in the second quarter.

Private and Government Consumption (at market prices):

As indicated by the estimates of expenditures on GDP, private consumption growth during the second quarter is somewhat muted. Private final consumption expenditure (PFCE) rates at constant (2004-05) prices are 59.8 percent in Q2 of 2013-14 as against 61.8 percent in Q2 of 2012-13.

Government consumption growth during the second quarter has declined. Government final consumption expenditure (GFCE) rates at constant (2004-05) prices are 10.3 percent in Q2 of 2013-14 as against 11.0 percent in Q2 of 2012-13.

What does the future hold for Indian Economy?

GDP growth rate in the second quarter at 4.8 percent is a tad better than 4.4 clocked in the first quarter of this financial year, but lower than 5.2 percent achieved in the second quarter of last financial year.  While the government’s estimated figures for the full year are indicating more than 5 percent GDP growth, others indicate sub-5 percent figures for the entire fiscal year 2013-14.

The first half-yearly growth rate is 4.6 percent. To achieve a minimum of 5 percent for the full year, the second-half growth should be at least 5.4 percent.

Half-Yearly GDP Growth Rates %
	First half	Second half
2009-10	7.6	9.5
2010-11	9.1	9.6
2011-12	7.0	5.5
2012-13	5.3	4.7
2013-14	4.6

As the above table shows, in the last two years, the second-half growth rates are much less than the first-half growth rates—these two years have shown declining growth trends for the economy. But in 2009-10 and 2010-11, the second-half rates are much better than first-half figures—interestingly in these two years growth rates have been on the upswing.

While inflation and fiscal deficit have been two big problems for the Indian economy in the past five to six years, current account deficit is somewhat under control due to gold import curbs, RBI’s swap windows, FII inflows and rupee strength in the last two to three months.

Consumer price inflation (CPI) continues to be above 10 percent, while whole-sale price inflation (WPI) is above 7 percent—negatively impacting the poor and the middle class sections of India. The government (s) have done precious little in the last five to six years to ease the supply bottlenecks. The RBI is left to battle the inflation monster on its own without any support on the fiscal side.

But this year, the central government is giving the impression that will stick to its 4.8 percent fiscal deficit target for the current year. Media reports suggest the government is cutting plan expenditure severely this year, due to slowdown in tax collections and sluggish disinvestment receipts. What is alarming though is the fact the government has reached 84 percent of its full year budgeted target of fiscal deficit in the first seven months  (April-October) itself.

This is an election year for the central government. So it remains to be seen how the government will curtail its expenditure, that too, when 84 percent of the budget target is already reached.

The government claims to have cleared projects worth lakhs of crores of rupees.  But investment activity is yet to pick up, with the private sector not showing much enthusiasm for new projects. Investors have to keep their fingers crossed with regard to the prospects of Indian economy until some clarity comes on investment cycle upturn.

Related Articles:

Reasons for the Sharp Slowdown in GDP Growth:

India’s GDP Growth Slows: 10Sep2013

Strengths and Weakness of Indian Economy: 01Sep2013

Data source: Central Statistics Office, Government of India

GDP – Growth Domestic Product or national income, RBI – Reserve Bank of India.

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Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

http://www.scribd.com/vrk100

Connect with him on twitter @vrk100

IFC's Offshore Bond Program for India Successful-VRK100-21Nov2013

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On November 19, 2013, IFC issued the first tranche of USD 160 million or INR 10 billion under its USD 1 billion Global Rupee Bond Program. The issue received very good response from global investors and subscribed two times, the details of which are given in the above template. The investors are from the US, Europe and Asia. They include fund managers, central and private banks. The coupon for the bonds is 7.75 percent, which is 70 basis points or 0.70 percent below the prevailing 3-year Indian government bond yield.

The bond is International Finance Corporation’s first rupee issuance, and the first bond issued under its USD 1 billion offshore rupee bond program. IFC, which focuses exclusively on the private sector, is an arm of the Washington, DC-based World Bank Group. 

The success of this IFC’s offshore rupee bond issue indicates the attractiveness of India for global investors—reflecting investor confidence.

  

What is this Global Rupee Bond Program?

IFC and the Indian government worked closely to bring this offshore bond program. This is the first of its kind Indian rupee-linked offshore bond program initiated by the IFC. This USD 1 billion program was launched by IFC on 9 October 2013. It the largest of its kind in the offshore rupee market—aimed at strengthening India’s capital markets and attracting greater foreign investment. IFC will use the money raised from this rupee-linked bonds to finance private sector investment in the country. It may be noted that the exchange rate risk on the bond is borne by the investor.

This bond program needs to be seen in the context of higher volatility of rupee against the dollar in recent months. The Indian government took this initiative with the IFC, in order to strengthen India’s capital markets and bring back foreign investors.

What is the purpose of this bond program?

IFC will issue bonds whose principal and coupon payments will be linked to the Indian rupee exchange rate. The US dollar proceeds from the bonds will be converted to rupees in the domestic spot exchange market and then lent exclusively to Indian private sector companies. The lending will be done in rupees.

Though the bonds will be denominated in dollars, they will be linked to the dollar-rupee exchange rate.  The bond’s value will move in tandem with rupee bonds, but the settlement will be in dollars for the convenience of global investors.  Once trading starts in these bonds, these bonds would reflect the risk premium attached to India and the rupee’s strengths and weaknesses. 

Benefits of the Bond Program:

1. IFC will use the funds to finance small and medium-size enterprises as well as companies engaged in agriculture and infrastructure development

2. Strengthens India’s capital markets by bringing liquidity, diversity and depth to the offshore rupee market

3. Widens investors’ base and allows foreign investors to invest in rupee bonds

4. May encourage other issuers to offshore markets

5. Provides an alternative funding channel for Indian companies

Is Indian Rupee Going Global?

An important objective of this bond program is not only to bring in dollar inflows but to send a signal to the international markets about India’s economic strengths.  The first tranche was issued for three-year maturity, but in the coming months IFC may issue long term bonds of up to 10 years. It is noteworthy that IFC enjoys AAA rating (the highest) and their bonds carry zero credit risk. Over the years, IFC has issued bonds in 13 local currencies, including the Brazilian real, the Chinese Yuan and the Russian ruble.

China has been making concerted efforts to internationalize its currency Yuan. In the next five to ten years, Yuan may emerge as one of the top traded currencies in the world. India needs to take cues from China in order to take Indian rupee global.

As India is hungry for capital, there is an urgent need to deepen and widen domestic capital markets and bring foreign money to India. The success of the first phase of IFC’s offshore bond program reflects confidence reposed by global investors in India.  On the day he took office, RBI governor Raghuram Rajan said, “As our trade expands, we will push for more settlement in rupees.”

To make internalization of rupee real, India needs to open up its financial markets further and make the country attractive for all kinds of investors internationally.

           

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Notes: USD – US dollar, INR – Indian rupee.

References: www.ifc.org and www.pib.nic.in

Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

http://www.scribd.com/vrk100

Connect with him on twitter @vrk100

Relaunch of Interest Rate Futures?-VRK100-18Oct2013

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Interest rate futures (IRF) may be relaunched for the third time in India, according to media reports widely circulated today—quoting sources in the Reserve Bank of India, India’s central bank.

Exchange traded interest rate futures (ETIRF) were earlier launched by National Stock Exchange (NSE), country’s premier stock exchange, once in 2003 and again in 2009. If this financial derivative product is launched again, this will be third time that the product will be making a re-entry in the Indian market.

On 31 August 2009, NSE relaunched ETIRF based on 10-year Government of India (GOI) security having a notional coupon of 7 percent, with physical settlement. And on 4 July 2011, NSE launched another IRF based on 91-day Treasury Bill, with cash settlement. Initially, these two products experienced some trades from market players. Later, market interest in these products died down. According to NSE’s IRF Tracker, trades are nil in them now.

Liquidity was confined to only a few government bonds. Traders were not interested in holding such illiquid bonds, which adversely affected trading interest in this ETIRF product.

The failure of this product could be attributed to a few things. The ownership of government securities in India is highly skewed towards banks and insurance companies, which keep these assets for long term and their risk appetite for trading is very low. So only a few players are in this market.

Another distorting factor is that banks need not value government securities as per the market value at day’s end (mark-to-market or MTM) since bulk of their investments are allowed to be kept in held-to-maturity (HTM) category. More than 90 percent of such securities are held in this HTM category, which prompts banks not to trade them and thereby avoid any interest rate risk.

Moreover, RBI is the Government’s money manager, undertaking issue of government securities, treasury bills and cash management bills. As a regulator and as a government’s fund manager, RBI exercises enormous control over banks in India—relating to reserve requirements and tweaking rules. As a Government's money manager and enforcer of reserve requirements for banks, it can be said that RBI has a conflict of interest. (However, a few studies dispute this conflict of interest argument).

If this interest rate futures product is to made successful in the Indian market, both RBI and SEBI (Securities and Exchange Board of India, capital market regulator) will have to make it more attractive by allowing flexibility for exchanges to design the product and features, allow cash settlement as against physical settlement, and permit contracts in various maturities.

Time will tell whether the new RBI governor, Raghuram G Rajan, will make this product click and tick. 


(Please see below to know about basics of interest rate futures, their features and contract specifications).

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For the benefit of readers, I reproduce my earlier article dated 28 August 2009 when NSE relauched interest rate futures.

It is two months since the operational guidelines for ETIRF were issued by an RBI-SEBI Committee. Now, National Stock Exchange is re-launching trading in ‘Exchange-Traded Interest Rate Futures’ (ETIRF) from August 31, 2009.  The operational guidelines for the interest rate futures (IRFs) in India were issued on June 17, 2009, by a committee jointly set up by RBI and SEBI. Institutions like, banks, insurance companies, primary dealers, pension funds, mutual funds, financial institutions, companies and provident funds are exposed to interest rate risk on account of their huge exposure to government securities and other fixed income securities. To mitigate the interest rate risk, RBI along with SEBI, has introduced interest rate futures in India. This is a measure that helps in deepening the debt market in India. (IRFs were first launched in 2003 by National Stock Exchange, but did not find favour with market players).

Exchange-Traded Interest Rate Futures (ETIRF): 

An IRF is a contract between two parties – a borrower and a lender – who agree to fix the rate at which they will borrow/lend on a future date. To put simply:

·        It is a hedging mechanism used by economic agents affected by interest rate movements

·        Alternatively put, it is a tool to manage interest rate risk

·        It is a derivative contract – providing standardization and transparency

·        It may be used by banks, insurers, primary dealers, provident funds, etc

·        Even FIIs and NRIs are allowed to take trading positions subject to norms

·        It will be traded on a stock exchange which bears the counterparty risk

Who are permitted:

·        Members registered by SEBI for trading in currency/equity derivatives are eligible to trade in IRF

·        Even individuals who have got interest rate exposures inherent in their fixed deposits, housing and car loans can hedge their positions with the help of an IRF

·        The minimum net worth of a trading member should be Rs one crore

·        The minimum net worth of a clearing member should be Rs 10 crore

The Exchange-Traded IRF product:

·        The IRF is based on yield-to-maturity curve

·        The notional coupon on the underlying 10-year Government Security would be seven per cent with semi-annual compounding

·        The size of the IRF contract would be Rs two lakh

·        Maximum maturity of the contract will be 12 months

·        The contract will be settled by the physical delivery of securities

·        The contract cycle will be at the end of March, June, September and December quarters

Gross Open Position:

·        The gross open position of a trading member across all contracts should not exceed 15 per cent of the total open interest or Rs 1,000 crore, whichever is higher

·        At the client level, the gross open position should not exceed six per cent of the total open interest or Rs 300 crore, whichever is higher

·        FIIs and NRIs, the gross long position in the debt market and the IRF contract should not exceed their maximum permissible debt market limit prescribed from time to time.

What is not permitted as of now:

·        IRF based on overnight rate (based on money market rates) is not permitted

·        IRF based on 91-day Treasury bill is not permitted now, but may be considered later

NSE’s ETIRF Product:

 The salient features of NSE’s new product are:

NSE Contract Specifications
Trading unit	One lot – equal to notional bonds of FV of Rs 2 lakhs
Underlying	10 Year Notional Coupon bearing Government of India (GOI) security (Notional Coupon 7% with semi annual compounding)
Tick size	Rs.0.0025 paise
Trading hours	Monday to Friday 9:00 a.m. to 5:00 p.m.
Contract trading cycle	Four fixed quarterly contracts for entire year ending March, June, September and December
Last trading day	Seventh business day preceding the last business day of the delivery month
Quantity Freeze	501 lots or greater
Settlement	Daily settlement  MTM:  T + 1 in cash Delivery settlement :  In the delivery month i.e. the contract expiry month
Mode of settlement	Daily Settlement in Cash
Deliverable Grade Securities	GOI securities

• NSE has waived transaction charges on IRF until December 31, 2009

Till now, the only interest rate derivative available for trading is Overnight Indexed Swap (OIS) which is a type of Interest Rate Swap (IRS). Interest rate swaps are agreements where one side pays the other a particular interest rate (fixed or floating) and the other side pays the other a different interest rate (fixed or floating). However, OIS is traded in the OTC market. The new IRF is the first interest rate derivative that is being traded on an Exchange.

IRF will be the first derivative product which will be settled by delivery whereas other exchange-traded derivatives (for example, stock futures, index futures, index options, etc) are settled by cash. Physical delivery will be in the demat form through the depositories NSDL, CDSL and Public Debt Office (PDO) of the Reserve Bank of India. 

Other Exchanges:

While NSE introduces ETIRF from 31.8.09, BSE it appears would introduce the product through United Stock Exchange in which BSE took a 15 per cent stake recently.

Interest Rate Scenario:

The huge borrowing programme of the Indian Government has muddied the interest rate scenario. What has been exacerbating the interest rate situation is the food inflation (based on Consumer Price Index or CPI) which has been rising to alarming levels of more than 10 per cent for several months. Any pick up in credit disbursement during the oncoming festive season and credit off-take from corporate sector during the second-half of the fiscal year will put further pressure on the interest rates. With the benchmark 10-year Government Security yield hovering around 7.30 per cent, an increase of more than 30/35 basis points in the past one month; the bond market is jittery about further hardening of bond yields. The bond market has completely lost the appetite for new government paper with Banks’ SLR (statutory liquidity ratio) holdings higher by more than 300 basis points over and above the statutory levels.

The 10-year benchmark yield is expected to touch 7.50 per cent in the next few months due to higher inflationary expectations, huge government borrowing programme, loss of agricultural output of around 20 per cent during the Kharif Season on account of monsoon failure across several states in India, rising international crude oil prices and anticipated credit demand in the second half of the fiscal. However, any revival in the manufacturing sector and consequent rise in tax collections; usage of disinvestment proceeds that are kept in National Investment Fund (NIF) for reducing fiscal deficit; and huge resources of around Rs 35,000 crore that are expected to accrue to the Government’s exchequer from 3G spectrum auction to the Telecom Sector are likely to mitigate the crunch situation in the interest rate cycle in India.

The launch by NSE is ushering in a product that seems to have been timed well in the current rising interest rate scenario so that market participants can hedge their positions.

Note: Interest rate risk: If interest rates rise, the bond prices will fall. Similarly, if interest rates fall, the bond prices will go up. As such, the movement of interest rates will have a big impact on the bondholders; be it, banks, insurance companies, mutual funds or such others, including individuals. The risk that the interest rate fluctuations will affect the prices of bonds or fixed-income investments is interest rate risk.

References: RBI Report on IRF dt. Aug.8, 2008; RBI-SEBI Report on IRF dt. Jun.17, 2009; and NSE.

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Disclaimer: The author is an investment analyst, equity investor and freelance writer. This write-up is for information purposes only and should not be taken as investment advice. Investors are advised to consult their financial advisor before taking any investment decisions. He blogs at:

http://ramakrishnavadlamudi.blogspot.in/

http://www.scribd.com/vrk100

Connect with him on twitter @vrk100