Insurance with a bond

Sanjiv Shankaran

LIFE insurance companies in India often mix and match features from different instruments to create a hybrid insurance policy.

For instance, look at a policy that mixes the characteristics of a fixed income instrument such as a debenture with that of a regular life insurance product.

Last week, the Life Insurance Corporation (LIC), the state-owned life insurance entity, re-launched the aforementioned policy under the name, Bima Nivesh. Other than LIC, a couple of other private sector companies have also launched insurance products similar to Bima Nivesh.

Look at the features of Bima Nivesh and HDFC Standard Life Insurance's Single Premium Bond which is conceptually similar to Bima Nivesh.

Common features: Both Bima Nivesh and Single Premium Bond share a few common and fundamental features. Both the policies require premium to be paid just once -- at the inception. This is unlike most other insurance policies that require premium to be paid periodically.

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The premium is then invested and the income that accrues from the investment is returned to the policy-holders in the form of a bonus when the policy matures.

The premium paid on the policy qualifies for a tax rebate. The tax rebate on the policy is one of the more attractive features, because it increases the return from the investment significantly. Also, the amount available at the end of the period (sum assured plus bonus) is tax-free.

If a policyholder fails to survive the policy period, the nominee is entitled to receive the sum assured (sum for which one is insured) plus any attaching bonus.

HDFC'S Single Premium Bond: The Unique Selling Proposition (USP) of HDFC Standard Life's Single premium bond is that it comes without an in-built maturity date. After a lock-in of six months, a policy-holder can choose to redeem the policy at a convenient time. Simply put, it is a product without a fixed expiry period.

For four weeks after the policy has completed 10 years, policy-holders can receive the sum assured plus the bonus. During the period, if the policy-holder withdraws the sum assured plus bonus, the policy expires.

On the other hand, if the policy is continued after the tenth year, the sum assured plus accrued bonus can be withdrawn during a four-week period at five-yearly intervals.

What if the policy-holder wants to withdraw at the end of the 12th year, or at any time between the five-yearly intervals? In that case, policy-holders can inform the company of the desire to surrender the policy.

The company subsequently calculates a surrender value, that may not be as beneficial as would have been the case if policy-holders stayed till the next five-yearly interval.

An explanation for the likelihood of a lower return is best answered by HDFC Standard Life. ``This is because a policy is essentially a long-term commitment on the policy-holder as well as our part. In calculation of a fair surrender value, we have to take into account the legitimate interest of the continuing policy-holders.''

LIC's Bima Nivesh: LIC has been around for a long time. Perhaps one of its luxuries is the company is in a position to guarantee a bonus on its policy -- something the Single Premium Bond does not do.

Bima Nivesh guarantees a bonus of 7.5 per cent for a premium of every Rs 1,000 up to the fifth year. In the subsequent years, the bonus increases to 8 per cent per annum. Over and above the guaranteed bonus, if an additional bonus accrues, it is transferred to the policy-holder at the time of the policy's maturity.

Talking of years, Bima Nivesh comes with an in-built maturity period. A policy-holder can opt for either a five-year maturity period or a ten-year maturity period. Another benefit offered under the policy is a ``loyalty addition'' that comes at the end of the term.

Suitability: These policies ought to be of interest to people looking for something that combines the benefits of a deep discount debenture with that of a regular insurance policy; all that comes with the payment of a one-time premium that is relatively high -- perhaps, a good option if one is sitting on one-time cash flows such as salary arrears.

The choice: If you are looking at a long-term option and are fairly certain you would not need to withdraw the money at the end of five or ten years, the HDFC Single Premium Bond may score. But if you are looking at a shorter period with lower returns and also seek to lock-in to guaranteed returns, Bima Nivesh may be ideal. So choose between the two depending on the risk, returns and liquidity preferences.