Insurance finance and investment
Insurances are a type of expense that keeps the policyholder indemnified against some expenses. As per the rules drafted by the insurance regulatory authorities, part of the premiums received are invested in stock markets, and liquidated periodically. This profit is distributed on the insurance policies as bonus.
Traditionally, this is how insurance companies did their business. In the past, government securities, and insurance policies were considered the only way to provide for future. Invariably, both failed to serve the purpose, even if the individual had invested substantially in both type of instruments. Interest received on government bonds, or securities lost its value due to inflation, and the bonus earned on insurance policies was not adequate because there were stringent norms that insurance companies had to comply with.
As the disposable incomes increased, the governments realized that alternate avenues of investment were necessary. Investors needed a category of investment that would help them earn more than conventional insurance policy so that the inflationary effect on their incomes is negated, and they are left with some surplus income. Governments allowed a new type of insurance product that is linked to stock markets. This type of insurance policy is commonly referred to as the Unit Linked Insurance Policy.
Such policies changed the conventional role of insurance in the society. Insurance policies are now used for several purposes, such as financing child's education, financing health insurances, retirement planning, medical insurance, etc. Often the policies for these specific functions are combined with life insurance to offer better product suiting the client's requirement. Insurance companies also design products based on risk appetite of the insured. But these are policies specific to individuals.
Insurance companies also have products for business enterprises. The usual burglary, flood, earthquake, catastrophes, vehicles, etc., policies form one category that is common with those offered to individuals. Other than this, business enterprises can insure their stock, their debtors, their investments, machinery and equipment, etc.
Insurance has also come into the finance and investment sector. Lenders reduce the risk of bad debts by insuring the debtors. Therefore banks offering home loans or vehicle loans pay a small premium and insure these loans. If the borrower defaults, the insurance company steps in and reimburses the losses to the bank.
Similarly, insurance companies have stepped into investment sector as well. Individuals investing in retirement policies with guaranteed returns effectively buy products that are insured. The fund manager can therefore play more aggressively on stock markets. However, there are certain stipulations that insurance companies impose on the investment companies while agreeing to insure their investments. The fund manager has to comply with them.
Insurance as a sector is a very profitable industry. The probability of any individual claiming on their policies is quite low. Yet, it does provide a safety net against several types of risks. It is, however, necessary to study each insurance document thoroughly. There are several inclusions and exclusions. In addition to these, there are customized insurance policies available in the market.
Unit linked insurances differ from mutual fund investments. Every mutual fund has a fund manager. He invests, and at the end of the day, announces the Net asset value. The units in the mutual fund can be sold at any point of time, and are therefore highly liquid. The only thing common between the two is the ability to earn from trading in stocks in stock markets. UliPs are long-term policies. Though the word Unit is used, this is not same as the unit of mutual fund. The policy represents collectively the units held by the individual, and therefore, the individual cannot sell one or more units.
Buying any insurance entitles the buyer to certain tax rebates. Keeping in view the nature of insurances, the governments allow certain tax rebates on them. There are, however, ceilings on how much of premium is eligible for these tax rebates. Business enterprises purchasing insurances can show them as expenses against income of the year, and thereby pay lower tax. Individuals too get to set off some of the insurances under various sections. Of these, premiums on life insurance policies, specified unit linked investments, retirement planning policies, and medical insurance polices can be deducted from income of the year to arrive at taxable income.
There are insurance companies that offer large insurance covers for a nominal collateral. At times this may be wiser to take an insurance policy in this way because selling the collateral property entails, capital gains tax.
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