Capital Management & Associates: Tuesday, February 10, 2009

Tuesday, February 10, 2009

Buying Life Insurance: What Kind and How Much?

Finding the middle ground between being "insurance poor" and unprotected requires assessing real needs and choosing products that are affordable. This article introduces different types of insurance products and the role that they can play in a personal financial plan.

Before You Start

Think about which members of your household should be covered by life insurance. (It's typically a good idea to insure anyone who earns income.)
Find out whether you're eligible for group life insurance coverage at work. If you already have it, review the policy to understand exactly what benefits it provides.
Keep in mind that you may not need life insurance if you have no dependents and nobody else relies on you for financial support.

How-To Guides

Calculators

Topics

Buying Life Insurance

Conventional wisdom says that life insurance is sold, not purchased. In other words, some people are reluctant to discuss the importance of owning life insurance, and others are simply unaware of the need to have life insurance. Although many large companies provide life insurance as part of their benefits package, this coverage may be insufficient.

Who needs life insurance? If there are individuals who depend on you for financial support, or if you work at home providing your family with such services as child care, cooking, and cleaning, you need life insurance. Older couples also may need life insurance to protect a surviving spouse against the possibility of the couple's retirement savings being depleted by unexpected medical expenses. And individuals with substantial assets may need life insurance to help reduce the effects of estate taxes or to transfer wealth to future generations.

Types of Insurance

Term insurance is the most basic, and generally least expensive, form of life insurance for people under age 50. A term policy is written for a specific period of time, typically 1 to 10 years, and may be renewable at the end of each term. Also, the premiums increase at the end of each term and can become prohibitively expensive for older individuals. A level term policy locks in the annual premium for periods of up to 30 years.

Declining Balance Term insurance, a variation on this theme, is often used as mortgage insurance since it can be written to match the amortization of your mortgage principal. While the premium stays constant over the term, the face value steadily declines. Once the mortgage is paid off, the insurance is no longer needed and the policy expires. Unlike many other policies, term insurance has no cash value. In this sense, it is "pure" insurance without any investment options. Benefits are paid only if you die during the policy's term. After the term ends, your coverage expires unless you choose to renew the policy. When buying term insurance, you might look for a policy that is renewable up to age 70 and convertible to permanent insurance without a medical exam.

Whole Life combines permanent protection with a savings component. As long as you continue to pay the premiums, you are able to lock in coverage at a level premium rate. Part of that premium accrues as cash value. As the policy gains value, you may be able to borrow up to 90% of your policy's cash value tax-free.

Universal Life is similar to whole life with the added benefit of potentially higher earnings on the savings component. Universal life policies are also highly flexible in regard to premiums and face value. Premiums can be increased, decreased or deferred, and cash values can be withdrawn. You may also have the option to change face values. Universal life policies typically offer a guaranteed return on cash value, usually at least 4%. You'll receive an annual statement that details cash value, total protection, earnings, and fees.

Drawbacks to this type of insurance include higher fees and interest rate sensitivity. Universal policies include up-front fees as well as ongoing administrative fees totaling as high as 5% to 7% of your premiums. You may also find your premiums increasing when interest rates decline.

Variable Life generally offers fixed premiums and control over your policy's cash value. Your cash value is invested in your choice of stock, bond, or money market funding options. Cash values and death benefits can rise and fall based on the performance of your investment choices. Although death benefits usually have a floor, there is no guarantee on cash values. Fees for these policies may be higher than for universal life, and investment options can be volatile. On the plus side, capital gains and other investment earnings accrue tax deferred as long as the funds remain invested in the insurance contract.

Universal Variable Life insurance is the most aggressive type of policy. Like variable life, you control your investment in mutual funds. However, there are no guarantees on universal variable policies beyond the original face value death benefit. These policies are probably best suited to affluent buyers who can afford the risks involved.

Key Terms and Definitions

Face Value -- The original death benefit amount.
Convertibility -- Option to convert from one type of policy (term) to another (whole life), usually without a physical examination.
Cash Value -- The savings portion of a policy that can be borrowed against or cashed in.
Premiums -- Monthly, quarterly, or yearly payments required to maintain coverage.
Beneficiary -- The individual(s) or entity (e.g., trust) that is designated as benefit recipient.
Paid Up -- A policy requiring no further premium payments due to prepayment or earnings.

How Much Insurance Do I Need?

A popular approach to buying insurance is based on income replacement. In this approach, a formula of between five and ten times your annual salary is often used to calculate how much coverage you need. Another approach is to purchase insurance based on your individual needs and preferences. The first step is to determine your unique income replacement needs.

Currently, a large portion of your income goes to taxes (insurance benefits are generally income tax free) and to support your own lifestyle. Start off by determining your net earnings after taxes. Then add up all your personal expenses such as food, clothing, magazine subscriptions, club memberships, transportation expenses, etc. The remainder represents annual income that your insurance will need to replace. You'll want a death benefit amount which, when invested, will provide income annually to cover this amount. Then, you should add to that the amounts needed to fund one-time expenses such as college tuition for your children or paying down mortgage or debt.

Income replacement for nonworking spouses is an important and often overlooked insurance need. Coverage should provide for your costs for day care, housekeeping, or nursing care. Add to this any net earnings from part-time employment.

Finally, estimate your own "final expenses" such as estate taxes, uninsured medical costs, and funeral costs.

Other Types of Life Insurance

Survivorship life insurance (also referred to as last-to-die or second-to-die) is a unique type of contract that insures the lives of two people. It pays a death benefit upon the death of the second insured. Therefore, it is typically less expensive than two individual policies. Survivorship life is often used for estate planning, where it may be possible to potentially leverage today's dollars -- via insurance premiums -- into a potentially significant death benefit that can be used to fund estate taxes, create wealth for future generations, or benefit a charity. These policies may be available if one insured is medically "uninsurable."

First-to-die life insurance insures the life of at least two people and pays a benefit upon the death of the first insured. This policy is useful for covering a mortgage or other large debt obligation where there is more than one debtor. In addition, it can be an ideal tool for funding a buy-sell agreement within a closely held business.

Conclusion

Life insurance is an important component of a sound financial plan. Buying insurance involves asking a variety of personal lifestyle and financial questions. If you are not already working with an insurance professional, you may want to consider the advice of a fee-for-service financial planner who can offer you an objective review of your insurance options. When you decide on what you want, there are many solid insurance companies to choose from. Consult your library or an independent insurance professional for companies with the highest ratings from the four ratings agencies: AM Best, Duff Phelps, Standard & Poor's, and Moody's.

Summary

Term insurance is basic, inexpensive coverage with premiums that increase over time and have no cash value.
Consider a term policy that is renewable and convertible to whole life should your needs change.
Whole life provides level coverage with level premiums. A portion of those premiums goes into tax-deferred savings.
Check rates on whole life policies and compare them to other investment opportunities.
Variable life offers control over your investments.
Premiums on variable policies are fixed, but face value and the value of your investments can fluctuate.
Universal life offers more investment options, but is highly sensitive to interest rate changes. Universal variable life is highly flexible, but offers no guarantees beyond the original face value.
Insurance needs are based on income replacement and personal preferences.

Checklist

Determine exactly how much money your survivors would need from life insurance in order to maintain long-term financial security.
Decide whether you prefer term life insurance or a policy that also includes a savings feature.
Shop around for the best deal, and read the policy before making a purchase. Don't assume you'll be getting benefits that aren't clearly spelled out.

Trim -- Don't Lapse -- Life Insurance

Bankrate.com
Trim -- don't lapse -- life insurance
Monday February 9, 6:00 am ET
Michael Giusti

As the nation enters the second year of recession, families are taking a close look at their budgets to find expenses to cut. And while life insurance may seem like an easy place to save a few bucks, letting a policy lapse may be trading long-term security for short-term savings.

Trimming life insurance costs

1. Shop around
2. Get the right size
3. Find the right coverage
4. Verify the company is sound
5. Get some professional help
6. Ask for a payment plan

"The dangerous thing about tough times is that things that don't seem critical get pushed aside," says Byron Udell, founder and CEO of AccuQuote, an online insurance broker and comparison service based in Wheeling, Ill.

Udell says trimming expenses like dinner out is one thing. "But with life insurance, you are taking a big risk by letting a policy lapse," he says.

So rather than cutting your coverage, consider these cost-saving moves instead:

1. Shop around

People are living longer now than they ever have, and insurance companies have taken notice. Since the mid-1990s, insurance companies across the nation have begun using new actuarial charts that reflect those longer life spans, which translates to lower life insurance rates.

That means that if you bought a policy in the years before the change, your rate is probably much higher than it needs to be.

"Most people who have term life policies are overpaying," Udell says. "Rates have come down dramatically in the last 15 years."

He says that in the mid '90s, a man in his 40s would pay $995 a year for a $500,000, 20-year policy. "And that was a terrific rate," Udell says.

Today, that same policy would likely cost just $350 a year -- less than half the cost.

"Now, you have to keep in mind, that same customer isn't 40 anymore, and so his rates would be higher, but the point is that rates have come down dramatically," he says.

Steven Weisbart, vice president and chief economist for the New York-based Insurance Information Institute, says the best answer for most people is to shop around. And because you don't have to cancel your existing policy to do that, comparing rates is risk-free, he says.

"Shopping costs you nothing but energy and time," Weisbart says.

Comparing rates especially makes sense if you didn't get one of the top rankings with your original policy, he says. That's because along with the longer life spans, many insurance companies also are taking into account developments in medicine over the last few decades when they price a policy.

"People who died of a condition years ago now live with it for years," he says.

So if a company wouldn't even consider you for coverage years ago, you may qualify today.

On the other hand, if your health has slipped significantly or if you have put on more than a little weight or have taken up smoking since you first bought your policy, you might do best by sticking with the old insurance, Udell says. That's because even with the lower rates, you may not qualify for the best coverage anymore.

2. Get the right size

If you are desperate to squeeze down your insurance costs, one option may be to reduce the amount of coverage you have.

"It's not the best solution, but it's better than dropping it altogether," Udell says.

Going with a smaller policy will reduce your premium, but the danger is twofold. First, if you were to die, your family may not have enough to replace your income. And second, once your finances improve, your health may not be as good, and that would mean you may have trouble getting that coverage back without having to pay an arm and a leg.

On the other hand, many older policies may suffer from the opposite problem.

While a $100,000 insurance policy seemed like a fortune in 1990, it may not be nearly enough to cover today's expenses, Weisbart says.

If that is the case, it may make sense to either buy a second policy to make up the difference or even cancel the old policy and replace it with a larger one at today's rates.

For help in determining how much life insurance coverage you need, consult Bankrate's life insurance calculator.

3. Find the right kind of coverage

Life insurance comes in two basic "flavors" -- term and cash value.

The different types of policies make sense for different financial situations. With life insurance, one size certainly doesn't fit all, and with a tight budget, you may just find that your policy doesn't fit you anymore.

As a rule of thumb, term insurance is much, much less expensive than the cash value variety. And while cash-value insurance can come in handy for special circumstances, such as if you have a special-needs child, or to offer some financial stability in rough financial times, term insurance tends to rule with budget-conscious buyers.

4. Verify the company is sound

With financial misdealings and banking scandals making headlines seemingly every week, one good practice when shopping around for life insurance options is to make sure you only buy from a sound company.

One way to do that is to rely on the ratings of companies like A.M. Best, Standard & Poor's, Weiss Research, Duff & Phelps or Moody's Investors Service.

These companies check the financial books of the different insurance carriers and make sure the companies will be around if you ever have to cash in that policy.

"These things are tough to judge on your own," Weisbart says. "But you can get some help."

Weisbart suggests you check the ratings of your company against at least two of these services to make sure the first one you picked wasn't skewed in some way.

5. Get some professional help

If shopping for an insurance policy still seems daunting, you aren't alone -- at least you don't have to be. That's because in every state, regulators set life insurance rates. That means whether you buy your insurance with the help of a broker, or if you go it alone, the price is the same.

"Since it doesn't cost extra, why not get help from an expert?" Udell says.

But Weisbart says you don't have to start the process in an agent's office.

"It is not a bad idea to go on the Internet and get quotes from sites like AccuQuote and Insure.com before talking to a professional," he says. Another good site to get information and quotes is InsureMe.com, a Bankrate company.

With a rate in hand, you can be more confident that the broker is being forthright with you.

Where the agent really excels, Udell says, is by steering you toward a policy that fits your specific needs.

"People are bad about knowing what rate class they will qualify for," he says. "If you have risky hobbies or ailments, knowing which company won't charge more for that can end up saving you a lot of money. Brokers know which companies offer what and which companies are your best fits."

6. Ask for a payment plan

Assuming you already have the lowest rate available, there is still one more step you can take to ease the burden of your life insurance bill -- ask for a payment plan.

Nearly every insurance company will let you split your premium into monthly installments, and many won't even charge more as long as you agree to have the premium automatically deducted from your account.

The bottom line is that you want to make sure you have enough coverage to pay your expenses if you die, without paying more than you need to.

Independent directors should ask the right questions at the right time

Monday February 9, 03:54 AM

Source: Indian Express Finance

'Independent directors should ask the right questions at the right time'

By Swarup Chakraborty

The concept of lead independent directors is new to India. Globally, they coordinate the activities of other non-employee directors and advise chairmen on issues ranging from the schedule of board meetings to recommending retention of advisors and consultants to the management. Infosys Technologies is one of the first companies in India to appoint a lead independent director. Swarup Chakraborty caught up with Deepak M Satwalekar who is the software major's lead independent director. He was earlier MD of HDFC and HDFC Standard Life Insurance. Satwalekar says independent directors can't magically stop scams from happening in a company, but they can at least play an important role to put the checks and balances in place by asking the right questions. Excerpts:

What steps in corporate governance should be taken that frauds like Satyam are not repeated?

None. Corporate governance can not stop frauds. Satyam got the Golden Peacock award for their corporate governance. I don't think the independent directors or the board can stop a fraud. I don't think that the audit committee can stop a fraud. They can only make sure that misdemeanours can be identified and the internal controls in the company are in place but if the management of a company decided to commit a fraud then it is very unlikely that the board can stop it. Where the Satyam board could have been found wanting is their decision to buy into Maytas and they can be questioned about it but on the fraud, I don't think so.

Should an ID be held non-guilty in case of a bad decision in a board meeting where he was not present?

If he was not a party which means if a decision was taken in one's absence or without one's knowledge then s/he can't be held accountable but in case that the person was present and did not like the decision but did not say so, s/he would be fully responsible. If one does not like a decision then it should be recorded so that it can be defended otherwise s/he is a party to that decision. However, if s/he was not present then s/he was not a party to that decision.

We know that independent directors (IDs) are paid by companies. In that context how independent are IDs in India?

Despite the fact that an independent director is paid by the company, it must be borne in mind that the company is not only owned by its promoter but all shareholders. And the IDs are supposed to represent the interest of the minority shareholders. We have companies which are minimally owned by promoters but professionally managed. IDs are distinct from the ones who actually run the business. We need IDs not just to keep an eye on the management but to give inputs from which the management can benefit.

What is the basis for selection of IDs?

You need to be clear what are the attributes you want in the IDs. So you may wish to have an economist on the board, if you have global operations then you might have somebody from overseas. If your business is in Asia, then you might want to have someone with an Asian perspective and so on.

Do you think only experts of the business that a company is in should be chosen as IDs?

There should be some IDs who understand the core business of the company. If the entire board has directors who are geniuses of the business the company is presently in, there would hardly be anyone to assess the chief executive's decision to diversify into other businesses if he so decides. While understanding the technicalities of the business is important, understanding business in the larger perspective is much more important.

How much authority does an ID have to interfere in the operations of a company?

None. An ID has no right to interfere in the day-to-day operations. S/he has the right to intervene in any misgivings or misdeeds. He has to support management in getting the delivery of what the objectives of the company are to its shareholders. An ID has to decide how intervening or passive s/he is going to be, one can't have a fixed number of questions that an ID should ask. One has to exercise due diligence, ask the right questions at the right time and get the answers. The idea is not to ask questions for the sake of records that so-and-so ID asked so many questions. The objective is getting the answers and if I don't get a proper answer I should be ready to ask a further question.

There is ambiguity in the guidelines for constitution of a board in India? What percentage (33 or 50) of it should be IDs?

At this point, it is only a recommendation (33 per cent of a board should be IDs) from the corporate affairs ministry. It is only when the Companies Bill is passed and we have an Act that it might change. As of now it is 50 per cent in the case of an executive chairman on the board but in the case of a non-executive chairman, one-third of the board should be IDs so there is no conflict over there.

What according to you is the correct mix?

For example, HDFC has an executive chairman but there are 3 executive directors and 12 IDs. That is how they have chosen it to be. I think governance and compliance should be arising out of a desire to meet the spirit of the regulation and not the letter of the regulation. I think we as corporate India have to rise above the letter of the law and get into adherence of the spirit of the law.

What is the trend globally?

Globally they don't have as many executive directors. Generally you might have the CEO and CFO on the board so you have just one or two EDs while the rest of the board is constituted of IDs.

Should it be made mandatory for IDs to attend all board meetings?

I don't know how you can make it mandatory. There might be incidents not in the control of a person which might lead to his/her absence. There are a couple of ways in which this can be addressed. I think there is a new amendment to the Companies Bill where you can participate in a board meeting through video or audio conference without being physically present and this is a big change that has happened.

There have been debates on the compensation of an ID. Who do you think should fix it and what should be the criteria?

The nomination committee and the remuneration committee should fix the compensation of an ID. We need to evolve criteria as it is not very easy. There are two views you can take: One is to pay a minimum amount to make sure that s/he remains independent. The second view is whether a higher amount should be paid because of the time s/he would devote and the responsibilities s/he would shoulder but then there is the risk of being accused that the company bought him/her.

Should there be negotiations between the management and the person it wants to hire as an ID for remuneration?

How can you decide whether Rs 5 lakh, Rs 50 lakh or Rs 1 crore is the right price? If a person is invited on the board because of the qualities, the value that would be brought to the table then s/he should be adequately rewarded. If you don't or can't pay rightly then you should not complain that they hardly attend any meetings. No, I don't think there should be any negotiations or individual one-on-ones, it should be across the board. The board should decide what it should it be.

You are the lead ID at Infosys. In that role do you ascertain that other IDs carry out their duties sincerely?

We have been fortunate at Infosys that we did not have to whip anyone to come and do their duties. As a lead independent director I organise closed executive sessions where only the IDs meet and the issues and concerns that we have are voiced over there and as the lead I take them to the chairman and the CEO to get them addressed in the same meeting or in the next meeting. The agenda for the main meeting is also set by what the IDs would like to happen in the next meeting.

Economy to grow at 7.1% in FY09: Govt

Monday February 9, 10:58 AM

Source: Financial Express

Economy to grow at 7.1% in FY09: Govt

India's economy is expected to expand at 7.1 per cent in fiscal 2008/09, the slowest in six years and below the previous year's 9.0 per cent, as the global slowdown cuts back demand and hurts key sectors, an official estimate showed on Monday. The estimate, the first official one for the financial year ending on March 31, was in line with other estimates but higher than some private economists forecast.

The central bank has forecast the economy, Asia's third largest, would expand by 7.0 per cent this fiscal year with a downward bias.

The central statistics office said manufacturing output growth was estimated at an annual 4.1 per cent, half of the expansion in 2007/08 while farm output is seen at annual 2.6 per cent.