Looking at insurance beyond Tax saving

The underlying concept of insurance is "Insurance is a subject matter of the solicitation", which means that the client or the person proposed to be covered by the insurance cover should seek insurance from the insurance company. But the irony is that insurance is not solicited in our country, but it is sold or rather 'mis sold' in the garb of certain benefits which are sometimes beyond the basic purpose of insurance, that is to safe guard the interest of the survivors or in other words the near and dear ones of the person seeking insurance. The advent of ULIPs had unleashed the beast of rampant mis-selling by the insurance advisers. Thankfully, better sense has prevailed of late and the regulators have come out with stringent norms of disclosure for ULIPs effective September 1, 2010.

Many people still buy insurance primarily to take advantage of the tax gains associated with it. There is no harm in saving a little of your taxes, but the primary purpose of insurance should not be missed. The tax breaks available on an insurance product should merely be seen as add-ons or sweeteners. With the application of the new direct Tax code from 01.04.2012, there are going to be some significant changes on the tax implications of insurance products. Here are the important changes proposed:

• Under DTC the deductions applicable to insurance products (currently defined under section 80C) will be over and above the limit of Rs. 1,00,000, to the extent of Rs.50,000. However, the deduction shall be available only to those insurance policies where the premium does not exceed 5% of the capital sum assured in any year.
• Insurance proceeds shall continue to be governed by EEE (Exempt-Exempt-Exempt) system of taxation, as contributions, accretions and withdrawals under a life insurance policy continue to be tax exempt.
• The maturity proceeds of life insurance policies become taxable, other than in case of death of the policy holder, if the premium paid exceeds 5% of the sum assured. In other cases the insurer company will be subject to dividend distribution tax, which will be deducted from the proceeds of the policy.
• Insurance companies will be subject to normal rates of corporate tax stipulated at 30%, instead of the 12.5% concessional tax paid by them currently. this is likely to increase the cost of insurance for the clients.

All said and done, insurance cover should be seen in the context of the need for insurance, which is based on the security and safety of the dependents in the event of pre mature demise of the individual, rather than the tax breaks associated with the insurance policy.

Ganesha Smiles: It's time to bid farewell!

Ganesha is smiling on the equity markets, but sadly it's also the time to bid farewell. The BSE Sensex is on the threshold of Mt.21000 again after a gap of 32 months. Bulls have been on the rampage for the last couple of sessions, but just like all festivities must come to an end one day, the dream run on the markets is also nearing an end for this season. Retail investors are advised to exercise extreme caution at this juncture, and refrain from putting fresh funds in the markets. It may not be a bad idea to book some profits. However, long term investors should continue to invest in Mutual funds through the SIP route.

The question nagging the market pundits is whether we have moved into a bubble zone? Let us try to find an answer to it. A bubble is defined as "Something that lacks firmness, solidity or reality." The bubble isn’t bad at all, that’s when prices inflate and living is good. As most economists will tell you, it’s the bursting of the bubble that markets should worry about. Forming of 'bubble zones' is not new to the markets,  as markets are not expected to trade on fair valuations all the times. “When people start using phrases like ‘this time it’s different, or we have a new paradigm, or I better buy now or I won’t be able to afford it,’ then you know you’re in trouble,” says economist Will Dunning. Investors should be able to see the writing on the wall.

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  There is a clear disconnect with the fundamentals. The PE multiple for the markets at 23-24 has moved into troubled zone. What is worrying about the current rally is that the PE of small cap index has also inched towards the 20 mark.
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  The rally is fuelled by FII money, sometimes called hot money. Unfortunately, there are no means to identify the origin of this money. How much of this is speculative investment by hedge funds, is any body's guess.
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  There is also the derivative bubble which threatens to destroy not only the US economy, but has serious repercussions for the developing world.
  The derivatives market is almost entirely unregulated and in recent years it has ballooned to such enormous proportions that it is almost hard to believe. Today, the worldwide derivatives market is approximately 20 times the size of the entire global economy. 
• "It's always better to be safe rather than sorry".

The intention of this piece is not to scare the investors but make them appreciate the impending scenario.