NRIs have to protect both their family and themselves

Dubai resident Sanjit Bardhan has taken out life insurance policies in both India and the UAE.

“My aim is to have my family absolutely financially secure,” says Mr Bardhan, 33, the vice president of a video surveillance products firm, who wants to ensure he leaves enough for his family to cover “general expenses, schooling and education upon my untimely passing”.

While protecting your family is a sensible decision, many NRIs are signing up for life insurance products that also double up as investments with interest earned, something many experts advise against.

“I can safely say that insurance is not an investment,” says Anshuman Mishra, the founder and chief executive of Loanadda, an online aggregator of financial products and services in India.

Life insurance cover can come in the form of “term” insurance, which pays out if the policyholder dies during the period when the insurance is active, but there is no return of funds once the term ends. But there are also life insurance investment plans, which pay interest on the funds put into the plan, so the policyholder gets their money back plus the interest. While the latter option might sound attractive, there are pitfalls to beware of.

“Insurance should be marketed as something that happens to my family if something happens me,” says Mr Mishra, adding that life insurance investment products are not sound investments as more lucrative returns can be made by investing elsewhere, such as in equities.

“An insurance plan might offer returns of 7 per cent a year, but these returns can be doubled by investing in stocks,” says Mr Mishra, who says a term product is far better value.

But with an overwhelming number of life insurance products available in India open to NRIs as well as options in the UAE and internationally, finding the right adviser and product can be tricky.

This is something Mr Bardhan, who is from Kolkata and has lived in the UAE for 25 years, has experienced. While both his life insurance policies also serve as investments – a decision he says he is happy with – he does advise others to tread carefully when considering purchasing such products.

“You risk getting carried away by an investment adviser’s typical sales talk,” he says. “I have realised over the years that a certain number of freelance advisers exist in the industry, whose prime aim is to get clients to buy various insurance programmes that the adviser benefits personally from. I realised this quickly – not before making a few errors. It is important to have the right financial adviser.”

Mr Mishra says the only person to benefit from a combined life insurance and investment product in India is the agent or adviser, as they receive high commissions for selling the plans – sometimes up to 40 per cent higher compared to other products.

For example, if you invest 100,000 rupees (Dh5,484) a year over 10 years into an investment product with HDFC, at an 8 per cent interest rate, you would receive more than 14 million rupees at the end of the tenure. If the policy holder dies, the nominee would receive 14m rupees.

However, with a simple life insurance plan with HDFC, with no investment, the policyholder can pay 10,000 rupees a year and receive 10m rupees of cover for a 10-year policy.

Mr Mishra says many Indians are duped into buying products that are not suitable. “Insurance is a very emotive product and you can scare somebody into taking it and the probability of someone mis-selling you a product is much, much higher. There are thousands of products, so, for the same price, you could end up getting one-tenth of the insurance cover,” he says, adding that NRIs should do their research before committing.

He also warns of heavy penalties that are levied if a holder ends an investment life insurance policy early to withdraw the funds.

Jay Dadlani, 52, the managing director and chief executive of Honest International Trading in Dubai, has been based in the emirate for 34 years. From Mumbai, he too has life insurance cover in both the UAE and India – a combination of term plans and investment products – despite saying he knows life insurance linked products are “not lucrative”.

“As per my understanding, insurance policies can’t be approached in a pure investment manner,” he says. “If one does, you will be upset as most of the times the policies perform below the benchmark.”

However, he says he opted for these policies for “peace of mind” and to “cover uncertainty”.

Mudit Kumar, the chief and appointed actuary with Bharti Axa Life Insurance, argues that India’s relatively high rates of interest can make investment plans appealing.

For example, under one of Bharti Axa’s life insurance investment plans, if someone aged 30 pays in 10,000 rupees a month for 10 years, they will get 1.47m rupees, inclusive of 8 per cent annual returns, at maturity, and they will be covered for more than 1.2m rupees in case of their demise. Therefore, the life insurance benefits are only significant in the first few years of holding the plan, otherwise in the latter years it essentially functions as a normal savings plan.

Mr Kumar highlights that NRIs must consider “the impact of the exchange rate” as it could reduce or increase the eventual cover of return if the rupee is appreciating or depreciating.

However Leena Parwani, the chief executive of UAE-based Icare Consulting, which specialises in insurance packages, advises a number of NRIs on life insurance and says the UAE is a better bet for NRIs looking for life cover.

“In the UAE, there is an access to a range of options, from international to local and even Indian providers and most importantly a stronger currency, which makes more sense for NRIs,” she says.

“It is also important that your adviser stays in touch with you to upgrade your policies and service them on a regular basis and that the family is familiar with the adviser so that they can be contacted in the wake of an unfortunate situation to seek further advice. I have seen many clients who buy their policies in India but they rarely meet their advisers, which results in forgetting about the details and benefits of the policy.”

One of her clients, Amit Walia, 43, the chief operating officer at Orient Links, has taken out policies in India with LIC, as well as in the UAE through Zurich, which are a combination of insurance as well as “investments with nominal returns”.

“I am OK with them as the purpose for which I took them is being achieved – to secure my family in case of an accidental or health emergency faced by me,” says Mr Walia, who is from Chandigarh and has lived in the UAE for nine years. “In any case, return on investment was not a criteria on basis of which I chose life insurance.”

With many NRIs taking policies out in both the UAE and India to reduce currency risk, Varun Dua, the chief executive and co-founder of Coverfox, an insurance broking company in India, advises comparing policies side by side.

“NRIs should compare the cost of the coverage as well as the probable tax treatment on the death or maturity benefit, bonuses and withdrawals in the country he resides in to decide whether he should buy the coverage in India or in his country of residence,” he says, adding that NRIs can still take out life insurance in India from the UAE by couriering the proposal form and required documents, which might include medical test reports, or they can purchase life insurance online.

Vikram Arora, the chief executive of Saffron Media Works in Dubai, who has lived in the emirate since 1998 has chosen international policies available in the UAE despite “Indian service providers offering very competitive products at attractive rates”.

He adds: “It is purely an issue of choice and comfort”.

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