Nominee for your investments

Many of us invest in shares, deposits and mutual funds without bothering to fill up the nomination details. Since choosing a nominee is not mandatory while making an investment, the decision is often postponed.

However, this process simplifies for nominees the realisation of investment proceeds in case of the original investor’s demise. This is even more critical when an investment is held in one person’s name since death makes it difficult to access his fund still several formalities are completed.

If nominees have been appointed, they can produce basic documents, such as a death certificate, to access the funds. The absence of a nominee may require more documentation, such as the probate of will and certified list of legal heirs, before the investment can be transmitted or withdrawn.

Nominees are deemed to hold the investment proceeds in a trust if it is disputed by legal heirs, pending a decision by the courts.

Documentation: Most investment forms provide a space for selecting a nominee. If it is not filled up at the time of investing, other prescribed forms can be used later.

Multiple nominees: Most investments allow more than one nominee and the percentage of share that each would be entitled to.

Signature: The nomination form has to be filled up by all joint holders, irrespective of the mode of operation of the investment.

Transmission: Nominees can have investments transferred in their names for redemption later. For this, they need to complete the KYC and PAN formalities.

Points to note

Who cannot nominate: Kartas of HUFs and power of attorney holders are not authorised to make or change nominations or be appointed as nominees to an investment.

NRIs: Non-resident Indians can be named as nominees of investments made in rupees. However, the proceeds cannot be repatriated and have to be continued to be held in rupees.

Who can be the nominees: Certain investments permit the nomination of a trust, religious or educational institutions. Others only permit individuals to be nominated.

Reduce tax on your retirement benefits

Perhaps one of the most ignored challenges after retirement is to manage your benefits. Ironically, you are anxious about everything else: the sharp fall in income, life without colleagues, lack of drive, and so on. 

But for obvious reasons, you are excited about the benefits—provident fund, gratuity, leave encashment, superannuation fund, etc. 

However, not all these returns are exempt from tax. So, it is important to distinguish the ones that are tax-free from those that are not. You should also be aware of ways to steer clear of such tax ‘traps’. 

If you are a government employee, there can be a marked difference in the way your funds are taxed. “There is tax exemption on certain receipts such as commuted pension, gratuity, leave encashment, etc. 

Private sector employees are generally taxed on the basis of prescribed rules. Let’s take a look at the taxable and tax-free benefits and learn how to reduce your burden. 

Provident fund: 

It is completely tax-free. However, ensure that your office invests it in a recognised provident fund. Unrecognised provident funds have different tax structures compared with the recognised ones. Further, the employer’s contribution and interest credited to such funds are taxable as income in the year of receipt.

When it comes to the Employee Provident Fund (EPF), the interest and amount paid at retirement are not tax-free if your employer had been contributing more than 12% of your salary to the account. Similarly, the interest “credited in excess of 9.5% per annum is included in gross salary.

The benefits of working continuously for five years with an organisation are widely known. The payment of accumulated balance from a recognised provident fund (RPF) is taxable unless the employee has worked continuously with a firm for five years.

However, if you know you are going to retire in less than five years of joining a new company, you can secure tax-free RPF on retirement by making sure you transfer the EPF account from the previous company to the current one.

Gratuity:

This is one corpus where government employees have an edge over others. Gratuity is a lump-sum payment made by an employer for long and meritorious service rendered by an employee.

Any amount that the government employees receive is exempt from tax, but there is a cap for non-government staffers. For employees covered under the Payment of Gratuity Act, the cap is the least of the following: a) actual amount received b) 15 days’ salary for each year of service c) Rs 10 lakh. 

The salary for 15 days is calculated by dividing your last drawn salary by 26, which is the maximum number of working days in a month.

There could still be situations when you end up paying tax on gratuity. Any gratuity received by an employee who is covered under the Payment of Gratuity Act and has worked for less than five years is fully taxable.

The clause, ‘completion of the five years’ service’ is not applicable in the case of death or disablement of an employee.

 Also, employees who are not covered under the Act do not have to complete five years of service to get tax-free gratuity. 

Superannuation fund: 

The amount received as superannuation is exempt from tax if it is paid on death, retirement, in lieu of or as annuity. 

Any commutation of pension is exempt up to one-third of the commuted value of pension, where the employee receives any gratuity and half of such value otherwise.

The interest that is accumulated on the superannuation fund is taxed under certain circumstances. “This exemption is not available if the employee resigns.

The escape route in cases where the amount becomes taxable is to purchase SAF (state annuity fund)-related annuity without any commutation.

 If you don’t do this, TDS (tax deducted at source) will be applicable on the average rate at which the employee was subject to during the preceding three years or during the period, if it is less than three years, when he was a member of the fund.

 The rest of the amount is exempt from tax only if annuities are purchased from life insurance companies.

Leave encashment: 

The tax treatment of leave encashment depends on the status of the employee as well as the point at which the leave is encashed, that is, during employment or at the time of retirement.

Leave encashment during the period of employment is taxed, but not at the time of retirement or leaving a job.

Any amount received as leave encashment by the state or central government employees is exempt from tax. However, the bar is stricter when it comes to others. 

The amount of encashed leave that is exempt from tax is the lower of Rs 3 lakh and the amount paid according to a calculation specified by the Income Tax Act. 

The taxable portion of leave encashment would form a part of the normal salary income and would be taxed as per the normal slab rate applicable to the employee. There is no special rate for this.

Voluntary Retirement Scheme:

VRS is applicable only to those employees who have completed 10 years of service or are over 40 years of age. 

When you opt for the voluntary retirement scheme, the company will pay you a compensation, which is tax-free if it is lower of the two: Rs 5 lakh or the last three months’ average salary multiplied by the number of years of service. 

Beyond that, it is added to the income and taxed accordingly. 

There are ways to avoid being slotted in the higher income tax bracket because of the hefty compensation paid in the year of retirement. This exemption is also available if the VRS amount is paid in installments spread over several years.

Staggering this amount would mean that the employee not have to pay the entire tax upfront but is subjected to TDS as and when the installments are paid.

Moreover, employees will also benefit from the interest on the outstanding VRS amount at a rate much higher than the market rate and from a safe source: his erstwhile employer. 

How to get out of a bad insurance

A life insurance policy is a key component of a financial plan. Chosen well, it safeguards the financial future of a family if the breadwinner passes away. If, however, it is bought for the wrong reasons, the same policy can become a drain on resources and prevents the policyholder from meeting crucial financial goals.

A lady entrepreneur told me that she is paying a premium of Rs 1.06 lakh a year for six policies that gives her a combined cover of Rs 20.4 lakh. "I feel I have over invested in insurance. These plans take up a huge chunk 

of my savings. I must resort to some course correction here," she says

.

My solution to her

Of her six policies, an Ulip offers her a reasonably high cover of Rs 12 lakh for a premium of Rs 30,000. If she discontinues the other policies, she will free Rs 76,000 every year. Of this, Rs 22,000 can be used to buy a term plan of Rs 90 lakh for 20 years, and the remaining Rs 51,000 can be invested in other asset classes.

One of my friend who is agonizing over his inability to save enough for his dream house. "I'm in a financial mess. My insurance policies take up too much of my savings, leaving me with very little for my house" he said to me. 

Worse, it leaves this sole breadwinner grossly underinsured. He is getting very low coverage at a very high cost. 

The high premium outgo not only prevents him from investing in other asset classes but also leaves him underinsured. His current life insurance is just one-fifth of the required cover of Rs 1 crore.

Getting stuck with an unsuitable insurance policy is a malady as widespread as the common cold. There's one wrong insurance policy in almost every household. A few buyers realize their mistake, but most policyholders don't. You can, however, find out whether your insurance policy suits your needs. Many blame the agents for their predicament. However what I found Very few investors spend time on understanding their policies and features as it is very much important to buy the right plan that suits your need. Buying anything blindly on the basis of high projected returns is not a wise thing.

Another young chap feeling depressed for his investment in ULIP’s. Despite the rise in the stock markets, his fund value is lower than the amount invested by him. Besides, he does not need insurance because he is a bachelor with no dependents.

My Solution

 He should stop paying the premium for Ulip and traditional plans and surrender them after five years. Thus he can free Rs 67,500 a year. However, he can continue with the pension plan. When he gets married, he should buy a term insurance plan of Rs 1 crore for 30 years. This will cost him around Rs 13,000 a year.

 What do you do if you find that you have the wrong insurance?

Escaping from an insurance policy entails a very high cost. You can lose up to 50% of what you have paid. In extreme cases, you might have to forfeit your entire investment. This is what keeps people from junking a plan, however unsuitable it is. There is a psychological barrier of losing money, which is why people avoid exiting an insurance policy. But it is better to incur a loss at the initial stage rather than continue and compound the mistake.

Mr.Arun Singh In the past three years has picked four insurance policies to save tax. He is paying Rs 42,000 for a cover of Rs 6.75 lakh! Tax-saver plans are a burden to him!!!

Another example: Mr.Vinod Dubey is a homoeopath & the sole breadwinner of his family, he is grossly underinsured. He needs a cover of at least Rs 60 lakh. Three of his policies are traditional plans that offer very low returns. The fourth is a Ulip that provides a very low cover. The premium outgo prevents him from executing his plans to buy a house.

My solution:

 He should convert his traditional plans into paid-up policies after paying the premium for three years. This will free Rs 26,000 a year. He should stop paying the premium in case of the Ulip and surrender after five years.

Now the big question is what is or what are the ways to stop this?

Option I:

Let the policy lapse

Don't pay the premium and the policy ends automatically.

This is the easiest way to exit a policy. It is also the costliest if the policy has not completed three years. The premium paid in the first two years is forfeited and the policy ends. You also stand to lose the tax benefits availed of in the first two years on the premium payment. You get nothing, except freedom from the policy.

Financial planners say this option should be chosen only if you realise that the policy is grossly unsuitable to your needs. If the policy doesn't meet your objective, it is better to let it lapse even though you stand to lose the premium for 1-2 years. It's much like junking a bad stock to minimise the loss and move on to a better investment.

The rule is different for Ulip. Even if it is discontinued after the first year, the policyholder is entitled to some amount after paying surrender charges. However, this sum comes to him only after the lock-in period of five years (three years, if bought before 1 September 2010). The fund value, after imposing all charges and penalties, is frozen in the account and earns 3.5% returns till this period.

The investor gets the money only after completion of five years now. The policies that are most likely to be allowed to lapse are traditional endowment and money-back plans. There's a widespread perception that they are a good way to save for the long term and cover against the risk of death. In reality, these plans offer very low returns and provide too little cover. The average return on traditional policies is 5-6%, which doesn't even beat inflation.

If anyone has taken a 20-year Ulip last year for an annual premium of Rs 34,000. It covers him for around Rs 2 lakh. If he were to let it lapse this year, he will not lose the entire premium. He might be better off if he buys a term cover of Rs.50 lakh for an annual premium of around Rs 8,000 and invests the remaining Rs 26,000 in some other option such as a Bonds, in metals, mutual fund or in a fixed deposit as per his risk appetite.

Option II:

 Surrender the policy

After three years, an insurance policy fetches a surrender value. Remember, the surrender amount is calculated over its actual premium!

If you have paid the premium for three years, your insurance policy would have built a reasonable corpus value. So, if the plan is surrendered after this period, the policyholder can get some money back. It will, however, be a fraction of what he has paid over three years because of the surrender charges levied by the insurer. In the third year, the surrender value is roughly 30% of the total premium paid, but this figure goes down as the term of the policy progresses.

Till last year, insurers used to levy very high surrender charges on Ulip in the first three years. But last year, the Insurance Regulatory and Development Authority (IRDA) put a cap on these charges. This is Rs 3,000 or 20% of the annual premium in the first year. For plans with a premium of over Rs 25,000, the cap is higher at Rs 6,000 or 6% of the annual premium. The surrender charges come down progressively to zero in the fifth year. No surrender charge is levied on insurance policies that are more than five years old.

Surrendering a policy gives you some money back, but it also ends the life cover. So, before you decide to junk your policy, find out if you have enough cover. Also, calculate the cost of a fresh insurance policy at the time. You might discover that the premium is very high because you are older.

Option III

Turn it into a paid-up policy                   

Stop paying the premiums, but don't discontinue the policy.

A better alternative to surrendering your insurance policy and losing the life cover is to turn it into a paid-up policy. As in the case of surrendering it, you can use this option only if you have paid the premium for three years and the policy has built up a minimum corpus. Instead of returning the money to the investor, the insurance company uses it to offer him a life cover.

 Every year, it deducts mortality charges from the corpus. However, in case of traditional endowment and money-back plans, this cover is proportionate to the number of years for which the policy was in force. For instance, if a policy offers a life cover of Rs 10 lakh for 20 years and the policyholder converts it into a paid-up plan after five years, the life cover will be reduced to about Rs 5 lakh. On maturity of the plan, the diminished corpus and the accumulated bonus will be given to the policyholder.

This feature has been widely exploited by agents to miss sell Ulip to gullible investors. They would tell investors that they need to pay the premium for only three years and their life insurance policy would continue for the rest of the term. What they really meant was that even if you stopped paying the premium, the corpus would be big enough to sustain the deduction of mortality charges for the entire term.

 Last year, the IRDA issued new rules for Ulip. If the premium of a plan bought after 1 September 2010 is stopped, the policy will be discontinued. This is meant to reduce the incidence of miss Selling.

When it comes to miss-selling, the charges on Ulip is the biggest point of contention. Insurers have brought down premium allocation charges to nil under some plans, but they raise policy administration charges every year or make them a percentage of the sum assured. One should look at these charges too to weed out bad plans from the portfolio.

The paid-up option is by far the best way to exit an insurance policy because it gives the policyholder the best of both worlds. He is freed from the burden of paying the premium that are a drag on his finances, but continues to enjoy the life insurance cover that was the primary objective of the plan.

Option IV: 

Let it continue                                                                  

If close to maturity, pay the premium till the full term.

Of course, if the insurance policy is only 2-3 years away from maturity, one should continue with it for the full term. This is because the painful period of high charges in the initial years has already gone and it doesn't make sense to let go of the accumulated benefits at the end of the term.

If you are finding it difficult to pay the premium, withdraw from the Public Provident Fund or any other long-term investment to pay the premium for your policy.

In this manner, you will not lose the life cover and will be eligible for a tax-free lump-sum payment on maturity. You could also consider taking a loan for this.

How to know if you have the wrong insurance

Low cover: Though insurance needs vary for individuals, a policy should give you a life cover of at least 40 times the annual premium. If it does not, you are paying too much for the cover.

High premium: According to a thumb rule, you need a cover of at least five times your annual income. The premium for this cover should not account for more than 6-8% of your annual income.

Tenure: Insurance is meant to replace the income of the policyholder and should, therefore, cover him for his entire working life. If the policy ends before he retires, it won't be of much help when he needs it most. Buying a fresh cover later will be costly.

Return projections: An endowment policy appears attractive because of the projected corpus on the maturity of the plan. But one must factor inflation into the calculation. In 25 years, a moderate 5% inflation will reduce the value of Rs 20 lakh to a mere Rs 5.5 lakh.


So be careful while choosing your new Insurance.

Resolve your insurance grievances of your own

Few moths back a person who is close to me had undergone two surgeries simultaneously, incurring a total cost of Rs 33,000. When the claim was lodged, the insurance company's third-party administrator held that though the surgeries pertained to two different body parts, these were conducted at the same time and, hence, the eligible claim was only Rs 10,000!!!

Despite explaining that the company would have had to shell out a higher amount had the insured decided to have the surgeries on different dates, the company refused to budge. Ultimately, the person approached the insurance ombudsman, who held that the eligible claim amount was Rs 30,000.

This is not the only instance of insurance companies trying to wriggle out of their commitment to policyholders. You no longer need to rely on the whims of insurance firms. Here's how you can resolve your grievances.

Round one

most insurance companies offer various channels, branch office, phone, and e-mail and snail mail, to register complaints. You can also approach to the company's grievance redressal officer. Insurance companies have to send a written acknowledgement within three working days of receiving the complaint and specify the period within which it is likely to be resolved. If the complaint is resolved within three days, the insurer has to inform the individual along with an acknowledgement. If this is not possible, the company will have to resolve it within two weeks of receiving the complaint and send a final letter of resolution to the aggrieved.

If the insurance company decides to reject the complaint, it has to give a reason, along with information on further redressal avenues that the complainant can pursue. In case you are not satisfied with the insurer's response, you have to inform it within eight weeks, or the company will assume that the complaint has been resolved.

Round two

if the above approach doesn't solve your problem, you can contact either IRDA’s Grievance redressal Cell or the insurance ombudsman, depending on the nature of the complaint. The ombudsman can make recommendations within one month of the receipt of the complaint and give a verdict within three months. If necessary, he can award compensation to the policyholder.

If you are satisfied with the settlement, you have to send your acceptance within 15 days. If the insurance firm does not comply with the order, you can approach consumer forums or civil courts. These offices handle cases dealing with insurance contracts with a value of up to Rs 20 lakh. The ombudsman addresses issues related to rejection or delay in settlement of claims, disputes on premiums, and non-issuance of a document after collecting the premium.

IRDA's Grievance Redressal Cell

Though this cell does not have the authority to pass orders, complaints addressed to it are taken up with the insurers. These could include delay or lack of response pertaining to policies or claims and complaints about agents' conduct. IRDA's toll-free number, 155255, has been publicised widely to create awareness about the recourses available to policyholders. One can approach the cell directly, and where required, you will be redirected to the ombudsman under whose jurisdiction the complaint falls."  

Ensure that you send the complaint yourself as the ones forwarded by third parties, including lawyers or agents, are not entertained by the cell. Also, the complaint should have complete information. So, disclose all the details in the complaints registration form available on IRDA's website @ www.irda.gov.in

AT YOUR SERVICE

you must first register your complaints with the insurer. You can approach the ombudsman only if you have not received any feedback from the insurer or are not satisfied with the given response.

After you have received a copy of the ombudsman's recommendations and are satisfied with it, you have to send a written communication, indicating your acceptance within 15 days.

The ombudsman handles cases with a value of up to `20 lakh and has the authority to mediate and give a recommendation, or award compensation, which is binding on the insurer.

You can also get in touch with the Insurance Regulatory and Development Authority's Grievance Redressal Cell through a toll-free number (155255).

The ombudsman does not hear matters related to the conduct of agents. This can be taken up by IRDA’s Grievance Redressal Cell.

You can approach the civil and consumer courts directly to resolve your grievance. However, the ombudsman will not accept your case if it is pending with other courts.