Get A Cover For Your Loan Amount & Sleep In Peace

Insurance cover on unsecured loans not only ensures repayment of loans, but also spares the family of financial burden in case of accident or death.

Have you borrowed Rs 1 lakh to buy a sleek laptop? And have you ever imagined a situation where you are unable to repay the loan? The reason could be anything, ranging from physical disability caused by an accident, to a job loss. How will you then be able to afford an equated monthly instalment (EMI) of around Rs 9,000? Do you want your family to be burdened with your loan liabilities? The answer lies in shelling out some premium over and above the EMI and insuring the loan.

What do banks & NBFCs offer?

Personal loans from IDBI Bank and UTI Bank come with an insurance cover. In case of death or disability due to an accident, the principal outstanding is paid by the insurance company. In case of IDBI Bank, you can opt for an accident insurance cover from ICICI Lombard for a maximum of Rs 10 lakh. In case of loss of job, the insurance company pays the EMIs for up to three months.

If you opt for the cover, you need to pay a premium of around Rs 300 if the loan amount is below Rs 1 lakh. If the amount is above Rs 1 lakh, the premium is higher at Rs 575. You have to pay the premium upfront. The loan cover is valid for the entire tenure of the loan or your retirement, whichever is earlier.

An insurance company usually charges a premium of Rs 150 on an accident insurance policy. However, in IDBI Bank's case, the premium is structured higher than a normal accident insurance policy as it also accounts for job loss. UTI Bank offers a free personal accident insurance cover with personal loan. So, a customer is not expected to pay any premium as the cost is usually borne by the bank.

GE Countrywide, on the other hand, provides a personal accident cover, as well as term cover, on its personal loan. Personal accident cover is applicable in case of an accident resulting in 'death or total and permanent disability' of the primary customer. Term cover is applicable in cases of 'death or total and permanent disability' not necessarily due to an accident. In case of a personal accident cover, you can take a cover up to a maximum limit of Rs 7.5 lakh on a loan amount higher than Rs 75,000. If the loan amount is less than Rs 75,000, you can take a cover up to Rs 5 lakh.

The term cover is available for borrowers in the age group of 18-59 years. In case of death or permanent disability of the primary applicant, the insurance company (SBI Life) pays the outstanding, if the loan amount is below Rs 75,000, to GE Money.

If loan amount is higher than Rs 75,000, the borrower can take a cover up to a maximum limit of Rs 20 lakh if s/he falls in the age group 18-45 years. Similarly, for age group between 45 and 50 years, a borrower can take cover up to Rs 15 lakh and Rs 7.5 lakh for age group between 51 and 64 years. The insurance premiums can be built-in with your regular EMIs. The charges work out to 2.03% of the instalment if the loan amount is below Rs 75,000 and 3.54% of instalment amount, if you have borrowed more than Rs 75,000.

Is it necessary?

Payment protection insurance is very common abroad. Bankers say it is the best way to ensure financial protection to borrowers' families as this cover takes care of the repayment of the loan in case of death or total permanent disability of the primary loan holder. UTI Bank's vice president-retail assets Sujan Sinha, says, "Accident in today's fast life is a possible risk. So if you have an instrument, which covers your indebtedness and it does not involve any inconvenience like a medical test or anything, you must definitely opt for it."

Ensure that you have a loan cover plan that will take care of your repayment obligations and relieve your family of the burden in case of an unfortunate event. If you have taken a loan for a large amount, say a home loan, such a policy is a must.

Centurion Bank of Punjab's retail head, Vivek Vig, says, "We insist on customers opting for a term insurance cover along with unsecured loans. It will be a financial burden for the family to repay the loan in case of death of the borrower or permanent disability. As it is, dealing with death/permanent disability of the borrower is stressful for the family. The least the borrower can do is pay some additional amount over and above the EMI and opt for the cover."

He adds, "Just go a for a simple term cover. We don't suggest Ulip or a fancy insurance cover. If the borrower already has life insurance in his/her name, he need not take an additional cover with the loan." However, borrowers have not shown much inclination towards this. This is because our country is still under-insured, according to industry players.

How To Gain From Losses in Stock Market

Are you aware of what the Income Tax Act says about setting off losses against other heads of income. Sonu Soni Iyer and Santdas Wadhwani explain the provisions

If, during a year, loss has been incurred in one source of income and there is profit in another source of income and both these incomes fall under the same head, for example, house property, business & profession, capital gains or other sources, then such a loss can be set off against that income while computing income tax.

Such a set-off is known as an intra-head set-off. Therefore, loss from one business can be set-off against income from another business; and loss from one house property can be set-off against income from another house property. To illustrate: Consider the case of Kavita who has incurred a loss of Rs 20,000 from her small business as a florist. But during the same year, she has earned professional income of Rs 300,000.

Since both incomes fall under the same head, i.e., ‘business & profession’, the loss of Rs 20,000 can be set-off against her professional income and Kavita’s total taxable income for the year shall be Rs 2,80,000.

Exceptions to the above are capital loss and loss from speculation business. Long-term capital loss is a loss incurred on account of sale of a capital asset, which has been held for more than 36 months. In the case of shares and listed mutual funds, the loss is considered a long-term loss if the shares have been held for more than 12 months.

Long-term capital loss can be set off only against long-term capital gains. If the individual’s longterm capital gains in the same financial year are insufficient to set off the entire loss, then the balance loss can be carried forward and set-off against the long-term capital gains of the next eight financial years.

However, long-term capital loss from sale of listed shares and equity-oriented mutual funds on which securities transaction tax (STT) has been paid cannot to be set off since the capital gains from these are statutorily exempt. Short-term capital loss can be set off against short-term capital gains as well as long-term capital gains.

Inter-Head Set-Off

Loss under one head of income can also be set-off against income under another head and this is known as an inter-head set-off. For instance, if an individual has suffered a loss from house property, it can be set-off against his salary income.
However, an inter-head set-off of loss is subject to the following exceptions:

Business & professional loss cannot be set-off against salary income. To illustrate: Consider the case of Dr Kapur who has incurred a loss of Rs 50,000 in his private practice. However, as an employee in a private hospital he has also earned a salary income of Rs 200,000 during the year. In this instance, the loss incurred by him in his private practice cannot be set-off against the salary income, but may be set-off against other heads of income in the same year.

Long-term capital loss can be set-off only against long term capital gains. Short-term capital loss can be set-off against short-term capital gains or long-term capital gains. Loss from speculation business can be set-off only against income from speculation business.

Carry Forward Of Loss

If a loss could not be set off entirely in one year due to insufficiency of income, then it can be carried forward to the next eight financial years and set off against incomes of those years falling under the same head of income. To illustrate, Gaurav has incurred business loss of Rs 50,000 during the financial year (FY) ’06 and has made a business profit of Rs 4,00,000 in the next financial year, i.e., FY07.

The loss of Rs 50,000 can be carried forward to FY07 and set off against Rs 4,00,000. Thus, Gaurav’s taxable business income for FY06-07 shall be Rs 3,50,000. However, the above law of carry forward of loss has the following exceptions: Business loss on account of depreciation can be carried forward for unlimited number of years.

Speculation loss can be carried forward only up to the next four years. Business loss and capital loss are allowed to be carried forward only if the income tax return is filed on time and therefore, in case a setoff of these losses is desired, the taxpayer must file the tax return before the due date.

Further, the individual who is claiming the set-off must be the same individual who has suffered the loss. One individual’s loss cannot be set-off against another individual’s income. Therefore, taxpayers are advised to plan their transaction in a manner that losses are effectively utilised to achieve the best tax results.

Financial Planning - Apply The Rules Of Thumb

Financial planning and products are all about number work, and most of it is fairly complex. It helps if there are certain guidelines to make life easy...

HERE are a few commonly used rules of thumb categorised into mathematical, financial advice and mythical.

Mathematical Rules

There are some rules that are true due to mathematical properties: Rule of 72: This rule (written as 72/r) helps one determine the number of years it will take to double money, where r is the annual compounded rate of interest. If a bank offers you 8% per annum compounded annual rate, then you can expect your money to double in approximately nine years. Similarly, in the earlier days of money doubling in five years, the implied annual compounding rate was around 14.2% p.a.

Real rate is twice ‘flat rate’:

Many agents sell loans at a rate which appears mouth-watering. But look closely and the fine print will say that the calculations are based on ‘flat rate’. Flat rate means that the interest is linearly (or simply) calculated, rather than on a reducing balance method.
For example, if you take a fiveyear (60 months) auto loan of Rs 3,00,000 and the EMI is, say, Rs 6,335, the total payment will be Rs 6,335 x 60 months = Rs 3,80,100, implying that the interest paid is Rs 80,100 over the next 60 months.
The wrong (or the flat) method of calculating interest is to say that the annual interest paid is Rs 80,100/5 years = Rs 16,020, and hence, the interest rate is 5.34% (Rs 16,020/Rs 3,00,000x100).
If you calculate the interest based on the reducing balance method, which is what banks actually do, then the real rate of interest works out to 10.18%, which is roughly twice (10.18%/5.34%=1.91) the interest rate that the agent will tell you. It is mathematically true that the real rate is approximately twice the flat rate.

Financial Advisors’ Rules

These rules help the advisor to devise a strategy for you.

Term + Mutual Funds > Ulips:

Bundling insurance and investments is typically not a good idea. A unit-linked insurance plan (Ulip) can be deconstructed into a term plan (pure risk cover) and an investment portion. Buying a term plan with the insurance company and investing the balance amount in mutual funds will typically result in a better performance.

Debt outflows should be limited to 50% of your income:

You would have noticed that banks offer loans of up to 48 times your monthly salary. Have you wondered why? Let us see: If you take a loan at 10.5% interest for 20 years, then the EMI per Rs lakh is Rs 1,000.
Assume that your monthly salary is Rs 10,000. Banks, following this rule of thumb will expect that you can pay up to Rs 5,000 as EMI. Hence, they can offer you a loan of up to Rs 5,00,000. Incidentally, this amount is approximately 48 times your monthly salary!
If the bank realises that you are paying EMIs on other loans (like car or education loan), they will reduce the quantum that you are eligible for, such that not more than Rs 5,000 of your income is used towards debt servicing. Anything more, and when the good times stop, you may be in a financial mess!

Mythical Rules

These rules have emerged to make life simple for the financial decision-maker. Since they are over-simplified, these rules very quickly lose their relevance on digging further. Be careful when using them!

100 minus your age in equities:

This rule states that the allocation of your portfolio in equities should be a decreasing function of your age. So, at the age of 30, you should be 70% invested in equities and at the age of 70, 30% of your portfolio should be in equities.
While this is a good starting point, the actual portfolio allocation should depend on your needs, upcoming milestones, special situations that you may face and your risk tolerance (ability and willingness). Hence, your advisor may recommend that even at the age of 30, you should be invested only 30% in equities, depending on your circumstances.
10 times your annual salary as insurance: The issue with life insurance, as opposed to non-life, is that it is very hard to put a financial amount to any one’s life. Hence, a rule-of-thumb says that your insurance should provide coverage worth 10 times your annual income: even if the life insurance corpus earns 10% return after you are no more, your family will get your income.
Again, this is a good starting point, but not complete. For example, it does not take into account inflation, the corpus that you have already built up and the change in circumstances once you are no more. A better way is to calculate the Human Life Value (HLV) or ascertain the liabilities that you have to meet and cover them all. Your financial advisor can help you determine the amount of insurance that you need.While it is good to have rulesof-thumb, it is important that you understand the underlying financial calculations. A detailed discussion on why your advisor is using a ruleof-thumb will give you an insight into your financial plans!