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Thursday, March 17, 2011

How you can resolve your insurance grievances

Noted consumer activist Jehangir Gai has a story to tell: "A person had undergone three 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 three 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, we approached the insurance ombudsman, who held that the eligible claim amount was Rs 30,000," says Gai.

This is not the only instance of insurance companies trying to wriggle out of their commitment to policyholders. But, like Gai, 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, e-mail and snail mail, to register complaints. You can also approach 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. You can approach the cell directly, and where required, you will be redirected to the ombudsman under whose jurisdiction the complaint falls," informs an official in the insurance ombudsman's office. You can get in touch with the cell via mail on 
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.


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. 

Curtesy: This article first appeared in ET

How you can make the best use of your LTA

If you were planning a trip to the hills this summer, it's a cinch that you will enjoy it more after reading this story.

For, we shall tell you how you can reduce your taxable income even as you have fun with your family. Yes, you can do this by availing of the leave travel allowance (LTA) that is part of your salary.

"The amount paid by an employer to an employee for travelling anywhere in India, along with his family, is exempt from tax subject to certain provisions," says Sunil Talati, former president of the Institute of Chartered Accountants of India.

Read on to know how you can make the best use of your LTA.

 What you are entitled to?

You may be entitled to a high LTA, but only the expenses you have incurred on travelling with your family within the country can be claimed as exemption under Section 10(5) of the Income Tax Act.

Expenses on hotel rooms, sightseeing, food, etc, cannot be included. This means that you cannot claim exemption for the money you spent on your stay at a five-star hotel.

The family can comprise your spouse, two children, brothers, sisters and parents, if they are dependent on you. "You cannot claim for more than two children unless the second birth has resulted in multiple children," says chartered accountant Paras Savla.

Don't think you can outsmart the taxman by taking a circuitous route to reach your destination. Expenses can only be claimed for travel by the shortest possible route.
"Though it's difficult to crosscheck the route, the claim amount should reflect this. So, you can go from Tamil Nadu to Kerala, but you cannot go to Delhi from Tamil Nadu and then take a flight to Kerala to claim your expenses," says Rajesh Srinivasan, leader, global employer service, Deloitte India.

The tax exemption is limited to the fare component, which is economy class air fare, first class AC rail fare or first/deluxe class bus fare. However, if there is no public transport, you can hire a taxi or rent a car and claim for expenses equivalent to first class AC rail fare.

While most companies ask their employees to furnish proof of travel, such as boarding passes, tickets and rental receipts, some don't. Srinivasan says, "The Supreme Court has stated that the employer does not need to collect bills from his employees as proof to make the allowance tax-exempt." Your employer will certify the LTA exemption in Form 16.

When you can claim your LTA?

Though you are paid the travel allowance in your salary every financial year, it can be claimed for only two journeys in a block of four calendar years, which are fixed. "The block of four years are considered according to the Income Tax Act and the current one is from 2010 to 2013," says Mumbai-based chartered accountant Mehul Sheth.

"So, if you are eligible for an annual LTA of Rs 20,000, you can claim exemption up to Rs 40,000 in a block. You cannot claim exemption of Rs 2 lakh even if you have actually spent that much," he says.

You can claim for two journeys in the same year, provided you make no more LTA exemption claims for the rest of the block. "The Act says twice in a block of four years," says Srinivasan.

If, however, you have not been able to travel during a block, you can carry forward the LTA exemption to the first year of the next block. This means you can claim for even three journeys.

"One can claim for three journeys subject to certain conditions. It is allowed for the first year of the new block, when you have carried forward exemption from the previous block. So, in the present situation you can claim in the first year of block that is 2010-2011, for a journey of previous block that is 2009. Plus you can make two more claims for this block (2010-2013)," says Srinivasan.

If both you and your spouse are eligible for LTA, you can claim exemption for separate journeys. What if there are only two journeys undertaken by the family in a block? You could consider dividing the expenses.

"The husband and wife can split the cost of the journey and claim them separately. However, there should be no duplication," says Talati. So, the husband can book the air tickets for one way and the wife can do so for the return journey.

The split can also be determined by the income slab of the husband and wife. "If the claim is to be made, it is better that the one who has a lower income does so. This is because it will not make much of a difference for the person with the higher salary to reduce his taxable income," says Srinivasan.

What if you don't claim LTA?

It's important to remember that when you are claiming exemption for LTA, it should be for the period when you were on leave. After all, you can hardly travel to Coimbatore while sitting in office. You can avail of the privilege or unpaid leave. Typically, the leave is sanctioned for five to eight days.

"If you do not provide a declaration to your employer to claim LTA, it will be added to your salary and taxed according to the relevant income tax rates," says Srinivasan.

However, if you forget to submit the proof of travel and your employer deducts tax on the LTA amount, you can claim exemption in your income tax return and you will get a refund.

 Maximise the benefit

Getting a higher LTA entitlement can help reduce your taxable income. Says Srinivasan: "It makes sense for people who travel to far off places to have a bigger travel allowance as part of their salary."

Though LTA can be claimed only for journeys within India, many tour organisers offer trips where they integrate foreign holidays with LTA plans without letting you lose out on the tax benefit. For instance, Air India Holidays offers 'LTC Bonanza' from Chennai/Bangalore to Kashmir with a trip to Dubai included in the package. The 8-night, 9-day tour costs about Rs 1 lakh for a couple.

There are others operators who offer a Delhi-Thiruvananthapuram-Delhi trip, which includes a 3-night stay at either Singapore or Malaysia for Rs 52,500 per person, stating clearly that you are entitled to a Rs 40,900 exemption for the air fare to and from Thiruvananthapuram. Be it Kashmir or Kuala Lumpur, make sure you claim your tax exemption in this block year.

 Curtesy: This article first appeared in ET

Lost money in stocks? Use it to save tax

An important rule of investing is not to be swayed by market volatility. If you panic and sell your stocks when they are down, you may repent later. However, if the stocks you bought a few months ago are running into losses, the best thing to do is sell them-and buy them back. This simple, two-step strategy can help you save a neat packet in tax.

Here's how it works. Your losses are notional till you don't sell your stocks. If you sell them, you can book short-term capital losses, which can be adjusted against profits from other assets. If you have run up losses of Rs 1 lakh and sell your stocks, you will be allowed to adjust this Rs 1 lakh against gains from certain investments, including short-term capital gains from stocks. So your losses from stock A can be adjusted against profits from stock B, thus nullifying your tax liability. What's more, the unadjusted losses can be carried forward and set off against future profits for up to eight financial years. This also applies to equity mutual funds.

Here are a few things you ought to keep in mind while booking losses.

Short-term losses only

When it comes to stock investments, tax rules allow only short-term capital losses to be carried forward. This means that the stocks you bought more than a year ago will not be eligible. Long-term capital losses from stocks cannot be adjusted or carried forward if the securities transaction tax has been paid. The logic is that since there is no tax on the long-term capital gains from stocks and equity-oriented mutual funds , there should be no provision to adjust their losses against other gains.

It is possible to carry forward long-term capital losses from stocks only if you strike an off-market deal with the buyer and the transaction is not routed through a stock exchange. However, it's not easy finding someone who is ready to agree to such a transaction. Besides, long-term capital losses can be set off only against long-term capital gains.


First in, first out rule

It's important to remember that the sale of stocks and funds is on a first in, first out basis. The shares you bought first will be sold first. So, if you have been buying small quantities of a stock for more than a year and sell some of your holdings now, be careful when you calculate the short-term losses. For, what you assume to be a short term loss can actually be a long-term loss, which cannot be carried forward.

Let's assume that starting January 2010, an investor started buying 50 shares of a company in the first week of every month. By now, he would have accumulated 750 shares of the company. If he sells 250 of these now, he can book short-term losses only for the 100 shares he bought in April and May 2010. The 150 shares bought in the first three months of 2010 will be treated as long-term capital assets since they have completed a year. 

How to go about it

When you buy and sell shares on the same day, you don't actually take delivery of the stocks. Such transactions are treated as speculative by the taxman and can be disputed by the tax department if you want to book losses. In some countries, such as the US, if a taxpayer wants to book losses, there should be a 30-day gap between the sale and subsequent purchase of shares. Though there is no such rule in India, it is best to wait for a day or two before you buy back the shares. This will ensure that the shares bought previously are out of your demat account before the new shares come in. If you think the share price might rise after you have sold, buy more shares of the company first and then sell them a few days later. The first in, first out rule will ensure that the shares that were already in your account are treated as sold. Also, keep the contract notes of the transactions handy. You will need to mention the details of the transactions in the tax form when you file your returns.

File by due date

The most important thing is that you can carry forward short-term losses only if you file your income tax return by the due date. Though you can safely file your return by the end of the assessment year without fear of penalty, you will not be allowed to carry forward the losses. That's one more reason to file before 31 July this year.

Curtesy: This article first appeared in ET

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.

Bangalore-based marketing manager Jitendranath Patri is paying a premium of Rs 1.06 lakh a year for six policies that give him 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," he says.

In Kolkata, Meraj Mubarki is agonising 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," says the 33-year-old college professor. Worse, it leaves this sole breadwinner grossly underinsured.

Jitendranath Patri, 43 years, Bangalore

He is paying Rs 1.06 lakh as premium for six policies that give him a combined cover of Rs 20.4 lakh.
Low cover at a very high cost

Jitendranath Patri, 43 years, Bangalore

His problem: 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.

ET solution: Of his six policies, a Ulip offers him a reasonably high cover of Rs 12 lakh for a premium of Rs 30,000. If he discontinues the other policies, he 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.

Mubarki is covered for Rs 6.75 lakh, though he needs an insurance of at least Rs 60 lakh. In Mumbai, software professional Amit Kolambkar is thoroughly miffed with the returns from his Ulips and feels cheated. "The agent didn't explain how the plan works and how I can decide my allocation to equity," he says.

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 such as Patri and Mubarki realise their mistake, but most policyholders don't. You can, however, find out whether your insurance policy suits your needs. Many like Kolambkar blame the agents for their predicament. "Very few investors spend time on understanding their policies and features," says Mark Meehan, COO, Bharti AXA Life Insurance . "It is important to buy the right plan that suits your need," adds Nageswara Rao, MD & CEO of IDBI Federal Life .

Amit Kolambkar, 25 years, Mumbai

Bought Ulips on the basis of high returns projected by the agent. He didn't know of the high charges levied in initial years.
Didn't know of high charges

Amit Kolambkar, 25 years, Mumbai

His problem: 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.

ET solution: He should stop paying the premium for Ulips and traditional plans and surrender them after five years. This will 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 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," says Arvind A Rao, chief financial planner, Dreamz Infinite Financial Planners.

We look at the options for policyholders who want to junk their insurance plans and explain the circumstances in which each should be exercised.

Meraj Mubarki, 33 years, Kolkata

In the past three years, he has picked four insurance policies to save tax. He pays Rs 42,000 for a cover of Rs 6.75 lakh.
Tax-saver plans are a burden

Meraj Mubarki, 33 years, Kolkata

His problem: 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.

ET 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.

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," says Pankaj Mathpal, managing director, Optima Money Managers . It's much like junking a bad stock to minimise the loss and move on to a better investment.

The rule is different for Ulips. 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," says Sanjay Tripathy, executive vice-president and head, marketing and direct channels, HDFC Life . 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 return on traditional policies is 5-6%, which doesn't even beat inflation," says Kartik Jhaveri, financial planner and director of Transcend Consulting .

Patri bought a 20-year Ulip last year for an annual premium of Rs 34,000. It covers him for 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 `50 lakh for an annual premium of Rs 8,000 and invests the remaining Rs 26,000 in some other option such as a mutual fund or a fixed deposit as per his risk appetite.

OPTION II - Surrender the policy

After three years, an insurance policy fetches a surrender value.

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 Ulips 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," says Tripathy.

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 mis-sell Ulips 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 Ulips. 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 mis-selling.

When it comes to mis-selling, the charges on Ulips 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," says Pankaaj Maalde, a Mumbai-based financial planner.

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 fag 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. The Life Insurance Corporation of India , for instance, offers loans against the policy for paying the premium.

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: An 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. 

Curtesy: This article first appeared in ET