Buy Online term plan to save premium Cost

Since the outbreak of COVID-19, interest of life insurance, especially term plans for pure protection, has grown. Data from Insurance Regulatory & Development Authority of India show that protection sales have risen in Q1FY21 as the sum assured-to-premium ratio has increased to 56.3% as compared with 32.4 in FY 20. Experts says policyholders are increasing their life cover and pure term plans, especially the online ones, are gaining traction. 

However, sales of unit linked insurance plans (ULIPs) have dropped as consumer confidence in the stock market has badly hit and customers are looking for stability and assured returns. Experts says that savvy customers who believer in buying at the bottom will start new ULIP and existing customers should stay put and not try to redeem prematurely as the SIP Rupee cost averaging is going to help them. 

Insurance companies have also been tweaking their product strategies and moving to digital to push sales. In fact, a report underlines that the heightened interest in insurance will be difficult to convert to actual sales, unless the industry moves to online fulfilment in a big way, with analytics-led customer segmentation and selective medical underwriting. 

Buy Online Term plans

An individual should opt for a pure term insurance plan to cover the life risk and protect the family. Term plans provide financial protection to one's family as the benefit amount is apid out to the nominee in case of death of the person insured. Most people still prefer buying term insurance fro agents although online policies are 20 to 30% cheaper. As the first-year commission paid to agens is high, buying a policy online saves tje agent's commission and documentation costs of the insurance company. 

You can purchase an online term plan directly from the company's website. Insurer offer customized term insurance plans according to the policyholders needs. Ideally, the cover or the sum insured should be 10 times of one's annual income and should be reviewed periodically depending on the age and the liabilities. Be

Before you finalize on the term plan, confirm from the company whether you would need a medical test. Most companies insist on a medical test after the age of 45 years. Insurance companies bear the cost the medical tests which have to be done at the approved hospitals and the report is generally shared with the applicant and Do fill the details in the forms accurately. Any wrong information will lead to cancellation of the policy and even rejection of claims. 

Look at costs before buying ULIPs

ULIP which are linked with stocks come with a thin crust of life insurance. These products have a lock-in period of 5 years and policyholders opt for either large, mid or small cap or even debt funds depending on the risk appetite. As ULIPs are market linked, they can be volatile in the short term and the returns are not guaranteed. 

You must know the cost structure of ULIP before investing. There are 6 types of charges - premium allocation, policy administration, mortality and fund management, switching and discontinuation of premium. The premium allocation charge is deducted form the premium paid by the policyholder for allocating the units. It is charged by the insurers to recover the costs incurred in processing the policy such as underwriting, medical examination and distributor fees. 

The mortality charges will depends on the age of the policyholder and the health conditions and is calculated per thousand of sum at risk. Mortality rate is higher for ULIP as compared with term plans. The fund management charge is deducted towards managing the funds and is levied as a percentage of the value of assets. It is deducted by the insurer before arriving at the net asset value. 

Behavioral Finance - Investor Psychology

 Smart and successful way of investing calls for a thorough understanding of behavioral finance not just market sentiments, crowd behavior or company performance. Evidence reveals repeated patterns of irrationality, inconsistency and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty. Behavioral finance attempts to explain how and why emotions and cognitive errors influence investors and create stock market anomalies such as bubbles and crashes. 

Why is Behavior finance Important?

"Investing is not a game where the guy with 160IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get others people into trouble in investing." -------- Warren Buffett

According to conventional financial theory, the world and its participants are, for the most part, rational "Wealth maximizers". However, there are many instances where emotions and psychology influence our decisions, causing us to behave in unpredictable or irrational ways. 

Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economies and finance to provide explanation for why people make irrational financial decision. 

Skewness of Asset Allocation Due to cultural bias

Behavioral finance can help people make better asset allocation and savings decisions, but it has less impact in te actual management of investment portfolios. This is because its lessons have not been fully learned. Investors seems to prefer stocks with a low probability of a very high return but the stock with high volatility and high return skewness show low future returns. To improve stock selection, behavioral tools should be used.  Various articles claim that behaviorally managed portfolios have not achieved higher returns than those managed in traditional styles, such as growth and value. But lack of success is mostly due to the incorrect application of behavioral finance to the management of portfolios and that behavioral tools can help investors meet and exceed investment objectives. 

Among the more puzzling phenomena in finance is the apparent negative empirical relationship between standard measures of risk and reward in equities. Established financial theory dictates that investors expect to be compensated for taking risk, yet the negative relationship between volatility and future stock returns is well documented. 

Stock with a history of infrequent extramental positive returns without a commensurate frequency of similarly strong below average returns are said to demonstrate positive "Skewness". A behavioral preference for stocks with lottery like payoff leads positively skewed stocks to be "Overpriced" under the mean variance appear willing to pay a premium for stocks with high skewness. For portfolio where skewness is low, expected returns increase with higher level of risk consistent with Capital Asset Pricing Model (CAPM). This relationship is reversed for high levels of skewness where the assumption of normally distributed returns does not hold. On average, skewness increases with higher levels of volatility. As a result, stocks with both high level of volatility and high historical returns skewness exhibit extremely low future return. 

Stock selection can be improved by the use of behavioral tools. Empirical academic research has highlighted two types of pervasive investor behavior which impact share prices, causing them to diverge from those predicated by  the Efficient Market Hypothesis (EMH); under reaction of stock prices to news and overreaction or anchoring to a stream of good or bad news.
E.g.: A company that has just reported a positive earnings surprise due to some fundamental improvement in its business. If EMH held, then the stock price should immediately change to the new equilibrium price where all the information would be reflected. 

However, in practice, analysts and investor will take a series of steps to fully reflect the new available information and, therefore, an investor who buys on the announcement of the news can generate a positive excess return. When a company's fortunes change from negative to positive and vice versa, investor ten to overreact and anchor on the past. As a result, it takes time for the change to be reflated in the share price. Similar in underreaction, an investor can generate excess returns by focusing on those companies where investor anchor. 

Timely sales could enhance portfolio returns. Other potential behaviors include risk aversion, the tendency to sell young winners well before they have contributed their full alpha to the portfolio; avoidance of pain, a managers tendency to sell stocks as they are experiencing a substantial drop in price, and loss aversion, the reluctance to sell losers in hope of their possible recovery.  Behavioral finance has been shown to positively impact investors financial decision making.