MORE PROFITABLE THAN THE BANK

Economic growth in Azerbaijan has been reflected to a considerable extent in the household budgets of every citizen. Thus, in a three-month-period this year the incomes of the population have risen by 4.5 per cent, whereas inflation only rose 2 per cent. In the first quarter, moreover, the average wage went up almost 7 per cent and reached a level of 430 manats, that is 550 dollars. This has led to a growth in citizens' savings, with the amount in the population's bank accounts rising more than 20 per cent.

In these circumstances the need has arisen for new types of investments and boosting incomes.  One of the attractive offers may be a life insurance policy with a savings' plan.  

In actual fact, a life insurance policy with a savings plan is not the simplest of instruments; it may be indispensable to one individual and not at all right for another. This type of insurance policy provides for life insurance combined with a savings' plan. In other words, when you acquire a life insurance policy with a savings plan, you gain something that will provide you with both good financial protection and savings for future purposes as well.

The main idea in acquiring a life insurance policy with a savings' plan is that the client is able to insure his life. In so doing, the client pays a fixed monthly (or even quarterly or annual) premium. The insurance company tops this sum up every year with the income from investments made with the savings, and, when the term comes to an end, the client receives the fixed sum of money [topped up with this bonus interest]. Should a life-insurance pay-out need to be made (this usually happens when the client dies for one reason or another, or there may be other additional options), then the insurance company pays out the insurance sum agreed in the contract to the insured individual's dependents. This ensures that the material commitments of the family, children and near ones are guaranteed to be met; if nothing happens to the client, he himself will be able to save up the fixed sum; if the client dies, the insurance company pays out the sum which partly compensates for the loss of the bread-winner.

The main difference between a life insurance policy with a savings' plan and a bank deposit is that the former provides for insurance protection as well as savings.

But the tax concessions relating to this type of insurance make it especially attractive in Azerbaijan.

Although the changes in the legislation aimed at developing the life insurance market and at life-insurance-related tax concessions were introduced a few years ago, it was not until last year that this type of insurance began to become especially popular. But 2013 became a turning-point for life insurance, first and foremost for life insurance policies with savings' plans. In 2013, the insurance premium for this type of insurance amounted to 37.7m manats and had gone up 3.1 times compared to 2012.

This tendency continued in the first quarter of 2014. Premiums for life insurance policies with savings' plans amounted to 17.6m manats or approximately 15 per cent of all insurance premiums and had increased by 57.8 per cent compared with January-March 2013.

It should be noted that in the first quarter of 2014 it was life insurance policies with savings' plans that manifested the highest growth rate. So, in the period under review, the total amount of insurance premiums collected by insurance brokers increased by 15.3 per cent.

So, it can be said that the insurance brokers have found themselves in pocket on account of life insurance policies, especially life insurance policies with a savings plan.

But what does an ordinary person get out of a life insurance policy with a savings plan?

Let's examine it all, drawing on specific examples. The client has decided to save 100 manats from his wages every month. Let's imagine that we don't have an insurance agreement. In that case, 14 per cent income tax and three per cent national insurance is retained as a compulsory State Social Protection Fund contribution. So, in reality 17 of the 100 manats goes on tax and other compulsory payments, and only 83 manats would go into savings

Should you enter into an life insurance and savings' plan agreement, these 100 manats are not subject to tax or compulsory national insurance deductions, and this sum remains in the client's account "untouched" within the terms of the insurance policy with a savings' plan. Besides this, the employer also makes a 22-per cent contribution to the compulsory national insurance deduction from the Labour Payment Fund. This means that the State Social Protection Fund has to add a further 22 manats to the employee's payment of 100 manats. But, once again, thanks to the tax concessions, the company is able to transfer this sum to the client's life insurance and savings' plan account instead of to the State Social Protection Fund of Azerbaijan.

 In Azerbaijan a life insurance agreement is concluded for a minimum of three years. Thus, over the 36 months (100 manats per month or 3,600 manats over three years) paid into the life insurance and savings 'plan account by the client, will amount to at least 4,400 manats. Every year, a rate of interest ranging from 5-7 per cent, earned from investing the savings, will have caused this sum to accrue, so that the sum that the client receives when the insurance agreement expires, has naturally increased.

On the whole, the life insurance policies combined with savings' plans are considered to be a better option than putting money into a bank account. There are several reasons for this. Firstly the life insurance and savings' plan agreement can be concluded without having any money in your pocket, since these pre-arranged manat payments are deducted from the salary every month. With a bank account this is impossible. In order to earn interest at the bank you have to put money into a bank account and the more the better. Secondly, the life insurance policy brings in more income owing to the tax and compulsory payments transferred to the insurance. Thirdly, this is additional financial protection for the client and his dependents, since, in event of an insurance pay-out having to be made, his relatives will be able to receive the full amount of the insurance.

There is also another factor that affects the amount of the insurance. This is age.  All else being equal, the young client of an insurance company has considerably greater advantages over a middle-aged person, since the risk of an insurance pay-out having to be made is far more likely in the case of the latter.

The advantage is quite clear. Let's say the client insures his life for 35-40 years and pays a monthly premium of 150 manats into an insurance and savings' plan policy. In this case, over a three-year term he will receive a sum of 8,200-8,600 manats from the insurance company. Now let's imagine that you have 5,000 manats and you have decided to put them in the bank at an interest rate of 10 per cent. Over three years this amount will have risen to 6,650 manats.

 "Throughout the world insurance policies with savings plans are a bit like a locomotive speeding on, since they offer good tax concessions and certain favourable conditions for investments. This is more profitable than putting money in a bank deposit account. Besides, if you put money in the bank, you have to bear in mind that the bank does not guarantee you against any risks, while an insurance company assumes certain responsibility for the life of the client, when the latter has life insurance with a savings plan," the chairman of the Association of Insurers of Azerbaijan (AIA), Orxan Bayramov said.

According to him, in 2014 the association is expecting a growth in the insurance premiums earned from life insurance with savings plans, and the AIA has definite plans for the development of this direction. For example, the association intends to invite an expert from Romania to share with the Azerbaijani insurance companies the models for selling life insurance policies with savings' plans. 

"It needs to be taken into account that it is not only the accumulation of premiums that is important, but also investing them in the right way. Selling life insurance products requires special types of advisors who work with the client and help him to invest his savings properly. In Azerbaijan the main factor acting as brake on the development of life insurance is the poorly developed securities market and the limited possibilities that insurance companies have to invest their money. The insurance companies need to have somewhere to invest the money that they receive from the population. The only real tool of investment is depositing it in the bank. Throughout the world most of the money is channelled into the stock-market. The promotion of life insurance may act as a spur to the development of the securities market in Azerbaijan," Orxan Bayramov stressed.  

He noted that the AIA is planning to discuss the state of affairs on the life insurance market at a session of one of the committees. "We need to take a look at the experience of other countries. Perhaps in Azerbaijan we can channel this capital into a form of investments in property. For Azerbaijan property is a realistic market for investments. This matter needs to be discussed, especially as the risk incurred in investing in property is greater than that  involved in investing in the bank," the head of association stressed.

One positive impact of life insurance with savings plans needs to be recalled. The application of it will lead to the legalisation of salaries, since the deductions relating to this form of insurance can only be made from legally-earned wages. You have to agree that there is something strange about someone whose employment contract states that he earns 150 manats [per month] paying 150 manats [per month] into a life insurance policy with a savings plan.

The life insurance market in Azerbaijan is only just beginning to become popular. Whereas the level to which life insurance has penetrated in the world is 4 per cent of GDP, in the countries of Eastern Europe it  is approximately 2 per cent, in Russia - 0.06 per cent, in Azerbaijan it is 0.07 per cent (according to the results for 2013). While throughout the world the per capita life insurance premiums are equal to 360 dollars, in Russia it is eight dollars and in Azerbaijan approximately six dollars.

Of course, the sum is a small one for the present, but at the beginning of any path, the point of departure is never all that promising.