How you could get back the controls, by reining in your expenses
“I would like to talk to you regarding a home loan”, a nurse told me, when I was in the hospital to visit my wife, who was admitted there. The nurse had come to know that I’m a Financial Planner and had wanted to take my advice about a home loan.
Like in all cases, I asked her about the investment she is planning to make. She wanted to buy a room, which would cost her Rs.2.5 Lakhs, in a wayout suburb. She wanted to buy that for her two young sons. She has about Rs.1.5 Lakhs and wanted to know about the home loan for the balance Rs.1 Lakh. “That should be no problem at all”, I told her. Then I asked her about her income. She was earning Rs.5,500 pm & her husband pulled in another Rs.3,500 pm. They were living with her in-laws. She told me she could stretch and pay upto Rs.4,000/- pm. I was deeply impressed. It showed single-mindedness of purpose & thrift. I asked her, ”Why don’t you approach the nearest bank and get going? They will need your payslip to let you know about eligibility amount”. She informed that she and her husband are both temps and don’t get any payslips. Now, I knew why she wanted to talk to me. It was not that simple a case at all. I suggested personal loans, from the bank with which she is having an account. I cautioned her that they may sanction maybe Rs.50,000/- or less, without collateral. With collateral, it may be more, I informed her. She thanked me for my advice.
On my way home, I was mentally thanking her for the revelation. Here was a woman of limited means, who wanted to buy a home as an investment for her sons and was prepared to save 44% of their income for that ! It was simply amazing.
Many of us, have that Rs.1 Lakh which she wants to borrow, in our SB accounts. A lot many spend what she saves in a month, on a weekend blowout! Lots of people also tell me that they are unable to buy a home as they do not have enough money to give upfront. Most who say this, are earning pretty well.
Expenses are like a multi-headed hydra, which can rear it’s ugly head, if one is not on top of it. Many of us do not have too much control over income increase, but we have control over expenses. But again, we have ceded control here and expenses torpedo us from all sides. We need to get back the control over it, so that we can get our life back on track.
Here are 10 Simple steps to get off the “Expensive” train
1. Properly plan for your goals & invest your money in the correct assets. Take professional help, if needed. Put the investments on auto pilot like a SIP, RD etc. That is what works best for most people. This will ensure that you can spend only the rest.
2. Understand how much you are spending by tracking the expenses. You will be surprised how much you’re spending on the “misc” head
3. Don’t borrow to spend. Credit card spends ensures that you do precisely that. Use a debit card instead.
4. Buy most provisions for a month at one go. You’ll end up spending less time, effort & money.
5. Do focused shopping. Write out what you want buy, buy that & head for the exit. Don’t take children with you on these occasions… they fill the shopping cart with unwanted fluff.
6. Don’t buy unwanted items or in huge quantity, just because there is some offer.
7. Don’t buy a toy due to your guilt that you are unable to spend enough time with your child. Try and find the time instead. You child wants you, not another toy.
8. Stop spending on that item, once you reach the limit in that month. For instance, if your entertainment allowance for the month is Rs.3,000/- and that is spent by the middle of the month, then it needs to be dal-chawal & TV for the rest of the month.
9. Same goes for fuel. Long drives and excursions on weekends are out, once the fuel limit for the month is breached.
10. Don’t switch on the AC by force of habit. Use AC as required. Switch off fans/ lights & other appliances, when no one is around. In many households, TV is on, irrespective of whether someone is watching or otherwise.
Have a bash if there is money left at the end of the month. That gives this exercise a positive spin. Take the family members into confidence as to why you have turned into an Uncle Scrooge. When they learn the larger picture, they will pitch in willingly.
I’m asking for too much, ain’t I? But, think of your future, your family’s future. If you are spending too much today, is it not tantamount to messing your future? The Americans have found that out to their dismay, in this downturn. You want to be like Americans or like that nurse, who was willing to save 44% for a goal? For her it is as difficult to find that Rs.1 Lakhs as it is to get Rs.50 Lakhs for us. My sense is that she will find the balance Rs.1 Lakh for that room.
Published in Moneycontrol.com on 1/10/09
04 October, 2009
Retire with a smile!
A smile on the face. A happy looking 60 something “Dadaji” playing badminton ( having Chyamprash, before and after the game ) with his Grandson. Nana Nani frolicking on the beach in floral print tops… you get the scene. Vignettes of happy retired seniors as seen on the brochures of Pension plans.
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retirement. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.
Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.
Published in Moneycontrol.com 23/09/09
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retirement. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.
Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.
Published in Moneycontrol.com 23/09/09
Retire with a smile!
A smile on the face. A happy looking 60 something “Dadaji” playing badminton ( having Chyamprash, before and after the game ) with his Grandson. Nana Nani frolicking on the beach in floral print tops… you get the scene. Vignettes of happy retired seniors as seen on the brochures of Pension plans.
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retremennt. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.
Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.
Published in Moneycontrol.com 23/09/09
Most people fear retirement for more reasons than one. First - what to do in retirement. Second – does one have the dough to indulge & do what one wants to? Like travelling abroad… or living life kingsize in the autumn of one’s life ( remember the nana nani scene…? )… or atleast live like they used to. Most people dread the penury in old age or being dependent on their children.
These are genuine concerns. Most people find themselves spending a good portion of what they earn, before retremennt. Somehow, there are expenses and more expenses to consume surpluses lying in the bank. Retirement concerns surface, when the Salt and pepper hair is more Salt than pepper – beyond 45, even 50.
It is at this stage that they buy pension plans to see them through retirement – in line with the sentiments of “hold your head high, live with dignity” that pension plans so evocatively portray. But in most cases, it may be too little, too late. At this stage committing even large sums of money is of limited help. If the target amount is Rs.1.5 Crores at retirement, the amount to be committed per month (assuming 8% return throughout the period) for someone who wants to invest for 30 years is Rs.10,065 per month. For someone who has only 15 years to go, it turns out to be Rs.43,348 per month. That illustrates the power of compounding, over time. Starting early is important for a well funded retirement.
Pension plans may not be the best vehicles, from a tax point of view. Consider the following –
a) If one wants to withdraw the accumulation before vesting, the entire amount is taxable.
b) Just before vesting, only upto one-third can be taken out, without tax incidence ( the rest will be used for paying annuity )
c) After annuity starts, one cannot access the funds at all, however badly you may need it
d) Annuities from these plans are taxable as income
Many are not aware of these facts and pension plans are equated with retirement planning.
What are the things to bear in mind while planning for retirement ?
A) Pension plans are not the only way forward for planning retirement
B) Invest in a basket of instruments like PPF, FDs, Bonds, MF, Equity, property etc. and gradually move the growth instruments to debt, over time. One can start with upto 75% in growth instruments and can slowly scale it down over time to bring it to between 40-50% at retirement, as per needs and risk bearing ability.
C) Property may be a good idea at retirement, as it can give a consistent rental income
D) Start early and invest every month for retirement
E) Retirement corpus need not be committed to “safe” investments like PPF & NSC only. This way, the corpus will not grow fast enough to create the nest egg required. If one starts early, the composition can be aggressive initially and can turn more and more sedate when nearing retirement. Early starters need not worry about market volatility. They can weather the storm as they are longterm investors
F) Do not access the funds earmarked for retirement for any other need
G) Keep speculative investments out of the ambit here.
H) Understand that Retirement period spans decades, these days. The money accumulated needs to last through the lifespan. Hence, it is a good idea to keep a portion of one’s assets in growth instruments like equity & MFs. Since retirement period itself is long, these instruments will have time to perform.
Pitfalls one should avoid
a) Not having a good medical cover is a serious lacuna at retirement & beyond. Ideally, such medical cover should have been taken earlier on and the policy should continue into retirement. If one has not taken, it needs to be done post haste.
b) Thinking about retirement too late in life is a pitfall one should avoid. We are not getting any younger with each passing day. And the day of retirement will come, eventually. Be prepared to welcome that day in comfort.
c) “Will use up whatever is left after all expenses during the lifetime”, is the planning lot of people do. That approach, can potentially be a minefield exposing you completely. That strategy will potentially expose those who’ve been swimming naked, when the tide of income recedes. You could end up with a much smaller corpus than required, that way.
d) Putting some money in most schemes that come ones way is something many do. Investments done should be carefully considered, from the risk/ return point of view as also the manageability.
e) Playing too safe will ensure that corpus does not grow enough to meet your needs at retirement.
f) Understand what you need to put aside for retirement every month. Do that first and then spend. Discipline & persistence are proven virtues here.
g) Don’t panic on investments made and keep shuffling them. It may be a good idea to keep them on , if inherently, they are good investments.
Good retirement planning needs just common sense. That ensures financial freedom. Once that is ensured, you could frolic on the beach too ( with your spouse, as in ads !). Or woo your spouse all over again, like the zoozoo in Vodafone ads. And play badminton with your grandson ( after the fortifying goodness of Chyawanprash ). And look like a million bucks, at 60.
Published in Moneycontrol.com 23/09/09
How critical is a Critical Illness insurance for you?
Build a security net, over and above the medical insurance that you have. But, do you really need this… read on.
“An open-heart surgery is required for Bhushan as there are multiple blocks”, the doctor was telling Seema, his wife. Tears welled up. Doctor was comforting her. “Don’t you worry. Medical Science has advanced so much that the risks in such a surgery is not that high any longer. Bhushan will be fine”, said the Doctor. Seema with tears still in her eyes asked, ”But, how much will it cost? “. Doctor replied that it may cost about Rs.3 Lakhs. Tears welled up again in Seema’s eyes. She knew that they have a medical insurance that covers them for Rs.2 Lakhs each. Now the surgery alone will cost Rs.3 Lakhs; and then there are the hospital charges, medicines… What she did not know was that Bhushan had taken a Critical illness cover and most of the expenses are going to be covered. Good news then! Seema however wants to know what this plan is all about and how this works.
Critical illness cover :
This is an insurance cover available against specified diseases/ conditions. Lumpsum payment based on the Sum Assured taken is made on diagnosis of the condition, irrespective of the amount spent or will be spent on illness. Such policies are available from both Life & General insurance companies.
Features & benefits :
• Benefit amount paid, over and above other medical policy claims as this is a defined benefit policy
• This is available as a separate product or as a rider in a life insurance policy. Depending on that, it may be a yearly renewable or a tenured contract.
• Will cover a specified number of illnesses – may be just 10 in some cases, especially riders and is over 30 in case of most standalone policies
• No maturity benefit is payable in these policies.
• There is a premium guarantee for a certain number of years, in most policies. Premiums can change post that, subject to IRDA approval.
• Premium varies widely. Indicative premium for a 40 year old can be between Rs.3000/- & Rs.8,500/- depending on the term, coverage & other benefits.
• Age at entry varies widely between product to product – 6 years or more, depending on the product chosen.
• Coverage term and age upto which covered ( 75 is the best I’ve seen in these policies ) also varies widely from policy to policy.
• Claim Payment made as per pre-decided payouts ( as a percentage of Sum Assured ). Many policies have a pre-defined list of illnesses for which they pay a certain percentage of Sum Assured - typically 50% to 100%
• Some policies limit the claim in case of a particular disease. After a payout is made for a disease, balance Sum Assured can be carried forward for other diseases – the premium is set accordingly lower in consonance with the balance Sum Assured.
• Claim can be done more than once, upto the Sum Assured. After that, the policy terminates.
• Some policies impose a survival condition of a certain number of days ( eg. 30 days ) for claim admittance.
• Waiting period for claims under this policy would be there in almost all cases – typically 3-6 months.
• Tax benefits available under Sec 80D or Sec 80C, according to the plan structure.
Analysis & deliberation
This policy is not a replacement for the Medical insurance policy. This cover needs to be taken to protect against the jolt like what Bhushan’s family would have received. However, the point to bear in mind is that this policy terminates once the sum assured is paid, unlike in a medical insurance policy, which I would rate as the most important limitation. Some policies allow you to carry the policy forward after settlement of a portion of the Sum Assured for the other covered diseases, for the balanced Sum Assured. This is a very useful option as atleast a portion of the cover is available for other illnesses. The other limitation is that the policy is only for a limited number of diseases/ conditions. In life, one may incur huge expenses in hospital bills for diseases other than those covered in the policy. Also, the number of diseases/ conditions covered by different policies is different. Also, this policy does not come very cheap especially considering it has limited applicability and can at best be an add-on policy.
Do you require it?
Insurance companies have come out with this product as there is a clear need for it. However, this is best taken in conjunction with a proper medical insurance plan – not in isolation as this a very focused, useful but limited plan. One should look at the family history, nature of work, station in life, ability / disability to absorb a jolt etc., before deciding on whether a Critical illness cover is required.
In the final analysis, one needs to take a view on the age upto which the cover is sought, diseases covered, special benefits in the policy, waiting period, survival condition imposed etc. apart from the premium before arriving on the final choice of the policy. If you can afford to put aside money for this, it is a good safety net to have.
A check on the claim history would be a good idea. You would not want to run around with IV needles still stuck to body parts, do you? Seema does not like that one bit and hopes like hell that the Critical illness policy of Bhushan pays. She is however wondering if a Surgical assistance policy would have been a better idea , as his friend Ajay suggested. She needs to wait till next week to know that!
published in DNA Money on 11/9/09
“An open-heart surgery is required for Bhushan as there are multiple blocks”, the doctor was telling Seema, his wife. Tears welled up. Doctor was comforting her. “Don’t you worry. Medical Science has advanced so much that the risks in such a surgery is not that high any longer. Bhushan will be fine”, said the Doctor. Seema with tears still in her eyes asked, ”But, how much will it cost? “. Doctor replied that it may cost about Rs.3 Lakhs. Tears welled up again in Seema’s eyes. She knew that they have a medical insurance that covers them for Rs.2 Lakhs each. Now the surgery alone will cost Rs.3 Lakhs; and then there are the hospital charges, medicines… What she did not know was that Bhushan had taken a Critical illness cover and most of the expenses are going to be covered. Good news then! Seema however wants to know what this plan is all about and how this works.
Critical illness cover :
This is an insurance cover available against specified diseases/ conditions. Lumpsum payment based on the Sum Assured taken is made on diagnosis of the condition, irrespective of the amount spent or will be spent on illness. Such policies are available from both Life & General insurance companies.
Features & benefits :
• Benefit amount paid, over and above other medical policy claims as this is a defined benefit policy
• This is available as a separate product or as a rider in a life insurance policy. Depending on that, it may be a yearly renewable or a tenured contract.
• Will cover a specified number of illnesses – may be just 10 in some cases, especially riders and is over 30 in case of most standalone policies
• No maturity benefit is payable in these policies.
• There is a premium guarantee for a certain number of years, in most policies. Premiums can change post that, subject to IRDA approval.
• Premium varies widely. Indicative premium for a 40 year old can be between Rs.3000/- & Rs.8,500/- depending on the term, coverage & other benefits.
• Age at entry varies widely between product to product – 6 years or more, depending on the product chosen.
• Coverage term and age upto which covered ( 75 is the best I’ve seen in these policies ) also varies widely from policy to policy.
• Claim Payment made as per pre-decided payouts ( as a percentage of Sum Assured ). Many policies have a pre-defined list of illnesses for which they pay a certain percentage of Sum Assured - typically 50% to 100%
• Some policies limit the claim in case of a particular disease. After a payout is made for a disease, balance Sum Assured can be carried forward for other diseases – the premium is set accordingly lower in consonance with the balance Sum Assured.
• Claim can be done more than once, upto the Sum Assured. After that, the policy terminates.
• Some policies impose a survival condition of a certain number of days ( eg. 30 days ) for claim admittance.
• Waiting period for claims under this policy would be there in almost all cases – typically 3-6 months.
• Tax benefits available under Sec 80D or Sec 80C, according to the plan structure.
Analysis & deliberation
This policy is not a replacement for the Medical insurance policy. This cover needs to be taken to protect against the jolt like what Bhushan’s family would have received. However, the point to bear in mind is that this policy terminates once the sum assured is paid, unlike in a medical insurance policy, which I would rate as the most important limitation. Some policies allow you to carry the policy forward after settlement of a portion of the Sum Assured for the other covered diseases, for the balanced Sum Assured. This is a very useful option as atleast a portion of the cover is available for other illnesses. The other limitation is that the policy is only for a limited number of diseases/ conditions. In life, one may incur huge expenses in hospital bills for diseases other than those covered in the policy. Also, the number of diseases/ conditions covered by different policies is different. Also, this policy does not come very cheap especially considering it has limited applicability and can at best be an add-on policy.
Do you require it?
Insurance companies have come out with this product as there is a clear need for it. However, this is best taken in conjunction with a proper medical insurance plan – not in isolation as this a very focused, useful but limited plan. One should look at the family history, nature of work, station in life, ability / disability to absorb a jolt etc., before deciding on whether a Critical illness cover is required.
In the final analysis, one needs to take a view on the age upto which the cover is sought, diseases covered, special benefits in the policy, waiting period, survival condition imposed etc. apart from the premium before arriving on the final choice of the policy. If you can afford to put aside money for this, it is a good safety net to have.
A check on the claim history would be a good idea. You would not want to run around with IV needles still stuck to body parts, do you? Seema does not like that one bit and hopes like hell that the Critical illness policy of Bhushan pays. She is however wondering if a Surgical assistance policy would have been a better idea , as his friend Ajay suggested. She needs to wait till next week to know that!
published in DNA Money on 11/9/09
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