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Do you need a Health Insurance?

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Few decades back health problems and hospitalization costs were not high. But today, we are more informed about the various lifestyle diseases and we go check with our doctor for any small problem and get it fixed immediately. Hospitalization expenses have also increased many times, so has the cost of any surgeries or treatments.

If you are hospitalized for some reason, bills can come to slightly less than a lakh to a few lakhs. How will you be able to pay for it when your monthly salary is lower than the bill? You can either borrow money from someone or break into your savings and investments to pay for your medical expenses. There is a third option: Have medical insurance. 

Medical insurance is very simple. You pay an annual premium and the insurance company covers your hospitalization costs up to the sum assured. Eg: If you paid Rs. 1000 every year for a sum assured of Rs. 2 lakh and you end up being hospitalized for some surgery, the insurance company will cover you as long as the bill is less than Rs. 2 lakh. If it exceeds Rs. 2 lakhs in a year, you just pay with your own money. And the next year you get back the Rs. 2 lakh limit after you paid the premium.

Lets look at the various factors you need to have in mind while taking a health insurance.

Types of Health Insurance

There are a few types of health insurances and for each person one suits best.

  • Individual Mediclaim policy: This is the most basic form of health insurance and it is what I explained using the example above. For each individual you need to take a separate health insurance and each gets up to their own sum assured every year if they are hospitalized.
  • Family Floater policy: This is an enhanced version of the individual policy well suited for your family. You would take a family floater policy for all the members in your family and your sum assured would be a common pool for your family. Any 1 person in your family can use up the entire sum assured (or major part of it) and the remaining amount would be available if another member gets sick.
    Say, there are three members, you can take a 6 lakh family floater policy. If Person A gets admitted and the bill costs Rs. 4 lakh, there is still Rs.2 lakh remaining for the current year. This remaining money can be claimed by anyone in your family. Just like individual policy, the next year, the limit resets back to Rs. 6 lakh again.
    The advantage here is, the probability of all members of the family getting hospitalized in the same year is lower. So you can take a single combined policy for all and share get a higher sum assured.
  • Unit Linked Health Plans: This is just like the Unit Linked Insurance Policies (ULIPs), where part of the money paid as premium is invested into the equity market and will be returned back to you at the end of the insurance term. ULIPs are a bad idea (Note to self: write a post on why its bad) and so is ULHPs. As I said before, “Never mix Insurance and Investment.” I would suggest you just forget this type of policy at all.

Now you know the different types of policies, which one is better? The choice is simple. If you are an individual, get an individual mediclaim policy. If you have a family (spouse and children) getting a family floater is advantageous.

Employee Health Insurance

Most companies would have a group health insurance scheme for all its employees. This would be sufficient for most people, but do ask your HR about the sum assured, what insurance company and how good it is and what happens if you quit/switch jobs. If you are not satisfied with any of these, you can take a separate policy which makes things simple for you, especially when you need that money badly.

Claim settlement process

There are basically two methods to get money from your insurance.

  1. Cashless: In this type, you just have to inform the hospital’s insurance desk that you have a health insurance and they would pass on the bills to your insurance company. But your insurance policy would have a list of authorized network of hospitals where you can get cashless treatment for your hospitalization. You must inform a third party administrator (TPA) about your planned hospitalization or within a stipulated time in case of emergencies.
  2. Reimbursement: This type of claim settlement is available for both network hospitals and non-network hospitals. Only you should settle the hospital bills first and then produce the bills during the insurance claim. The money paid would be reimbursed to your account directly by the insurance company

Its better to choose an insurance company which has wider network of hospitals for utilizing the cashless hospitalisation facilities as you don’t have to borrow a huge amount of money just before your surgery and wait for reimbursement. Also search the internet for reviews about the company and the third party administrator about the number of claims they settle and how hassle free the process was.

Health Insurance for aged people

There are companies now which sell health insurance for aged people (but most want you to buy it before the age of 65).  But the premium will be higher as health problems are more common to a 60 years old person than a 25 years old person. However if you pay the premium for your parent’s health insurance, you do get tax benefits for that too.

Tax Benefits?

Yes. Premium you pay for health insurance is exempt from income tax, upto certain limits.

  • Rs. 15,000 for yourself, spouse and children
  • Rs. 15,000 for your parents (Rs. 20,000 if parents are senior citizens)

And this is exempted under section 80 D (Life insurance is under 80C) so you can save a cool Rs.35,000 (max) for your taxes.

How much cover do you need?

So does that mean you go ahead and pay Rs. 35,000 for premium and get maximum tax benefit? No. Tax is not the primary reason for you to get health insurance. Your general health condition and diseases you may get because of your lifestyle should be the primary reason. Check for the expenses for basic medical ailments and surgeries and then decide on the sum assured based on that. Your premium will definitely be less than the tax exemption limits, but remember saving money on taxes aren’t important. Having adequate health insurance cover is important.

You can save money through various other ways and also earn extra money through your investments which will be the topics I will be writing about in the next few days.

How to buy a Term Life Insurance in India

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Now you should be pretty convinced why you need insurance and why term insurance is better than the traditional insurances. Now let’s see how to buy one. Buying term insurance is pretty easy and can be done entirely online. And there are numerous insurance companies which now offer term insurance.

Things to remember when choosing an Insurance company

There are a few important things to keep in mind while choosing a company for your term insurance.

  • Find the premium cost. For the same Rs. 1 Crore sum assured, different companies would charge different premiums. It all depends on their expenses. If the company has a lot of agents to sell their plans, they need to be paid salary and the expenses increase. If the company sells it primarily through online and has 1 office per city, then their expenses are low and thus the premium is also. You should try to get as an insurance plan which has the as low premium as possible.
  • But premium alone can’t be the only factor (else I wouldn’t have put in bullet points). Check the claim settlement ratio of the company. Every year, each company needs to publish the claims which it received and the percentage that was accepted and paid for vs the percentage that was rejected. You can get this info mostly from the company’s website easily and IRDA also publishes this information. Better companies like LIC, HDFC, ICICI, SBI, etc usually have a better claim settlement ratio.
  • Also, some companies/plans have a maximum limit for the sum assured or the policy period. Do make sure you research these too and fits your needs.

What about the extra riders?

These insurance policies have extra features that you can add to the plans – called “riders”. These cost extra and would be added to your premium. Some of the riders are:

  • Accidental Death: If you die because of an accident your dependents get this extra money. Do note that the money one gets from this rider is extra to the sum assured you get from the term insurances. Say you bought a plan for Rs.1 Crore and a 25 lakh accidental death and you die because of an accident, your nominee would get 1.25 crore. If you died of natural causes, they would get Rs. 1 Crore.
  • Critical Illness: If you are diagnosed with a critical illness (listed out in the policy), you would get a lump sum amount for your medical expenses. Eg: If someone is diagnosed with cancer and has term insurance + critical illness, he would get the benefits from this rider, even though he is still alive.
  • Accidental Disability Rider: If you are disabled because of an accident you would get a sum in installments per year as mentioned in the policy.
  • Premium waiver: This rider is useful if for some reason are not able to continue paying your premiums due to disability or loss of income. Eg: if a woman working and has a term insurance + premium waiver rider, stops working, thereby losing her regular income, she will still be covered under the policy even though she doesn’t have to pay any more premiums.

Do remember these riders are not mandatory and most of the cases just term insurance should be enough to cover the most basic needs. If an agent tries to upsell you any of these waivers, ask him to explain it in detail and decide accordingly based on your financial goals and needs.

Many companies also have even more features in their plans. You can check out their websites or call up their agent to get more information about it.

Premium Payment Frequency

Different companies and plans have different payment frequencies like monthly, quarterly, annual or single premium. Usually, it is best to pay it annually as the amount you would end up paying wouldn’t be very high. Please stay away from single premium option, where you would pay the entire premium (a few lakhs) at the beginning itself for the insurance. It significantly reduces the risk for the company and increases your net amount paid.

If you were to die in year 3 of normal term insurance paid annually, you would have paid about Rs.30,000 (assuming Rs.10,000 premium per annum). Instead, if you opted for a single premium option, you would have paid Rs. 2 lakhs (these are rough figures) for the plan and if you died in year 3, the insurance company profits more than your dependents.

Return of Premium

Term insurance isn’t an investment, so at the end of maturity, you (as the insured) wouldn’t get any money from the company if you survived the insurance period. There are however some plans which would return back the premium paid at the end of maturity. So, if you had paid a total Rs. 5 lakhs as premium for 30 years, on the 31st year, if you are still alive, you would get back the Rs. 5 lakhs.

However, the premium for these plans is higher than the normal term insurance, because they now need to save your premium and return it back to you after 30 years. Apart from the increased cost, think about the value of the Rs. 5 lakh after 30 years. It would maybe help you pay your expenses for a couple of months. Is it really worth spending extra to get this kind of low returns?

Instead, buy a normal insurance policy and invest the remaining amount in a better investment product and reap the benefits after 30 years.

Policy Period

Now you may ask how long should one take the policy for? Most financial planners would say “the maximum period you can get”. But, some companies allow you to take a policy until you are 75 years old. So should you take a policy till 75? No. Please don’t do that mistake.

When you are 58 years old, you would have mostly retired and would now have no income (or very low-income). By the time you retire all your debt would have been paid off and your (and your spouse’) expenses would also be very low. Your kids would have been settled in a nice job and are no longer dependant on your income. But since you have taken a policy till you are 75, now you have to keep paying the premium for 17 more years extra. Once you are retired, it doesn’t make sense to spend money on things which don’t return anything (or too risky).

According to me, the easiest way to calculate the period is age at which you wish to retire – your current age. Say you want to retire at 50 (means you should’ve paid all your home loans and be financially secure for the rest of your life) and you are currently 25 years old. Then take a policy for 25 years (50-25). Because when you reach 51, you would have no income (or very low regular income) and would also not have any major expenses too.

All your financial burden is now gone and you would have saved enough money for both you and your spouse to lead a nice worry-free life. No one is dependant upon your income (remember you don’t have any) for paying any loans. So just decide your age of retirement and use that as a guide for the insurance period.

How to search for these policies

The easiest way to find the various companies that provide term insurance in India is to check out CoverFox.com. You just have to enter basic details about yourself and you will be given a list of plans which you can compare. You can even buy it directly from their website.

There are also options to buy the term insurance policies offline through agents. If you are not feeling safe buying online and need more clarifications about the various options and riders, do call an agent and buy from him. However offline term insurance will be slightly costlier than online. But it is better to do it the right way even if it costs a bit more.

Other things to remember while buying the plan

Once you have decided on the sum assured, company/plan, riders you want to add, etc. Now comes the part of filling up the form. If you fill it online or offline through an agent, make sure you disclose everything about yourself to the company – your age, medical history, smoking/drinking habits, any hereditary diseases in your family, any other insurance policies, etc.

Missing out or providing false information for any of these are a sure way to get a claim rejected. Remember, your family would already be affected emotionally by your death and if the claim is rejected, it would push them into an even worse position. So please make sure you fill in the right information in the application form.

Usually when the sum assured crosses a threshold, the companies would want you to take a medical test. They have approved medical centers which test you and send the result directly to the company. If they find any anomaly like higher nicotine levels or blood sugar, etc., they have every right to put you in a higher risk category which increases the premium. So, if you smoke, do mention in the form that you smoke. They will find it out anyway.

You are also required to inform the insurance company if you begin smoking after the policy is issued and they will increase the premium from then. If you didn’t inform the company about your new habit and you die, it would be impossible to get the claim accepted.

But I do have an even better option: Quit smoking. Smoking kills you and also others around you.

Anyway, do make sure you research the different term insurances by this week and buy one as early as possible.

Why you should buy a Term Insurance instead of Traditional Insurance Plans

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Remember in the last post I warned you to stay away from the traditional Insurance Plan agents trying to sell you the various Insurance policies? I am going to list out the various reasons why and also the best alternative for insuring your life.

There is this company called Life Insurance Corporation of India (LIC) and for a long time they had a monopoly on Life Insurances in India. There were many agents of LIC who were selling Life Insurance policies to everyone. There are various products but usually the popular ones are the Endowment policy.

The way endowment policies work is, you pay a monthly/annual premium for a sum assured for a fixed period. If you die before your policy expires, your nominee gets the sum assured. If you survive the policy period, you get the sum assured + bonus.

I just copied some sample numbers from here:

Policy period: 30 years
Premium: Rs. 31,000 per year
Sum assured: Rs. 10 Lakhs (if you die, your nominee gets this)
Maturity amount: Rs. 23.1 Lakhs (if you survive 30 years, you get back this amount)

Now, you might think this is great as you get back 23 Lakhs if you survive which is a great deal of money right? Yes, I agree it is a huge amount – TODAY. But think about 30 years later when you will actually get the money. It isn’t a huge amount.

That is because of inflation. Inflation erodes the value of your money every day. When you were a kid, you could get a notebook for Rs.5. But the same notebook would cost more than Rs.15 today. Things become costly every year and with the Rs. 23 lakhs after 30 years, you would be able to lead your life for only a few months.

The reason so many people put in so much money into endowment policies is these agents make you believe it is an investment for your future. Based on the numbers we see above, this Rs. 9.3 lakh you invest over the period of 30 years (Rs.31000 x 30 years) earns just a rate of 5.4% per annum. This is pathetic considering the rates you could get in every other investment product today.

For comparison (these are the safest investment options you could get in India today):

PPF earns you 8.7%
National Savings Certificate (NSC) earns 8.8%
Fixed deposits earns you 8.5 – 10%
Hell, even some banks have savings account with 6-7% interest rate (FYI, savings account isn’t an investment at all, just a place to park your money for a while)

How much did the endowment policy earn you? a meagre 5.4%

So why the hell do you want to “invest” your hard earned money into a product which can’t even beat most basic savings bank accounts? And this doesn’t even beat inflation.

And in case you die, the Rs. 10 lakhs you get from this policy isn’t going to help your family much, given that you had taken many loans like the home loan, car loan, etc. How is your family going to pay for all these with this Rs. 10 lakhs? Are you sure you insured your life and your family’s financial safety sufficiently?

Lesson for you today: Never mix insurance and investment. 

Yes you read that right. Insurance and investment should never be mixed. If you want to invest your money, put it in some investment product which gives the highest return. There are safer investment options available like the ones I mentioned above (don’t worry, will cover more in the future posts). If you want insurance, ask just for a plain insurance against your life. Never ask for both in the same product.

Term Insurances – cheaper and better

And that is what term insurance does. While the traditional insurance plans lure you with the survival bonuses and investment for your future story and making you live your life not sufficiently covered in case of death, term insurances uses all the premium and just keeps it safe for your family in case you die. There is no investment and there is no return of your money.

Term insurances give you a much higher insurance coverage with much lower costs. For eg: insuring a 27 year old for a sum assured of Rs. 1 Crore (which is 10X more than the endowment policy example we saw), one would pay less than Rs. 10,000 per year (that is 1/3 cost). For 30 years, you would be paying just Rs.3 Lakh and if you die before your policy expires, your family would get Rs. 1 crore which is more than sufficient for most of their needs for the years to come.

Also because it is 1/3 cheaper, the remaining Rs.20,000 per year can be invested in better yielding investments which will also be a source of additional money for you or your family later. The return you get from investing this elsewhere would beat the returns you get from traditional policies and you are also fully covered for your future.

Remember insurance isn’t for saving “your” life, it is for saving your family’s lives after your death. So term insurance is the best form of insurance one can get to fully secure your family’s financial future.

How can term insurance be so cheap?

  • Most term insurances are bought online. So no need to pay for so many offices in every corner of each city in the country. No need to pay for agents for selling the policies, etc.
  • LIC usually invests the premium you pay in various investments like government bonds, shares, etc. This requires fund managers who make sure your money is safe and yields enough returns to give you your bonus + pay for their huge salary + make LIC profitable. The majority of your money goes into making more money for the company than to give you the best return.
    Whereas term insurance doesn’t require all these as all the money is kept liquid so that any claim can be immediately settled.
  • Usually whenever the government offers some stake in public companies for sale, if there are no takers, the government would force LIC to buy up the stake (invest in the companies). Even if the investment is a bad choice, LIC would have to invest as it is controlled by the government.

Are Term Insurances Safe?

So you may ask, if term insurances are safe? Will the company settle claims without any issue? All insurance companies in India come under the IRDA, a regulatory authority, which make sure these companies don’t fail to do their duty. In other words, if you furnished all your details properly (about your health, medical history, etc), these companies can’t reject a claim. Even if they, you can go to IRDA and fight it out.

Now you want to apply for a term insurance. We will see how to choose a good term insurance policy in the next post. And the various things to keep in mind while picking one.

What is Insurance and why you need it

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After you have solved your debt problem and set up automated transfer to pay your loans, the next important task for you is to take a life insurance. If you are the sole breadwinner in your family, then I would say life insurance is mandatory.

So lets see what insurance is and how it works. According to wikipedia “Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment.” In simpler terms, if you lose something valuable (in the monetary sense), insurance is a way to get back the money (at least partially) which you lose.

Types of Insurances

There are various types of insurances. If you crash your car into a concrete pillar, your vehicle insurance would compensate for the repairs. If a thief robs your house while you are enjoying your vacation, your home insurance would compensate for your losses. If you are admitted in the hospital for a surgery, your mediclaim insurance would pay for most of the hospitalization costs.

All of the above examples are instances when you get the money when you claim for insurance. In case of life insurance (which is the most popular form of insurance) on the event of your death, your family would get the insured money. This is important because, when you are dead, your family’s source of income (sometime the only source) stops immediately. And your family now has to make ends meet somehow, without you to support them. This money from the insurance helps them in the time of need.

So how do insurance companies work?

The way insurance companies work is, they collect a small fee called a “premium” every month/quarter/year from you when you insure something. The insurance would have a sum assured value, which would be the maximum amount you would receive when you claim an insurance because of loss. This sum assured will be more than the premium you pay. For eg: For a sum assured of Rs. 1 Crore, you would pay a premium of Rs.10,000 every year. Of course your premium amount would vary depending upon your age and health condition.

But you ask “Is the insurance company nuts to give you 1 Crore? The math doesn’t add up!”. The math does add up if you understand that there are tens of thousands/lakhs of customers for these companies. Lets say there are 1 lakh customers who are healthy and in their early 20s and every year they all pay Rs.10,000. It adds up to Rs.100 Crores, every year.  Lets say on the first year 90 customers die (may be due to accidents or because their health was sooo bad). That means the company has to pay these 90 families, Rs. 1 Crore each. Even after paying this 90 crores, the insurance company still has Rs.10 crore as profit, and this is just for year 1. They would get premiums every year and every year few people would die and the sum assured would be paid to the families.

Of course, the calculation that I made was very crude and simple. But you get the idea. Insurance companies work because the probability of all of its customers dying (or claiming a loss) is very small. And that is the risk these companies are willing to take. So you have transferred the risk (of supporting your family or paying for the hospital bills or repairing your car) to some third party by paying the small premium for it.

Why you need to get a life insurance

Now lets say you are working in a company and get regular salary and decided to buy a nice apartment with a sea view. It costs about Rs.50 lakhs and you pay an EMI every month from your salary. Lets say you die before you could finish paying the EMIs, your family would now have to take over the loan repayment. Or they would have to give up the house and move to a rented house. In most households, it isn’t that easy for a spouse/parent to go to work and earn enough to pay the EMI.

What can you do to reduce this risk? Take a life insurance for yourself with one of your family member as the nominee who will receive the money if you die. You would pay a small yearly premium, which reduces the tension of the financial insecurity your family would be thrown into if you die.

Remember, life insurance isn’t going to save your life when your bike gets hit by a bus from behind. Instead life insurance will save your investments for your dependants after you die. It is going to protect your family by providing financial safety in your absence. That is why life insurance is very important to take once you started earning a good salary.

How much insurance to take?

In the examples above I used sum assured like Rs.1 crore and enough insurance for repaying Rs. 50 lakhs house, etc. You say “But the uncle next door who is a LIC agent showed me insurance plans for Rs. 2 lakhs or Rs. 3 lakhs. Also he is asking me to pay huge premiums every month/year. I asked for Rs.1 Crore coverage and I can’t pay such a heavy premium.”

Please stay away from these agents and ask them to STFU as politely as you can. You could do a much better job of insuring your life using something called as term insurance than these insurances plans these agents suggest. These term insurances allow you to insure yourself for crores by paying a very small premium every year. And the best part, it can be bought online by filling a form and it takes just minutes.

We will see the difference between these term insurances and the other insurance policies these agents try to sell and why term insurance is better, in tomorrow’s post.

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