Deductions under 80C: Life Insurance

The first article under the Income Tax series was about Income Tax Slabs. Do go read it if you have difficulty calculating your taxes and the different slabs.

There are various sections under which we can claim tax deductions. And each has it’s own limits and uses. 80C is the most popular section under which people claim tax deductions. Even though I have written in brief about this section, it was in 2013 and a lot of things have changed since then.

Under this section 80C, Rs.1.5 Lakhs can be claimed for tax deductions. Money invested under this section enjoy tax deductions. They also have a long lock-in period attached to it.

There are other types of expenses that can also be claimed under 80 C and in this article I will explain in depth about what I consider to be the most important one – Life Insurance.

Life Insurance Policies are a must if you have dependents – spouse, children, parents, etc. It is double important if you have liabilities like home loan, car loan. The Insurance Policy makes sure that your dependents can maintain the same life style as they are currently enjoying even after your death.

There are lot of Insurance agents who sell policies without trying to mention the words “DEATH“. Death is the one certainty that can happen to anyone at any time. It is very important to not mince words and ensure that your dependents are well protected.

Life Insurance is needed for everyone who earns money in the family. Without their money, if you can’t lead the same lifestyle, then get that person insured.

  • If you are the primary bread winner, get insurance.
  • If your spouse also earns money, get insurance for him/her.
  • If your children are still in school or college – don’t get insurance for them.

There are many insurance providers who sell insurance policies in the name of Children Savings policy.
These are just emotional words to get your money.

When your child earns his own money, he can get himself insured. Till then, it is not needed.

The only difference is if you child earns the money in your family as an artiste and you are dependent on him/her, then you need to get them insured.

What Life Insurance Policy to buy?

Always buy a Term Insurance policy.
End of discussion.
Go on to the next section.

Ok. You are still here? Want to know why I said Term Insurance?

Lets see the dictionary definition of Insurance

Insurance
an arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium.

See how the dictionary definition doesn’t have any word called investment or savings? Term insurance is the only true life insurance policy that strictly follows the dictionary definition.

You should never mix insurance and investment. Both are completely different and should remain separate. Since term insurance is just a pure insurance product, you get more value for your money.

How much Insurance do you need?

Generally speaking you should be insured for 10x to 12x your annual income + any liabilities (loans) you have.

So if your annual income is Rs.10 lakhs and you don’t have any home loan, get a term insurance for minimum 1 crore.

If you have a home loan of Rs.50 lakhs, up your term insurance to Rs.1.5 crores.

Which Term Insurance to choose?

There are many providers to choose from and it is easy to buy a term insurance online by spending less than 30 mins. All Insurance Providers are regulated by the IRDA, so you can choose any provider. So it makes sense to choose the provider who gives the lowest price and has the highest settlement ratio.

But you should make sure that you fill in your insurance form by yourself and fill it in truthfully. The premium you pay depends on your health conditions (smoker/diabetes/heart condition/etc). If you fill it in with wrong details, there will complications when the policy is claimed. And the only time the policy is going to get claimed is when you are not alive – leading to unnecessary complications for your near and dear.

So always fill in the form properly and get the mandatory medical test to avoid complications.

Now that you have covered your dependents for cases when you might not be alive and also gotten tax deductions for the premium paid, next is to invest the remaining money for your future and also get tax deductions for that.

The next article is about my most preferred tax efficient investing method – ELSS funds. Do give me your email address below and I will send it to you as soon as I publish.

Last minute tax savings investments

Mar 31 CalendarIf you are a salaried employee the next 1 month is when your company’s HR/Payroll department keeps bugging you for your tax savings. And many employees haven’t done any investments for tax savings for this year or haven’t completely maxed out your 80C. If you also belong to that camp, there would be some colleague or friend who would try to sell you some LIC policy or a ULIP policy. But you know that you handling your insurance and investment yourself will lead to much better returns than buying an ULIP at the last moment.

If you checked my previous article comparing ULIP vs ELSS mutual funds you see that I suggest taking a term insurance and then doing a monthly SIP into a ELSS fund. Doing a monthly SIP would protect you against the ups and downs of the market. But since you missed your opportunity to start your SIP at the beginning of the financial year, you are now stuck with buying your fund at a lump sum amount. If the markets fall down after you just bought your fund, you will be at a significant loss. But there is a solution to that too.

I am assuming that you have not done any of your 80C investments and you have 1.5 lakhs ready to be invested. If you are contributing to an EPF (Employees Provident Fund) then subtract that total amount for this year from 1.5 lakhs and likewise subtract any life insurance premium you have paid.

Step 1: Get a Term Insurance first

If you don’t have a life insurance yet and you have others who are financially dependent on you, you need a term insurance first. There are numerous websites where you can search and compare different term insurances. Two of the popular ones are Policy Bazaar and the new CoverFox. First decide on a sum assured value which needs to be at least 10-12 times your current annual income. So if your annual salary is 10 lakh, your cover should be 1.2 to 1.5 crores.

Choose whichever policy is lowest price and has a decent claim settlement ratio. You won’t need any of the fancy riders or add-ons to your policy. Buy your policy online and you will be asked numerous questions. Please fill it in accurately. You would also be asked to do a health checkup (which is mostly to detect if you are a smoker or not). After all those are done, your policy document will be emailed and also sent by post to you. Now your insurance is done so you can subtract the amount you paid as premium from the 80C 1.5 lakhs limit.

Step 2: Put remaining money into ELSS

Next is investing into an ELSS fund. There are numerous ELSS funds and it is difficult to choose a good ELSS fund these days. You should get a professional financial advisors help if you can’t choose one yourself. But if you can spend a few hours you can identify good funds yourself. Goto websites like ValueResearchOnline and search for a section called ELSS. It would have different funds that are sorted by star rating. Just ignore the star rating.

Instead check for funds which has consistently performed well and given good returns even if the market is not doing good. Those fund managers know how to really pick the right stocks to invest in even if the market is on a downtrend. You can also check what kind of companies that fund invests in and how it has performed over the past 5 years. There are also neat graphs to show how an SIP in that fund would have performed.

Now we unfortunately can’t do an SIP today as we don’t have enough months remaining in the financial calendar. But we have enough weeks remaining – and as of Monday (Jan 30), exactly 9 weeks to March 31. Lets assume that you have to invest 1.4 lakhs into ELSS dividing it by 9 weeks, you have to invest Rs.15,555 per week into the fund.

Weekly SIP
Invest your weekly amounts on the dates marked in red

I can hear you asking that there is no SIP option for weekly period.
Yes there isn’t.
Does it mean you have to login to your mutual fund website and manually invest in the fund every week?
You can do that, but No. There is an easier way.

For this week, invest the first week’s amount manually. Then in the same fund house choose a Liquid fund. Make sure that the fund has no exit charges. Put your entire money into that Liquid Fund and search for an option called STP and set it up to transfer the weekly amount from the Liquid Fund into the ELSS fund on a specific day of the week.

STP to the Rescue

STP means Systematic Transfer Plan. It is an easy way to transfer money from one fund into a different fund within the same fund house. STP allows you to transfer money weekly, fortnightly, monthly or quarterly. Once you have set it up, transfers money from the Liquid Fund into the ELSS fund (just like you would have done a monthly SIP from your bank account to the ELSS fund).

And since you are doing a weekly transfer, even if the markets fall after week 1 or 2, you will be able to capture the fall over the next weeks. And the best part is once you have set it up, you wouldn’t have to lift a finger as everything is automated. End of the March you would have invested all your 80C money into an instrument which is both tax efficient and also have protected it against the market volatility.

Don’t forget to setup an SIP per month for the right amount from April 2017 to Mar 2018 (or till any year you want to).

Remember to use this STP only if you haven’t done your full 80C savings this year. Doing your regular 80C investment via STP instead of SIP would also work, but if you forgot to put in the money in your Liquid fund your STP would stop and you wouldn’t remember to check it. Instead go for a simpler SIP as the difference between a monthly vs weekly investment wouldn’t be too much over the long run.

At least from the next financial year onwards be more regular in your investments and make sure you don’t get stuck with a bad investment at the last minute. If you have any other ideas on savings tax better with only 2 months remaining, please comment below.

PS: This is just a simple idea for people to invest at the last minute. Each person’s financial situation might be different. Please get in touch with your financial advisor (you do have one right?) or email me at srini@getricher.in for help.

Do you need a Health Insurance?

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.

What is Insurance and why you need it

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.