Let's Talk Money: You've Worked Hard for It, Now Make It Work for You

by Monika Halan

The problem is deep and wide, which is why there are insurance ratings available to help you choose. But some ratings can be compromised due to conflicts of interest, so take that as a starting point, but use the material in this chapter to ask questions and do your own due diligence. As you look at the ratings online, the most important thing to know is that the cheapest policy is not necessarily a good plan. Agreed that a low premium is good and an important factor in your choice of a policy, but it is not the only factor. Look at the policy as a three-part decision. One, how does it perform on the metric of price. Two, how does it perform on the metric of benefits. Three, how does it perform on the metric of claims. You may have the cheapest policy with the best benefits, but if the company’s claims policy rejects a large number of claims, the policy is not of much use.

Price

It is important to know what the policy costs right now and in the future. Unlike a life cover, where your premium gets locked when you buy a term cover, the premium of a medical cover changes as we age. You need to look at two things in price. How does the price compare with policies from other companies right now and how does the price compare over the years? Your policy may cost the least today but may become the most expensive when you hit age sixty or seventy.

If you are buying from an agent, ask him to show you the price comparison at ten-year differences. If you are forty, ask for the price of the policy as it is today when sold to a fifty-, sixty- and seventy-year-old. If he can’t do the work, find another agent. He will be getting a commission on your purchase now and every year after you buy. Let him earn this...

Ben...

Insurance companies have the ability to set up the game so that you lose. And given how technical an insurance product is, there is no way you will know all that there is to know. You need to find out if your policy gives at least these eight benefits. One, ensure that you have a policy that does not have something called a ‘co-pay’ clause.

Look for a policy that does not have a co-pay clause. Ask your agent to mail you the policy document and then do a search on the words co-pay. Search the net to see if the policy being sold has complaints related to it having a co-pay clause. Build an email trail with the company or the agent to ensure that you have something in writing that ensures that you have not been lied to.

Two, check for a ‘pre-existing’ disease clause. Insurance companies will not cover diseases that you already have when you take the policy. Insurance rules allow a company to refuse to pay for any treatment related to any condition, ailment or injury for which you were diagnosed or had symptoms when you took the policy, for four years.

Three, check if your policy has a ‘disease waiting period’. Many companies have a cool-off period of thirty to ninety days during which they will not pay any claim. Some ailments such as cataract or hernia may have a ‘waiting period’ before the company will pay. Ask the agent to list out all diseases that are covered under this clause. Look for a policy that does not have a waiting period on diseases or coverage.

Four, check if your policy has ‘sub-limits’.

A sub-limit is a limitation on what the company will pay out for specific things. We usually stumble upon a sub-limit on room rent. There are two kinds of limits on room rents – either by price or by category. Your policy may say that it will pay a maximum of Rs 2,000 as room rent or it may say that you are eligible for a double occupancy room with air conditioning. Room rents in the large five-star health shops (can’t call them hospitals any more) cost much more. Remember that the other expenses are associated with the type of room you take. You could find yourself paying for a lot more if you take a higher category room than what your policy will pay for. Look for a policy with no sub-limits.

Five, check for exclusions. A policy will list out diseases, conditions and medical services that the policy does not cover. Dental treatment, pregnancy and cosmetic surgery are standard exclusions. It is a good idea to get a list of all that is excluded in the policy you buy. What you can’t do much about is when the policy you buy excludes something at some future point in the policy. One firm excluded a costly cancer injection midway in a policy and people who bought the plan and made a claim were not paid for that injection. The dice is loaded against us, the individual customers of mediclaim.

Six, ask how much of the costs before and after hospitalization the policy will cover. You can claim expenditure made on doctor’s fees, medicines and diagnostic tests done before a planned hospitalization and for three months afterwards. For example, a knee replacement will have MRI costs before the surgery and physiotherapy costs post surgery. ...

Seven, ask for a list of ‘day-care’ procedures that don’t need you to stay for twenty-four hours in a hospital any more. Procedures and treatment such as a cataract surgery or surgery for a ligament tear (there is a standard list of 130 such procedures) are treated as ‘day-care’ procedures and are covered. Check the details of the day-care c...

Eight, look at the ‘no-claims bonus’ feature. When you don’t make a claim in a year, you get rewarded by the insurance company. It does this by giving a ‘no-claims bonus’ (NCB). The usual way is to raise your cover by 10 per cent for the same premium. If your cover was Rs 15 lakhs, for a premium of Rs 25,000, when...

Claims Your search for that good policy is not over till you understand the claims history of the...

when you file a claim. Does the insurer pay up? How much does he pay? Is the process easy? How quickly does the company respond to complaints? These are questions that you must think about at the time of buying your policy. Unfortunately, in India, claims data is not standardized and is difficult to get. The regulator has not thought the disclosure of data through so as to make it meaningful to consumers. Ask the agents these questions on claims before you buy.

One, how many claims does the company settle? Out of 100, if the company’s claims history does not settle more than ninety-five claims, don’t buy from the firm. Claims are a tricky area because the companies club together group and individual claims data. Group claims get paid far more than individual claims. Ideally the disclosure on claims should be product-wise and not clubbed as one big number.

Two, look at the claim-complaints data and look for a policy that has less than thirty complaints on every 10,000 claims made. Be careful of firms that give data on complaints as a percentage of policies sold. What is relevant is how many people, how many made a claim, then how many went...

What to do if you are not getting cover because of a pre-existing disease?

Insurance companies ideally want to insure supermen and superwomen who are in the best of health and won’t ever make a claim. Some companies take their aversion to giving cover to people with a pre-existing ailment to ridiculous lengths. If you fall in this category and are not getting cover, there are still some things you can do.

You can buy a policy with sub-limits, co-pay and an exclusion period for your existing ailment. Remember sub-limits are limits on what the policy will pay for certain diseases and for the room rent and related costs. A co-pay is what you agree to share with the company in terms of cost. An exclusion period is the waiting period before the policy will start paying a claim. These are restrictive, but better than not having a policy. Also, you may get ‘loaded’ or pay an amount over the regular premium paid by a healthy person due to your pre-existing ailment.

Strategies for older people

If you are unable to get even a top-up, targeting your own medical fund is your only option. Talk to your kids if you don’t have the surplus. Many of them will be able to get you on to their work-given group health insurance plans.

Critical illness and personal accident

Do I buy a critical illness and accident cover while I’m at it? Yes, you do. A critical illness, like cancer, is a disease where you may not spend too much time in hospital but have very large out-of-pocket expenses. The disease may also affect your ability to work for some time. Such illnesses are covered by a ‘critical illness’ cover. T...

Some policies cover up to twenty such illnesses including cancer, kidney failure, heart attack, major organ transplant, stroke, serious burns and end-stage diseases of the liver and lung. A Rs 10-lakh policy should cost between Rs 3,000 and Rs 5,000 roughly. Prices will change...

You should be able to add a ‘rider’ to your existing policy on the policy renewal date. A rider is an add-on at a very low cost to a basic policy. Riders look attractive, but I recommend that you buy a stand-alone accident policy from a general insurer. This cover is likely to be more compreh...

A personal accident policy adds another layer of security to your by-now robust medical insurance portfolio. This kind of policy gives you a lump sum if you meet with an accident that leaves you temporarily or permanently disabled. A personal accident plan has four covers: death, permanent disability, permanent partial disability and temporary total disability. For death or permanent disability, the policy pays the entire sum assured. For permanent partial disability, the polic...

buying a medical plan. It is tough. There are too many moving parts. You can use the health insurance ratings to shortlist some products, but the best solution will be to work with a good financial planner to buy your medical plan. Use the information here to see if the planner knows more than you or not. If you don’t hear the words pre-existing, sub-limits, claims and waiting periods, you know that you need to keep searching.

You need this cover more than you need a life insurance cover since you are more likely to break a leg than die. This cover is the difference between using your savings for a medical emergency and simply flashing your cashless card. You are doing OK if … along with your work cover, you have your own family floater; you live in small-town India, and have a family floater between Rs 3 and 7 lakhs; you live in the large metros, and want the five-star hospitals, and have a minimum of Rs 15 lakhs’ family floater; you are over sixty years old and have a top-up plan to bump up your basic cover.

What if you die?

You need a life insurance cover for only one reason: to protect your family’s financial health if you die an untimely death. Shut your eyes for a moment and imagine not being there. Being dead. Seriously, do it. You may have seen your loved ones crying, coming to terms with you not being around. After the emotional trauma, you see the financial vulture land on the house.

The way insurance has been sold in India, my guess is that you are sitting on a lot of dud policies. Why do I call them ‘dud’? Because they don’t solve any of your financial problems. These are products not designed to give you either a good cover or a good return. In its purest form, a life insurance cover should pay your beneficiary a lump sum when you die for the price of the premium. If you outlive your policy, no money comes back.

Think of the premium as the price of the product. Ask the question, what am I getting for this price? If you can’t answer the question clearly, you don’t have a term plan. A pure life insurance policy is called a ‘term plan’. This is not a policy that your agent or bank will tell you about. Why? Because it is cheap and does not soak up too much of your money.

Understanding life insurance products in the market

In a term policy, your premium is a price you pay for buying a life cover. So if your premium is Rs 10,000 a year for a one-crore cover, this is the price you pay to the insurance company for taking the risk of you dying an untimely death. When you buy this policy, you understand that if you live beyond the policy term (usually till you reach retirement age – more of this in the chapter on retirement), you get nothing back.

It is easier to see the logic of why we should ‘waste’ this money on a term policy than buy the other kinds of policies in the market – endowment, money-back plans or unit-linked policies – once we understand how these policies work.

that is the carrot for you – you get a ‘cover’, so your family’s safe; you get a return and you get a tax break. The pista on the jalebi is that the money at maturity is tax-free. The way the policy is sold talks about the returns in terms of whole numbers: You invest Rs 50,000 a year for five years and you get back Rs 5 lakhs after another fifteen years. Or you invest Rs 50,000 a year for fifteen years and you get back Rs 10 lakhs. The whole numbers look big with lots of zeros, but ask the question what the return percentage a year is, and you get shocking answers. The first policy returns 4.15 per cent a year. The second, 3.98 per cent a year.

Ouch

An easy way to cut through the tyranny of being hit by large numbers is to use the Rule of 72.

To know the rate of return every year of a double-your-money proposition, simply ask the question: Over what time does my money double? Then divide 72 by that number. Suppose the agent says: Your Rs 1 lakh will grow to Rs 2 lakhs in fifteen years, divide 72 by 15. Your return per year is 4.8 per cent, which is near the 4.73 number that a more exact calculation will give.

they give you pathetic returns. On an average, a guaranteed return policy gives around 3 per cent annual return. What are called participating plans (or plans that give you a ‘bonus’ at the end of the policy) give between 0.5 per cent to 4 per cent return. You read that correctly.

A lot of people make the mistake of thinking that the poor returns are because of the life insurance cover. Think of the premium as a price again. This price is now buying you two things: an insurance cover and a return. The price of an insurance cover (called mortality price) cannot be different for the same person for a term policy and for a bundled policy because it is based on what are called ‘actuarial tables’.

the price of your pure life cover is calculated by keeping in mind, among other things, how long an average person lives, what the gender is and at what age they are today. So now we know that the price of the pure risk cover should be the same across a term policy and an endowment policy. Now let’s look at the price of two similar cover plans. If the premium of Rs 1,000 a year buys a thirty-five-year-old person a life cover of Rs 5 lakhs for twenty-five years in a term plan, then the cost should be the same in the money-back plan of the life cover, right? This means that of the Rs 50,000 a year premium in a bundled product, just Rs 1,000 is going towards your life cover. The bulk – that is Rs 49,000 a year – is your investment.

The day you realize that it is in your best interest to separate your investment and insurance products, is the day you move solidly towards building your financial security.

What about ULIPs?* Think of a ULIP (unit-linked insurance plan) as a mutual fund with a crust of insurance on top of it. ULIPs used to be really toxic products till 2010 but since then have become much better in terms of costs. But they still have problems of poor portfolio disclosure and lack of portability, making them not such great vehicles for investment. I prefer to unbundle my investment from my insurance, and stay with a large term plan for my life insurance needs, and buy mutual funds for my investment.

How much cover do I need?

In addition to a cover for your income, you need to buy insurance for all the debt you have. Each time you take a large loan – usually a home loan, sometimes a personal loan – buy a term cover for the full amount of the loan that you take.

When’s a good time to buy? Buy as soon as you have dependants or the possibility of getting dependants arises.

Buy as early as possible because you get locked in for the duration of the policy from your first premium. And this is something you need to know: The younger you are the cheaper you lock in for.