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

by Monika Halan

Getting a good medical cover is probably more important than buying life insurance – you’re more likely to go to hospital with an illness or accident than die. But

For a nuclear family it makes sense to get a product called a ‘family floater’ that allows the insurance cover to whichever member of the family that needs it.

Most personal finance advice on this usually begins with: ‘Research the company, its management, its hospital reach, its third-party agent (TPA) service (TPAs are firms that insurance companies outsource claims management to), its claims experience before you buy a policy.’

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.

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’.

Four, check if your policy has ‘sub-limits’. A friend was admitted for a knee surgery to one of Delhi’s upmarket hospitals. Confident of a Rs 4-lakh cover, she selected a single deluxe room. When the time for the payout came, the insurance company refused to pay the room rent, which was over Rs 8,000 a day. Her policy had a sub-limit of 1 per cent,

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.

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.

Six, ask how much of the costs before and after hospitalization the policy will cover.

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.

Eight, look at the ‘no-claims bonus’ feature.

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.

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

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.

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 comprehensive and will not lapse if you discontinue your basic policy for any reason.

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, you mostly get the entire sum assured. For permanent partial disability, the policy pays a part of the sum assured, and for temporary total disability, it pays a weekly compensation, usually up to 104 weeks.

You need a life insurance cover for only one reason: to protect your family’s financial health if you die an untimely death.

The other big expense that will hit the family if you suddenly disappear is the debt you have. Home loans, car loans, education, personal loans, credit card debt – all of this will need to be paid back if you are to continue using what was bought with a loan.

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

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.

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.

you need eight to ten times your take-home annual income.

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. Suppose you take a home loan of Rs 80 lakhs. Buy a term cover of Rs 80 lakhs. Your bank may offer you a reducing cover policy whose premium is bundled with your EMI. Say no. It’s likely to be more expensive and there is another logic for buying a Rs 80-lakh cover. As your loan amount falls, you are growing older, doing better at your work. Your salary is rising; therefore the need for the cover is rising.

Rule One: Get a cheap plan. The online plans are the cheapest since they remove the agent commission (up to 42 per cent of your first-year premium) – from the price of the insurance. When term plans were launched online some years ago, the prices dropped by almost half! A policy sold by an agent costs twice as much as the policy you buy online.

Rule Two: When buying a term cover, check the claims experience of the insurance firm.

A claims experience of over 95 per cent is fine.

There is one more situation in which you don’t need a cover – when you are financially free. When are you financially free? When you don’t need to go to work to pay your bills, EMI, fees and other living costs. Your investments are large enough to look after all your expenses – current and future. Most people reach this milestone around the age of sixty, when they retire. Retirement either comes with a pension or a lump sum that is invested to harvest an income.

The job of the life insurance cover is to serve you till you are debt-free and financially independent.

To protect your family against your untimely death, the only life insurance product you need is a pure term cover. Do not buy any other kind of cover. Do not mix investment and insurance in the same product.

You are doing OK if … you have a pure term insurance plan; you bought this online to remove agent commission cost; you don’t have a single ULIP or ‘traditional’ plan in your money box; you have a sum assured that is eight to ten times your annual take-home income or fifteen to twenty times your annual expenditure.

The important thing to do is to start rather than wait for that golden moment when you have a big amount to hit the market with.

But the financial seat belt does another thing – it reduces the need to keep most of your money ready at hand.

Remember that each financial product you buy must solve a problem you have.

India, do buy gold. But buy it sensibly. Not more than 5–10 per cent of your total portfolio goes into gold. You do not buy jewellery as investment.

As of 2017, the smart investment decision is to buy the bonds issued by the Government of India; these bonds give you not only the full market value of gold when you sell the bonds in the future, but also a 2.5 per cent interest on your investment each year.

So much of our buying decisions has to do with what other people think of us.

The index has an initial value of 100, as on 1 April 1979.

In a growing economy, stock prices go up over the long run. Why’s that? Think about it.

FDs are low-return investments that destroy purchasing power due to the impact of inflation.

Gold does badly because its price goes through highs and lows, and while there are periods in the history of gold that could have made you a lot of money, over time it loses steam.

You’ve heard this phrase so often – it is not market timing but time in the market that matters. Time in the market matters because it smoothens out the volatility of the market.

Tracking real estate is tougher due to lack of data and location issues. So I picked the village where buffaloes bathed earlier but which has turned to a boomtown now, i.e., Gurgaon, to see what the price change has been. Speaking to original inhabitants from the 1980s of what is now DLF City, I get rough rates of an investment of Rs 2 lakhs turning into Rs 2 crores over thirty-four years, or an average annual growth rate of 15 per cent. But remember, both gold and real estate have high transaction costs that equity does not have.

The only two assets to give a positive return post tax and inflation are real estate and equity.

One, when investing in the stock market, give it the same patience you give real estate – a good equity portfolio needs five years of patience, ten years to see consistent returns, but actually will slow-cook over fifteen to twenty years.

Five, if you want to invest in managed funds, start learning. Read through the Mint50 coverage (http://bit.ly/1Kd4Mhv). Go through the Value Research data (http://bit.ly/1KYChan) and Morningstar ratings (http://bit.ly/1TjoxZy). Some smart investors run their funds past all the three metrics to see if they pass the test. Take a considered decision that you can own. Not investing in equity is not an option. You may as well understand the road rules of investing.

A mutual fund will hold bonds of at least twenty-five to thirty firms. If one of your three bonds does badly, you lose one-third of your portfolio.

This is called diversification – we reduce our risk by increasing the number of products we hold.