Don't buy health insurance out of fear!

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At this time, you are in one of these two groups – you have health insurance (either corporate or self-purchased) or you don’t have health insurance. 

If you have health insurance, in all probability you would have received communication from your insurer (or your HR) stating that you are covered for hospitalization expenses against coronavirus.

If you’ve not purchased health insurance, you’re wondering if you should take one now. The answer is yes but only if you genuinely have a need for it (and not because of the fear of coronavirus). Insurance is a financial decision. It is slightly complex because one has to calculate an approximate amount they may need in the future. It involves a cost which is not low so don’t rush into it. The best part is you can do the whole thing online, without meeting anyone (even if it is through an insurance advisor). 

Once you decide on the product, the coverage amount and the premium, there is an online application form to fill. You may have to upload an identity document (PAN/ Passport etc). After this, you will have to pay the required premium, again online. Once the approval team (underwriters) goes through the application, they can either approve it or ask for some clarifications.

There could be a second process  - a medical test. This is required only if 

1. If you are above a certain age (usually 45 years)

2. If have a pre-existing condition (asthma, high BP, cholesterol, diabetes etc)

Usually, a blood test is enough and it is convenient because a person comes home, draws blood for testing. You may be asked to visit a diagnostic center for a specific test (example - pulmonary function test for asthma, treadmill test  for high cholesterol levels). The good news is some insurance companies are now doing tele / video call to see if they can waive the medical test. So if you are above 45 years but don’t have any pre-existing diseases, there is a high chance that you won’t have to go for a medical test. Again, contactless and safe (in the current context).

If you want a specific policy to cover coronavirus, check this article https://www.financialexpress.com/money/coronavirus-insurance-looking-for-a-covid-19-cover-here-are-your-options/1905821/  Remember to first check with your existing insurer for cover of  hospitalization expenses against coronavirus. As of now, the government is treating all patients so this cover may never be used. 

A quick checklist to assess health insurance policies

1. If you have a pre-existing condition, apply for a health insurance product which specifically covers that condition as there are higher chances of approval (yes, the premium will be higher)

2. Read the product brochure carefully to understand the features. Use this document to compare between products.

3. The more features a health insurance product has, the more it will cost

4. If you have a specific query, ask for the policy wording. Use the search option and read the specific terms associated with that. For example, if someone has varicose veins, they can search the policy wording to get a better understanding of how the insurance company treats this particular illness.

5. A good advisor will help you understand the terms and conditions better. They will also manage the claim related co-ordination, reducing hassles when you are already dealing with a medical condition.

6. Study the waiting periods and the exclusions so that you are not caught surprised at the time of claim.

Health insurance products are not simple and there are many features which sound important but may not be useful. Do try to analyse in detail and ask for clarifications till you are satisfied. Please feel free to contact me at mathewpravin@yahoo.com / 9900335853 with your queries and I’ll be happy to clarify.

Who is selling when you are trying to stay invested?

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Let’s look at some data first. Foreign Portfolio Investors (FPIs) have withdrawn Rs 24,776.36 crore from equities in March so far. These are the folks who have done the maximum selling in the past few days.

Who are FPIs?

Foreign investors (individuals, companies, governments) create a portfolio consisting of stocks, securities and other financial assets. These investments tend to be more liquid, which makes them much easier to sell (as compared to foreign direct investments). Foreign portfolio investments also tend to have a shorter time frame.

Why are they selling?

The key word is ‘foreign’ as in they have many geographic options to invest in. Right now, it is very difficult to judge which countries will be most impacted by Coronavirus. Also, the rupee has been weakening - in the year 2020 so far, the Indian rupee fell about 3.61 percent against the US dollar. Given these two factors, FPIs have likely moved their funds to safer havens.

Why should you stay invested?

Simply put, because your equity (mutual fund) investment objective is long-term wealth creation and your timeline is five years plus. Obviously different from the FPIs, right? Also, governments across the world are ready and responsive. We are seeing instances of global monetary policies being extremely supportive which will boost corporate efforts as they work harder to overcome effects of the pandemic. Most importantly, because the chart says so 😊 (yes, these are the times we bring out charts and quotes by Warren Buffet).  Despite the many ups and downs caused by various events, the Indian stock market has moved upwards and it will continue to do so.

One more thing – who is buying? 

Domestic Institutional Investors (which are largely mutual fund houses and insurance companies) have been net buyers. This is because their fund managers can purchase stocks at cheaper valuations and therefore provide greater value to their clientele (including you) when the stock market turns upwards.

And now for Warren Buffet’s quote “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.” So forget about all the doomsday predictions and the media tsunami waves. Please focus on staying safe and protect yourself and family from the coronavirus pandemic. After all, You are the biggest asset in your portfolio.

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Choose 'increasing cover' term life insurance

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When you buy life insurance, it is best to go for term life insurance. Let me quickly recap what term life insurance is – it is a policy that provides only death benefit i.e. in the event of demise your family stands to receive the coverage amount (sum assured). This is pure insurance and so it comes at a low cost. But it provides high coverage. If planned properly, it will ensure that financial needs of your loved ones are taken care of (in your absence).

Within term life insurance, there are primarily two options which you can go for

Option 1 Level Sum Assured – where the coverage remains the same throughout the policy term

Option 2 Increasing Sum Assured – where the coverage increases every year

I recommend Option 2 and the reason is simple – Inflation. What is inflation? Every year there is a rise in prices of goods and services and therefore a fall in the purchasing power of each rupee. As inflation rises, every rupee will buy a lower quantity of goods. Put simply, what could be bought with Rs 51 in the year 2010 now requires Rs 100. 

If a person chooses option 1 (coverage amount stays same), the effects of inflation would erode the actual value of the cover. For example, if Rs 1.00 crore is take as cover amount and if demise happens after 10 years, the nominee would get Rs 1.00 crore but the purchasing power would be equal to today’s Rs 69 lakhs (assuming a 4% rate of inflation). 

What happens if the increasing coverage option is chosen, say with 5% increment every year? In 10 years the nominee would get a payout of Rs 1.50 crores. Even after the effects of inflation, this would be equal to Rs 1.03 crores in today’s term. Which is what the insured was aiming for in the first place, right?

Will this mean a higher premium has to be paid? Yes, it will be cost at least 15% higher to go with increasing coverage. It may be a bit of a struggle initially but your income is going to go up every year. And you still get high coverage at relatively cheaper premiums.

I’m going to give you a quick tip to further reduce the premium amount – don’t take a policy tenure up to the age of 80 years. You are going to retire between the age of 60 and 70. By then your kids would have grown up and you would have amassed enough wealth to support your family. Essentially you will lesser financial dependents at that time and so you won’t need this cover.

Life insurance comes with a lot of options today but if you choose wisely, it can become very cost effective. If you need any further help in choosing a life insurance cover, drop me a line at mathewpravin@yahoo.com and I’ll be happy to help.

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Teach your kids to save money

I’m sure you’ve noticed how your child’s favourite cricketer is your favourite too or she is as eager to jump into the pool as you are. Maybe they cuddle up to you with a book when you are reading too. Teaching your child to save is much the same. Conscious lessons and practical examples are certainly required but they should also learn by your example. Otherwise kids mimic what you do even if you tell them to do the opposite. Do as I say, not as I do never works. Like most of their lessons, it needs to be built-up over time and reinforced with practice. Taking my own example, Dad was a spender but Mom was the careful one, squirrelling away money for the future. I’m lucky that the example she, not he, set took to my heart and I too started saving.
 
Most people think of financial decisions as complex ones which are neither discussed with or around children. How then does one teach them about understanding and taking such decisions? You could break down the complexity and talk about it in small, understandable bytes as and when it is happening. Or you could park it for later when you have the time to talk about it and the patience to answer their questions (which will be quite a bit). I give you a few current examples (my kids are seven years old so these suited to that age group)
 

• A pack of chips costs Rs 10 while a Kinderjoy egg costs Rs 40. If your child buys a Kinderjoy, he has to spend more out of his pocket money. He forfeits buying 3 other packets of chips but he gets a different, possibly a better quality product. He also gets something more -  a toy – that he can play with for longer.

Lesson imparted – money is a finite resource and requires allocation
 

• Set a budget before going to the toy shop. Example: You could tell your daughter – you can buy as many toys as you want but the total cost cannot cross Rs 2,000. When you are at the toy shop, she could first set aside all the toys that catch her fancy. Once the initial selection is over, she can further examine her choices and shortlist them into a smaller list. You can them help her to total up the cost and decide which ones to take within the agreed budget of Rs 2000. Trust me, the less attractive ones quickly get separated and both of you will come away happy

Lesson imparted – A budget keeps a person focused on their goals, organizes spending and takes away conflict.

• You could explain how and why we pay the household help or the cook/gardener/driver. Paying for services could be an abstract concept (since there is no physical exchange of money and goods). However children do see the time and effort put in by the help and will understand how this exchange works.

Lesson imparted – time is money
 

• Whenever you buy something for the family or yourself, I assume you must be evaluating choices and making informed decisions. Sit your child down and explain your decision-making process. They may not understand everything but they will begin to understand that it’s not just about going to a shop to buy whatever you want and then paying with a credit card that somehow has endless money on it 

Lesson – money doesn’t grow on trees
 

• Your child probably gets pocket money and sometimes an indulgent relative may gift money too. Try and inculcate a habit in your child to put away some part of the money as soon as she gets it. Most people make the mistake of not saving when they start earning, not only missing out on the savings but also on the years of compound interest it brings. This is probably the best habit you could inculcate in her.

Lesson imparted - A penny saved is a penny earned
 

• Teach your child to examine products closely and to compare it with similar offerings. If something looks too good to be true, then it probably is. It’s better to research it properly or avoid it.

Lesson imparted – all that glitters is not gold
 
Teaching them the meaning behind each common proverb in bold above will not only help it stick in their minds but will also earn them some brownie points with their teacher ;)
 
When it comes to older children, they can be given access to a savings account and encouraged to operate it. Under supervision, they could even do things like booking tickets, online shopping etc. However, investing in mutual funds or any other long-term investment can cause two complications – either it can’t be sold off easily and/or the proceeds get locked till the minor attains eighteen years of age. This could be frustrating for a teenager / young adult so best avoided for their pocket money. If you really want to save money for them in that way, it would be better to make a separate portfolio within your portfolio, which you could operate on their behalf.
 
Your child could have a very different thought process from you so it is important to start early and build up the discussion to their decisions and savings slowly. Do reach out to me at mathewpravin@yahoo.com for any more inputs, suggestions or feedback.

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A quick guide for submitting proofs to save tax

New Years Day is over and you've got back to office to find HR has issued dire warnings about submitting proofs of investing in tax saving instruments or facing a massive deduction in the next 3 months salary. How did this happen, you think? There seemed like so much time and now....

Before you start getting frantic, remind yourself that you've already planned out the tax saving for the year. You just need to follow the below steps and you can quickly put everything in place.

1. Call your insurance advisor or the call centre and ask for the premium paid certificate for this financial year. Don’t forget, if you’ve paid for an annual health check-up, you can claim that amount too along with health insurance premium amount

Applicable sections are 
Sec 80C for life insurance premium paid amount
Sec 80D for health insurance premium paid amount
 

2. Call your mutual fund advisor and ask for a statement of investment in ELSS fund (equity linked savings scheme) for the financial year.

Applicable section is Sec 80C
  

3. If you have done any other investment like PPF, NSC, NPS, 5 year tax saver FD etc, gather up those receipts

Applicable section is Sec 80C
 

4. Call up your home loan provider and ask them to send you the interest and principal paid certificate

Applicable sections are 
Sec 80C for principal paid against home loan
Sec 24B for interest paid
 

5. Gather up the receipts issued by the school for your children’s fees

Applicable section is Sec 80C
 

6. Call up your education loan provider and ask them for interest paid certificate

Applicable section is Sec 80E

A few things to remember

1. Creating online profiles for login and retrieving statements / tax certificate is cumbersome. Call your advisor or the call centre, they will mail it to your registered email
2. Haven’t completed your investments? Don’t rush into something unsuitable. It’s extremely important to make the right investment. You can always claim a refund of excess tax paid later.
3. Section 80C has the maximum options to invest. Chances are you already have investments going on applicable under this section but there is an upper limit of Rs 1.50 lakhs. Any investment above that will not be considered toward tax saving. Your EPF contribution (employee provident fund) will anyway cover a large chunk of it.

Submit your proofs to the HR department at the earliest. This way, they can do the calculations and raise any discrepancy or short-fall and then you have enough time to complete it. Hope this article helped you streamline the process. Reach out to me at mathewpravin@yahoo.com and I’ll be happy to clarify any further queries you have.

Porting is good for your health insurance

All soaps are for cleaning us up but we pay more for Dove because it offers many more features than say a Dettol soap (like creaminess, moisturizing, gentle on the skin etc). Dettol soap stands for one thing – it cleans up germs. Like soap, health insurance is a commoditized product today. And just like soap there are many health insurance products. The insurance product that gives you more features will charge a higher premium. So if you want higher number of days of pre & post hospitalisation coverage or coverage of a pre-existing disease from Day 1, you will have to pay more.

When you are buying health insurance for the first time, the premium is not the only aspect to consider. It is important to assess the features, understand the waiting periods & exclusions. But what if you already have an existing policy? The good news is you can move your policy from one insurance provider to another (much like mobile connection porting).

I can think of only two scenarios where one should port their existing insurance. The first is if you are covered by a nationalized insurance company. Generally, you will find that their policies have a lot of ‘sub-limits’ or restrictions. The usual restrictions are

A. room rent limit up to 1% of coverage

B. ICU room rent limit up to 2% of coverage

For example, if your coverage is Rs 5.00 lakhs and you are admitted to a hospital, they will pay a maximum of Rs 5,000 per day as room rent. If ICU admission happens, they will pay a maximum of Rs 10,000 per day

C. Each procedure is also likely to have a sub-limit.

For example, a cataract removal procedure may cost Rs 50,000 but the insurance company will have a sub-limit of Rs 35,000 i.e. they will pay only up to Rs 35,000. Any cost above that is payable by you. But if you are with a private sector insurer and choose coverage of Rs 5.00 lakhs or higher, typically such restrictions won’t apply. So the first advantage of porting is that you will get better features.

The second advantage of porting is waiver of waiting period for pre-existing diseases. What does this mean? When you apply for health insurance, you have to declare pre-existing diseases if any. The insurance company is not liable to cover you for any expense arising due to that condition for the next 2 to 4 years. For example, if you have sinusitis, related medical expenses will not be covered for 2 years. But if you’ve completed 2 years and are then porting your policy, the new provider will take this into account and waive off the condition. See how it paid off that you were already covered.

The other scenario where you are likely to port the existing policy is when you've made a claim and found the servicing processes poor. In this case too, you should consider porting your health insurance.

As I mentioned earlier, health insurance policies have a lot of features but they also have a lot of clauses and exclusions. The important thing about porting is to clearly understand the benefits / waiting periods / exclusions / premium offered by your existing insurer and compare it with what the new insurer is promising. If you want to assess your existing policy, reach out to me at mathewpravin@yahoo.com and I can help you compare and select a suitable policy.

How to plan a child education fund

To tell you the truth, when I got married, it never crossed my mind that I should be saving for the education of a child that would probably arrive one day. When the babies did arrive, we were too busy taking care of them or catching up on sleep. It was only when they started going to school did we think – “Oh, one day these kids will go to college (hopefully), we need to plan and save for that cost”.

But for a long time, this thought never translated into action. The kids seem capable of becoming anything from the next Michael Phelps to Michelangelo to Ramanujam. The possibilities are endless. Even sending kids abroad for education is more achievable these days. So what do we plan for financially? We were stumped by so many options.

Finally we realized we couldn’t really predict what kind of education the children would eventually select. So, we decided to benchmark our future costs on a course that is not cheap and looks set to remain popular in 10 years time. This way, we wouldn’t be too off the mark in terms of cost. Yes, you guessed it - B.E. (Bachelor of Engineering). The only courses which are more expensive than this are medicine or flying.

The next question that popped up was how much to save? Put in a different way, what would a B.E. course cost when my child completes 12th std? I had to rely on past data of fee increases to predict the future cost.

How did I do that? My starting point was the fees for a BE course today (easily available thanks to collegedunia / shiksha). I found that a fee of 3 lakhs per year would cover most colleges. I then spoke to friends and acquaintances who had completed B.E. over a range of past years to get the fee cost then. From there, it was easy to calculate the likely rate of escalation. For example, B.E. at IIT Madras cost Rs 25,000 a year in 2008. The current fees are 2 lakhs a year. So the annual cost increase rate is 23% (you can use this calculator https://cagrcalculator.net/result/).

IIT had the highest escalation rate from the data I got. The range of escalation varied from 4.2% to 23.1% (depending where the friend studied - govt college, aided or private).

As an example, my child is now 7 so I have time till my child turns 17. Assuming a 20% escalation every year (on the higher side), the fees would have moved from 3 lakhs per annum to 18 lakhs per annum. So, 4 years of BE fees means a total of 72 lakhs. Well, that’s a birth control ad for you right there ;)

No need to panic, let’s just focus on the numbers. We’ve arrived at a cost of Rs 72 lakhs, now it becomes easy to calculate the amount to be saved every month. I opened an SIP calculator (https://cleartax.in/s/mutual-fund-calculator) and calculated that a monthly investment of Rs 20,000 invested with an expected rate of return of 8% in 14 years (even when the child is studying we will be still be working and saving) would yield me Rs 61 lakhs. Phew that’s a relief.

You are thinking – “I need only 8%!! Then I’m going with PPF or Sukanya Samridhi which will give me a guaranteed return and tax-free too”. Wait, I’ve not included incidental costs like hostel fees, exam fees, pocket money, project work, why even preparatory courses. Let me assume that if I double the amount of fees, it should cover all these expenses. So now I need to save Rs 40,000 per month.

So now I'm putting a sizeable amount of money aside for a long investment period. Why shouldn’t I get more bang for my buck? This is where it makes sense to invest in equity mutual funds. The returns here are likely to be higher and the downside risk becomes much less. In my earlier calculation I was reaping 61 lakhs with an 8% return, so if I could get a 10% return with EMF, the corpus would grow to Rs 72 lakhs and a 12% return would translate to Rs 86 lakhs.

A few things to remember

• It is important to have term life insurance covering this amount (as well as living expenses and liabilities) so that your plans continue even in your absence.
• You also probably need to plan for a Masters course. You can use the same methodology, just take care to increase the tenure by 3 or 4 years
• The amounts may seem huge but don't panic. If there is a shortfall, education loans are a viable albeit cumbersome alternative
• Your income will increase over time so ensure you increase the amount of savings, this will increase the corpus

There are many variables that will increase or decrease education costs. Your child may get a merit seat in a government college or study in a college close by, thus reducing hostel and other costs. You may have two children and so the costs double. The important thing is to start now. Once you get the investments going, you can relax  knowing your money is working as hard as you are, to give your child a good education and the springboard to a good life.

If you found this article useful and wish to chart a plan for your child, drop me a line at mathewpravin@yahoo.com and we can set up a convenient time to discuss. All the best to us and the next generation.