Khota Paisa

Choosing a Health Insurance Plan

Posted in Insurance by khotapaisa on January 7, 2010

With so many players offering so many health plans, choosing one can be a frustrating task. In general, there are certain parameters like premium, exclusions, coverages etc that you are expected to consider while comparing health plans. But believe me, even with all this information in front of you, you will find it difficult to choose a plan. To keep it simple, I would try to list out some important points which you should keep in mind.

1. Go through the exclusion list. Read it in full and see if any of it is relevant to you.  Just go thruough the list.

2. Pre-existing diseases should generally be covered after 1 year.

3. Go through the list of network hospitals in your city. The policy you choose should cover most of the reputed hospitals in your city or the nearest big city.

4. Always go for a family floater plan unless you are single.

5. You must opt for atleast 3 Lacs of coverage.

6. Check out about the claim settlement record of the company. For this you could talk to your friends who have claimed earlier under health insurance. Typically, you will be paying higher premium for companies with better claim settlement record.

7. With the earlier point in mind, don’t just go for the cheapest plan.

Public or Private Insurers?

Posted in Insurance by khotapaisa on December 4, 2009

I have got more than few mails/comments on this topic. Even I have often wondered earlier whether I should go for public insurance company (say LIC) or private ones. In theory, there is no difference. The same regulations applly to both and they are equally monitored by the concerned authorities. But then in the financial world, nothings is guaranteed to work just because there are rules. This question is more important when you go for pure insurance(term plan) which has no investment in it. So the performance of the plan is not a valid criteria for selection. To figure out an answer to this question, I downloaded some figures from IRDA site. Based on the data, I prepared these graphs. The first graph shows the ratio of annual expenses vs premium allocated. It doesn’t need rocket science to figure out the lesser the better for the company & the customers.

The follwoing graph shows the ratio of claims settled vs premium collected. So, the higher this ratio, better it is for policy buyers.
For obvoius reasons, I have not given the names of other insurers. But if you see the no. of bars (each representing one insurer) in the graphs, you will realise that it pretty much covers most of the insurers today.
Some of the differences between LIC & the rest can be explained in terms of size & age of the company. But that doesn’t make the point less valid. Also, most of the private insurers are making loss. They might start making profit in coming years, but there is no guarantee or strong sign of it.
The catch is that LIC charges more premium for the same sum insured. But then, I would say that it is better to pay a little extra if it gives you peaceful night.

Insurance – Not For A Common Man

Posted in Insurance by khotapaisa on November 7, 2009

In the world of insurance, there are countless types of products. Each offering a unique set of features to attract the investors. But all these products are designed to benefit the insurance companies, not the investors. Surprised! Don’t be. Let us go thru some of the hot-selling insurance products in market.

1. ULIPs  – Without going into details, let me tell you that ULIPs have been the costliest insurance products of all. Now how does it go with the fact that they are the most sought-after products! If you are interested to know the ULIP story, you can follow the link here.

2. Endowment Plans – These are classic insurance plans which were the only insurance product we Indians knew of till ULIPs arrived. They typically pay you < 5% return. 5%! Would you go for a FD offering the same return today?Though common sense says that there is no reason you should be buying this kind of products, there are some execptions.

3. Other Exotic Plans – Some of the exotic plans in market are guaranteed NAV plans, ULIP based health plans etc. These are some of the most complex insurance products out there. But why would someone launch such complex products? Well, it is made to be complex to hide the various holes thru which the insurance company skims you.

The only product that is designed for the common man is the pure term insurance. Ever seen an insurance agent trying to sell a term plan? Let me know if you ever see one! After all what do you expect the insurance companies/agents to sell you – A products designed to benefit you or A product designed to benefit them?

Moral of the story – If it’s being sold to you, it is designed not to benefit you.

Who Needs a 5% Return on Investment?

Posted in Insurance by khotapaisa on August 30, 2009

1. Recently IRDA made it mandatory to submit PAN details for insurance having more than 1 lacs premium. This happened after it was noticed that many people were buying insurance policies by paying huge amounts (guess it was crores) in premium (in cash).

2. I could never fully understand why would someone need an insurance policy (classic insurance) offering 4-5% return.

Combine the two and you get the answers. Who should buy classic insurance plan offering 4-5% return? Well, everyone who has bundles of money lying around unused. These insurance products offer (at least till now) a very good investment option (with no upper limit) which is mostly out of view of the banking system (and tax system). Add to this the tax exemption one gets on the maturity and the insurance, you get a perfect investment option.

But the problem is that most of these policies are bought by people who just don’t need it. People who earn hard money need to take the most out of money, instead they end up putting their money to idle at 4-5%.  The reason for this is mis-selling (as is in ULIPs) as well as low awareness. The best way to solve it is to remove the tax benefit on insurance premium partially. So, if you are paying a premium of 50,000/- and out of it 5,000/- goes toward mortality charges (i.e. towards pure protection), you should get tax exemption only for 5,000/-. This will also mean that only term insurance plans will get full tax exemption. Even otherwise, the common investor should be encouraged to buy insurance for protection not for saving.

Which Term Insurance Plan to Buy?

Posted in Insurance by khotapaisa on July 9, 2009

While selecting a term plan, the premium is recommended to be the deciding factor. But there are few other factors which are more important than the premium. The single biggest criteria of selection should be the policy exclusion. Generally, term plans don’t have too many exclusions. But there are some and you need to know them. Let me give you an example. A pure term plan from CompanyX is low on premium whereas one from CompanyY offers higher premium. Going by widely accepted (and recommended) logic, you would go for the plan from CompanyX. But let’s get into some details. The exclusion policy for CompanyX-plan includes death due to riot and few other unnatural causes of death among others. On the other side the only exclusion for CompanyY-plan is suicide. So, if you had read the policy details, you would have rather selected policy from CompanyY even though it is costlier.

Another not-so-technical deciding factor is your comfort/belief with/in the insurer. This may seem to be an emotional issue, but seeing big private insurance players near collapse (AIG etc), it does become an important factor. All the talk about insurance being a contract, insurance regulation etc is on one side but your personal faith in the insurer does make sense. I know this is a contrversial suggestion, but i would anyday prefer being safe than sorry. Remember all the experts telling you that having 10% of your portfolio in cash is makes no sense? Well, check out the experts now and see what they tell you.

Insurance – Is Cheaper The Better?

Posted in Insurance by khotapaisa on July 8, 2009

Ask any financial advisor as to which term plan to buy and he/she will tell you to go for the cheapest one. That may be a good option as far as numbers are concerned, but personal finance is not just about number. It is better to pay a higher premium for your term plan in return for a better claim settlement ratio. Yes, I know all the claims about the regulations in insurance and the insurance being a contract. But then, every contract has these holes which you would never know till you see it being used.

The “Cheaper is Better” theory is actually counterproductive in case of health insurance. To give you an real life example, there is this company XYZ, which provides health insurance. As per their rule, if you don’t intimate them within an hour of hospitalization, they will reject the claim. How do you expect somebody to be able to call up the insurer when his/her family member is seriously ill and needs immediate medical attention? Keep in mind that this insurer provides one of the cheapest (may be the cheapest) mediclaim policy. So chances are that if you haven’t researched properly, you will endup buying this insurance, only to be rejected (most likely) when you need it.

On a side note there is a proverb in hindi which goes like this –
Mahnga roye ek baar, sasta roye baar-baar“.

Which Insurance Policy is The Best?

Posted in Insurance by khotapaisa on July 4, 2009

I have been seeing a lot of questions on the lines of “Which policy should I buy? LIC jeevan shree, SBI shield or Jeevan Varsha.”. Without going into details, I can state few thumb rules for selecting insurance policy.

1. If you have no insurance or less insurance, then buy a pure term insurance.

2. If you have  sufficient insurance (for this go to rule 1) you don’t need to buy insurance anymore. People typically buy insurance to get assured returns. But what they don’t realise is that there are better assured return products than insurance. The assured returns from insurance is typically about 3-5%. Infact, most of the times a simple FD is a better choice.

3. You may (i recommend for most people) buy ULIP product if your goal is longer than 10 years. It gives you a combination of pure term plan and mutual fund (protection + investment). But remember that it is costlier and hence only for those you don’t have means or discipline to invest regularly.

4. Unless you have a very specific need (and believe me you have no such need), don’t buy any non-ULIP (classic) insurance(i mean endowment, moneyback etc.) policy.

5. Don’t buy insurance if all that you want is safe investment.

How Much Insurance Do You Need?

Posted in Insurance by khotapaisa on June 8, 2009

When I was looking to take insurance, I talked to a no. of financial advisors. I also read articles, blogs etc on the net. But I couldn’t arrive at a satisfactory insurance figure. Infact, the insurance needs are very specific to the individual. Ideally, if you need enough insurance to allow your family to live off it for the rest of life. But it is not practically possible to take such a huge cover. There are few thumb rules to calculate insurance needs. But I have my own thumb rule to figure it out.  It goes like this –

Step 1. You need to fix the no. of years you want the insurance amount to last for your family. Typically, 20 years is good enough.

Step 2. You take your current annual expenses (minus your expenses) and multiply it by the no. of years from the previous step.

This amount will be sufficient to cover your family for the no. of years you planned for (refer step 1) no matter what the inflation. As an example, if your annual expense on your family is 4,00,000/- and you want your insurance amount to last for at least 20 years, you should take an insurance of 80,00,000/-.

Assumption – It is assumed that the insurance amount is invested to give enough returns to match the inflation.

Note – Treat this is as another thumb rule.