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A couple of medical professionals put their finances through a health check-up and draw up a wellness plan

A couple of medical professionals put their finances through a health check-up and draw up a wellness plan

SMITA and Bipin have been seeing a lot of articles in the newspapers lately, about financial planning. They wanted to see whether there was anything they could do to meet their family’s financial goals through a disciplined approach to investing. They are well informed on financial matters, and save regularly. But they nevertheless wanted to know whether they could do better.

Bipin was bursting with questions. Was his and Smita’s life insurance cover adequate? Should they invest in unitlinked insurance plans of private insurance companies? Should they sign up for a unit-linked pension plan?
In order to answer these questions, we had a long and detailed discussion about the state of their financial affairs, and listed their assets (see assets table).

Rs per Month (all other Figures are Rs per Year)

The Phadkes had no direct investments in the stock market, but had recently started investing in mutual funds through systematic investment plans (SIPs). We thought their equity exposure was on the lower side, considering the overall picture of their assets.

On analysing their present cash flow (see cash flow table), we concluded that the large outflow on account of life insurance premia was not justified by the relatively low cover.The total life insurance cover for Bipin and Smita was Rs 5 lakh each, for which they paid a total premium of Rs 58,700 each year. It seemed to us that this otherwise well-informed couple had not thoroughly grasped the concept of life insurance cover, as they were not only underinsured, but were paying too much.

Of their cash surplus, the couple are committed to invest Rs 5,000 each month in equity funds through SIPs, leaving a substantial surplus that could go a long way in improving their financial position between now and retirement—a period of almost 20 years.

We identified some key issues the Phadkes needed to address. The first of these was risk management—ensuring adequate life insurance for both earning members. The second issue was to build short-term capital for the education of their daughter Mrinmayi, who is now nine years old. The third was to build long-term capital building for Mrinmayi’s higher education, wedding, and other future needs. And fourthly, both Bipin and Smita would get a pension when they retired, but retirement planning was still essential as the pensions may not be adequate to maintain their standard of living.

We advised the Phadkes to increase their life insurance cover by Rs 25 lakh each. We suggested they opt for a term assurance plan of any life insurance company, for a term of about 20 years. We chose this term to coincide with their retirement. The additional cover would entail a total cash outflow of about Rs 35,000 a year for both of them together—a small price to pay for risk management, when you think about it.

One of the safest ways for a conservative investor to build capital continues to be the Public Provident Fund account. Considering the invested amount qualifies for exemption under Section 80C of the Income Tax Act, and the interest rate of 8% a year (interest is also tax-free), the yield on PPF works out to 16.3% a year for an individual who falls into the 30% tax bracket. The Phadkes were already investing Rs 70,000 a year in each of their PPF accounts, and we suggested they continue to do so.

Some private insurance companies offer unit-linked pension plans, which invest your entire premium in stocks and bonds as per your choice. The biggest irritant in unit-linked insurance plans has been the high administrative expenses/selling expenses in the first couple of years. The present plans with 100% allocation can be considered

All Amount in Rs Lakh *Market Value

investor-friendly. We recommended investing Rs 10,000 a month for both of them in this the unitlinked pension plan of LIC, with a total allocation to equity funds at this stage. We suggested a term of 20 years. These plans allow investors to switch their preference from equity to balanced to debt funds without any loads, for a limited number of times in a year. From the investor’s perspective, this is good because it makes for flexibility in planning one’s asset allocation. Our objective in recommending the above was to build retirement capital the risky, aggressive way (with option to reduce risk as Smita and Bipin grow older), as opposed to PPF, which is a safe, slow and steady way.
The Phadkes plan to c o n t i nu e with their e x i s t i n g SIPs , contributing Rs 5,000 per month in diversified mutual funds. But we suggested an addition of about Rs 6,000 per month, given available liquidity, to build up short- and long-term capital, mainly to meet little Mrinmayi’s education and marriage expenses.

In this planning process, we ensured that all the financial goals of this conservative middle-class family would be met in a systematic way, with a blend of conservatism and aggression. The Phadkes appreciated our balanced approach, and agreed to implement the plan. We will be reviewing it on a periodic basis.

D Sundararajan is Certified Financial Planner and Investment Consultant, Trendy Investments

MEET THE FAMILY

Smita and Bipin Phadke are both medical professionals. They are in pensionable service. Bipin is 41, and Smita is a year younger. The couple live with their daughter, nine-year-old Mrinmayi. They have no other dependants. Both Smita’s and Bipin’s parents live independently

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Giving Protective Cover

India must get down to finding a viable health insurance model for the needy

 

India has been described by columnist Martin Wolf as a premature superpower: one of the world’s largest economies, but a country with a low per capita income. In countries with low per capita income, public health expenditure has to be primarily focused on preventive healthcare, especially protection from communicable diseases. Curative care has to be largely financed from private sources. But what is the best way to do that, and how do we provide healthcare to those too poor to pay for themselves?

Health insurance is the most effective way of privately financing healthcare. However, global experience shows that private health insurance systems work in countries with per capita incomes of at least Rs 4.5 to Rs 5 lakh. Clearly, with a per capita income of only around Rs 50,000, India still has a long way to go. But there are large variations around this average and those in higher income groups can well afford to insure themselves while those at the lower end cannot. From the perspective of health insurance, three broad groups are identifiable.

For those in the lowest income groups, the government has launched a bold experiment under an insurance scheme called the Rashtriya Swasthya Bima Yojana (RSBY). Under this scheme which started in 2007, ‘below poverty line’ or BPL families are given an entitlement of up to Rs 30,000 per family per year to cover treatment costs. The insurance premium is paid by the central and state governments in the ratio of 75:25 (higher for some special category states).

To minimise leakage, the scheme has introduced cashless transfers through smart cards. It is still early days. So far, 26 states are participating in the programme, of which 22 have started issuing smart cards. About one crore cards have been issued so far. Bihar, rapidly moving from near-‘failed state’ status to almost a star performer in governance, has just extended the scheme’s coverage from eight to 30 districts in
partnership with four major private insurance agencies through competitive bidding. Rs 30,000 cannot cover the treatment cost of catastrophic illness, but it is not chicken feed in a country where average income is only Rs 50,000 and where BPL families cannot afford any healthcare at all.

 

Since states typically inflate their BPL lists well beyond those identified as BPL by the central authorities, RSBY could eventually cover over 400 million people. If properly implemented, alongside the National Rural Health Mission, it could prove to be as much of a political game changer as NREGA, and set an example for the rest of the developing world.

There is a Distortion in the market for private Health Insurance.. it is interesting to ask why no insurer has yet offered a proper insurance product to beat the competition. is tere a cartel at work.

If RSBY provides minimal insurance cover for a large number of beneficiaries, at the other end of the spectrum we have maximum healthcare cover at a nominal premium for a relatively small group of beneficiaries – government employees, including retirees, and their families – under the Central Government Health Scheme (CGHS). Though the number of beneficiaries is large in absolute terms, it is still a small fraction of the country’s population. Though probably the best among the three broad systems of health insurance found in the country, CGHS still needs major reform.

Though coverage is virtually unlimited in theory, including treatment abroad, what actually gets covered is still subject to discretionary approval by the concerned authorities. That needs to change. The premiums are nominal and need to be enhanced, along with a ‘deductible’ share payable by the beneficiary, subject to a ceiling, to make the system financially viable. Moreover, private hospitals are increasingly reluctant to treat under CGHS coverage. They complain that getting paid is a nightmare. Nevertheless, for the beneficiaries this is on the whole a good insurance scheme.

Between RSBY beneficiaries at the bottom and CGHS beneficiaries at the other end, we have the rest of the population, close to half a billion people, left to their own devices. Those employed in the corporate sector, just a few million people, usually get medical care cover as part of their benefits. Those in high income groups, again just a few million, buy their own insurance from private insurance agencies. The rest pay what they can afford for doctors, medicines and private hospital care, or they queue up in public hospitals.

 

The challenge is to find a viable health insurance model for them, based on low margins and high volume. There is a peculiar distortion here in the market for private health insurance that needs to be addressed. Health insurance is bought not for treating a flu or sprained ankle but as protection against the huge expenses of treatment for a catastrophic illness or accident.

Elsewhere in the world, a good insurance policy provides unlimited cover for such illness, with a ‘stop loss’ limit beyond which there is no ‘deductible’ payable by the policy-holder. In India, it is the reverse. The ‘stop loss’ limit is a cap beyond which the insurer provides no cover! It is interesting to ask why no private insurer has yet offered a proper health insurance product to beat the competition. Is there perhaps a cartel at work?