5 Health Insurance Myths that may put you at risk

Health insurance or mediclaim is a labyrinth full of exclusions, room rate caps, pre-existing illnesses, loading, no claim bonus etc. While we do not decode all of these, we do attack some common myths that exist in the minds of the customer. Often the broker is also clueless or prefers to act dumb. The health insurance field is very much “buyers beware”, so read on.

 1.    When I buy health insurance, all I need to do is price comparisons, all plan features are essentially the same

Price is just the first comparison point for health insurance policies. Other important touch points where the polices will differ must be compared:

  • Room rent sub limits – the public insurers sub limits are usually capped at 1% of the sum assured or Rs 5000 whichever is lower. The room sub limit also restricts the reimbursement you will get for other expenses to the same category.
  • Insurance co-pay – It means that the expenses you claim will be divided between the insurer and you. So if there is a co-pay clause of 20% then for a claim of Rs.1,00,000, the insurer will cover only Rs.80,000/-
  • Renewable age: Many insurance companies will not renew your insurance policy once you are past 60 and need it the most. Do watch out for this since there are insurers which will give you insurance even at 80 years.

2.    Once I have brought the policy, I can blindly renew it the next year

Expect changes in your policy every year. The policy pricing and terms will change according to your age, claims made throughout the year, the insurers’ loading policy and the insurers’ internal policy changes. The insurance policy contract is an annual contract (at times two or three years’ contract), hence it is free to change over time. Besides there may be some framework changes from IRDA, the insurance regulator. Do ask your agent clearly about what changes have occurred.

3.    You need a minimum 24-hour hospitalisation to be claim health insurance

While this was true till a few years ago, 24-hour hospitalisation is not a criterion for making a claim. Due to advancement in medicine and better awareness, many overnight procedures can now be completed within a shorter period. Infact many insurers use the number of day care procedure offered as a selling point.

4.    The policy covering the maximum procedures / having the most day care procedures and pre-existing illness covered is the better policy

So which policy would you buy, one which covers a 160 day care procedures or one which covers 85 procedures? Well you might be making a mistake if you buy the first one. Often insurers list all possible variations of procedure make the numbers swell and also to exclude procedure. For instance one insurer mentions 4 different type of Tonsils procedure while another just mentions Tonsils and covers all variations of the treatment (which are likely to be more than 4).

Most insurers will cover pre-existing illness after a delay of 3-5 years. If an insurer is covering this with a first time buyer, then he will load it up in the cost.

  1. 5.    Since my policy offers cashless facilities, I do not need a medical emergency fund

In a cashless system, when you get hospitalized with an approved network hospital, the Insurance Company or  TPA co-ordinates with the hospital and settles the bill without you having to pay first. This however is subject to an approval for the procedure. In case of an emergency hospitalisation, the authorisation may take a few hours or it may even take a day if the insured is admitted on a holiday.

The hospital is likely to ask you to deposit cash before starting any procedure. Hence a medical emergency fund is a must even if you enjoy cashless health insurance facilities.

Review for “Everything you wanted to know about investing – A new Perspective”

BasuNivesh has done a very nice review of the book. We thank him for his kind words.

Are you looking for a personal finance book which deals all aspects of investment in a simple and understandable manner? Then my recommendation will be recently published CNBC TV18  bestseller “Everything you wanted to know about investing-a new perspective” by Shalini Amarnani.

Here is the rest of the post…….Click here

Everything you wanted to know about investin a new perspective

India on the move

This article was written by me for Sify.com on the event of the 60th birth anniversary of our nation. 6 years later we seem to be worse off than ever. Some part of the blame lies on the world financial crisis, but a large portion lies within lack of political will and business apathy.

Here is hoping that the next 6 years will see a robust change

 

2007 has been a momentous year for India. We have seen the stock markets rising and the dollar falling. Consumer spending and salary levels are never before heights. Today’s young Indian is earning a start salary that his father barely managed to before retiring.

India achieved 8.5% GDP growth in 2006, significantly expanding manufacturing. India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers. Economic expansion has helped New Delhi continue to make progress in reducing its federal fiscal deficit. However, strong growth – more than 8 percent growth in each of the last three years (and over 9% in parts of the last year) – combined with easy consumer credit and a real estate boom is fuelling inflation concerns. The huge and growing population is the fundamental social, economic, and environmental problem. Here is a comparative picture of the growth of India’s GDP.

india graph

The 11th Plan

Sector              Growth rate                 Share of GDP
                          2002-07   1997-02     2002-07  1997-02

   Communications   15.0     17.14             2.3        1.7
   Manufacturing       9.82      3.68            16.7      15.3
   Agriculture            3.97     2.06             20.5      24.7

India is moving from an agricultural economy to a service economy surely but steadily. In relative terms, the decline of agriculture in the share of GDP from 24.7 to 20.5. That decline implies that services and manufacturing are gaining share and that implies that we are moving away from a subsistence economy to one in which we may have some hope of improving our lot.
Of course, as a developing economy, agriculture is the core of the economy.  If India is to ever develop. It is only very severely underdeveloped economies have high agricultural sector share of GDP. For instance Albania, Ethiopia, Mali, Nepal, Ghana — economies with agriculture accounting for a large share of the GDP. Australia, France, Germany, US — agriculture accounts for low single-digit shares of the GDP.

The Indian economy on the eve of the 11th Plan is in a much stronger position than it was a few years ago. After slowing down to an average growth rate of about 5.5% in the Ninth Plan period (1997-98 to 2001-02), it has accelerated in recent years and the average growth rate in the Tenth Plan period (2002-03 to 2006-07) is likely to be about 7%. This is below the Tenth Plan target of 8%, but it is the highest growth rate achieved in any plan period. While this performance reflects the strength of the economy in many areas, it is also true that large parts of our population are still living below the poverty line. The percentage of the population below the poverty line is declining, but only at a modest pace.  These problems are more severe in some states than in others, and in general they are especially severe in rural areas.

 

Oil- The master of the future

Petrol has dominated world economics for long and will continue to do so for the years to come. Oil has formed a large part of India forex outflow. It is however earning refining business which has been offsetting its import bills. In fact, during 2006-07, refined petroleum products formed the largest chunk of total exports overtaking the Gems and Jewellery sector.

The cost effectiveness of refining in India is drawing many global players here. This is because India is logistically well placed for refineries. Besides being a major market for crude oil and petroleum products, it adjoins major demand centres such as China. Also, crude oil from West Asia can easily be brought to refineries in India.

Of late, a number of players have evinced a keen interest in laying pipelines in the domestic market to supply gas to the consumers. For example, Gujarat State Petronet Ltd, a group company of the Gujarat State Petroleum Corporation, plans to connect all 25 districts of the state with 2,200-kilometre high pressure gas pipeline laid down across the state. Reliance will invest US$4 billion to lay a 1,386-kilometer pipeline from Andhra Pradesh to Gujarat. India is also one among the four countries which have the world’s richest gas hydrate reserves.

India ranks sixth in the world in terms of petroleum demand and by 2010, India is projected to replace South Korea and emerge as the fourth-largest consumer of energy, after the United States, China and Japan. The rising price of crude is of great concern to the growth of the Indian economy. India needs to step up its domestic exploration to produce substance instead of wisps of promise that it has been done till now.

The Forex concerns

In recent days the rupee-dollar exchange rate has been, on average, Rs 39.3 per dollar. A year ago it was 44.7. This means that the rupee has appreciated against the dollar by 13.7% in the last year. Put differently, for an Indian the average price of all American goods has fallen by 13.7% and, for Americans, goods from India have become more expensive.

Over the last year virtually all major currencies have been appreciating vis-à-vis the US dollar. The euro rose by 14.7%, the pound by 10.4%; the Canadian dollar by 23%, Sweden’s kroner by 13.7% – the same as the Indian rupee. Vis-a-vis all major currencies, outside of the US dollar, the rupee has changed very little. It is due to our high dollar exposure of our exports (especially software exports which has been driving the economy to a high) that the fall of the dollar has become a cause of concern.

The 3-D Advanage

As Mr Anand G Mahindra, Vice-Chairman and Managing Director, Mahindra and Mahindra, India said in a seminar, he reposed faith in the 3D advantages of India, Democracy, Demography and Durability. Democracy is a prerequisite to a healthy society, polity and economy. India’s demographic advantage is that it has the highest number of people in the working age group and this is going to continue for some time. Durability stems from the fact that India is a peaceful and stable nation despite many internal disturbances. He said that India has the second largest Muslim population in the world peacefully coexisting with the Hindu majority.

Some facts to chew on

  • India is the world’s fourth-largest economy.
  • By 2034, India will be the most populous country on Earth, with 1.6 billion people.
  • India’s middle class is already larger than the entire population of the United States.
  • One out of three of the world’s malnourished children live in India.
  • India is home to the biggest youth population on earth: 600 million people are under the age of 25.
  • India just edged past the United States to become the second-most-preferred destination for foreign direct investment after China.
  • In 1991, Indians purchased 150,000 automobiles; in 2007, they are estimated to purchase 10 million.
  • By 2008, India’s total pool of qualified graduates will be more than twice as large as China’s.
  • By 2015, an estimated 3.5 million white-collar U.S. jobs will be offshored.
  • India is the largest arms importer in the developing world.
  • American corporations expect to earn $20 to $40 billion from the civilian nuclear agreement with India.
  • In 2007, there are 2.2 million Indian Americans, a number expected to double every decade.
  • Twenty-nine percent of India’s population speaks English – that’s 350 million people.

The Investment Demons

The twin demons of fear and greed can destroy the soundest of investment strategies.  No we are not on a moralistic religious talk here. We are taking of two all pervading invaders who destroy our investments.

Be satisfied – aim higher – two contrary ideas which are drilled into the Indian psyche. Both of them are at a constant battle. The virtue of being satisfied with little has been drilled into us and yet very contrarily, we also taught to aim higher. To seek more than what we have, to be the best.

In the investing world, one often hears about the consensus between value investing and growth investing. And although understanding these two strategies is fundamental to building a personal investment strategy, we are often swayed by ‘hot tips’ and ‘insider information’ that can change our life. All the common sense and fundamentals analysis flies out of the mind replaced by greed – shinning and inviting.

 invest

Greed Governs

Most of us have a desire to acquire as much wealth as possible in the shortest amount of time and why not? Unfortunately this may take us to the level of being imprudent in our investment decisions.

This get-rich-quick  attitude makes it hard to maintain gains and keep to a strict investment plan over the long term.

Beat the greed

Any prudent investment approach should contain some form of an exit strategy; simply put how you plan on getting out of the stock you hold.

This would be one way to avoid greed, have a set price at which you intend on selling the stock, WALK AWAY with the money in your pocket and move on to the next investment. It sounds like a simple doable idea but one tends to ignore this essential strategy when the market is on the upswing. Holding on for a little higher returns may often cost us too much.

Fear Festers

When stocks suffer large losses for a sustained period, the overall market and the individual investor can become more fearful of sustaining further losses. But being too fearful can be just as costly as being too greedy.

Fear can make you take panicked decisions which do not match with your long term investment strategy. Getting swept up in the prevailing fear of the overall market by switching to low-risk, low-return investments can set you back by years in your financial planning.

Countering fear

The best way to counter fear is to have a financial plan in place and keep the eye on the goal. It is also important to choose a suitable asset allocation mix.  The herd mentality will only help keep the head down and give grass to gaze.

‘We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.’ – Warren Buffet

Reduce your credit card debt

Credit cards are very convenient and have become a everyday part of our lives. Often we lose control of our spending as it is too easy to make a minimum payment and roll over the payment to next month and then the next and then the next. Before you know the debt becomes unmanageable.

Pankaj Jain.29. sales executive, is a happy go lucky chap. He works hard and loves to have fun too. By the middle of the month he starts running low on cash. Cash withdrawal from the credit card and payments on the credit card seem like the best option to him. Of late, he noted that he has been barely able to pay off the minimum balance due and the total amount due has been rising dangerously. Though he has reduced his spending now, each month the interest has been mounting and it was swelling the total amount due. Pankaj need some serious debt management

Steps to manage debt

  1. 1.    Change the lifestyle causing debt

In most cases debt mounts up due to excessive spending and lack of checks and balances. Very often these are not even big or asset building expenses. Most often the credit card is whipped out on impulse buys for clothes, accessories or to pay restaurant bills.

  1. 2.    Stop using the credit card

Don’t reduce it – just stop. Put the cards in a sealed envelope in the darkest corner of your cupboard. If you have to pay Rs 5000 for a pair of shoes in cash, it will pinch much more than paying by card. It will also help you curb impulse purchase after all you cannot buy more than the cash you are currently carrying.

  1. 3.    Take a loan

The overdue interest you pay on credit card debt is between 36% – 40% p.a. 10-15% more than what you would pay on an unsecured personal loan and 20-25% more than a secured loan such as a home top up loan or loan against an LIC policy. Look at all your option and make some calculation. Lastly, do not let your ego come in between taking a temporary loan from close family if offered.  Avoid settling with the bank or defaults since will reflect poorly in your credit report and you may be rejected for a loan when you need one.

  1. 4.    Understand where you are overspending

To make change permanent it is essential to understand the problem areas. Take your credit card bills of the last 1 year and try to figure out which are the high spending items there. Is that Rs1800 shirt you purchased a year ago still in use? Would it not be of much better value if you had brought one for Rs500?

  1. 5.    Set up a budget

Budgeting does sound boring but wallowing in debt is far worse. So you need to allocate your spending prudently. Till your debt is fully repaid ALL unnecessary expenses have to curbed include the evening coffee at Starbuck.

  1. 6.    Be prepared

When the debt is repaid one breathes a sigh of relief and then goes back to the same destructive behaviour. It much like going on a strict diet and then binging. Be prepared for the urge for financial binging. Living within your means is not difficult as long as you have made up your mind to do it.

 Article first appeared in Credividya.com

Taking inflation in your stride

Image courtesy Hindu

 

Having done various back-of-the-envelope calculations, you must have arrived at a savings target for your child. After adding in a buffer, you must be satisfied about the figure you have calculated and have perhaps started saving to reach your target.

But hold on! Are your calculations on the spot? Have you calculated the invisible ever looming cost for all investors – Inflation?

 

Inflation hits just about anything one need to live on — rice, vegetables, clothing, fuel, medicine and doctors’ fees and most especially the cost of education.

 

A simple example to understand inflation is that when a small child takes 3 steps forward and two backward, he has crossed the distance of just one step.

Similarly if your savings are earning you 12% p.a. but the inflation is raging at 10% p.a then your net savings are growing at only 2% p.a.

 

To look at this by zooming into the future, if your genius 8-year-old child’s medical education costs Rs 5 lacs now, by the time he is eighteen it will cost Rs. 10,79,462/- at a moderate 8% p.a. inflation rate. That is more than double of the current cost of education.

The inflation will lessen the current value of your money hence to beat inflation:

  • While choosing  an investment make sure that the return is more than the inflation rate.
  • When planning long-term savings, remember that the cost of living will go up by the time you reach the goal.  So set the goals for the child’s saving plan accordingly.
  • To help make sure inflation does not eat into your savings, you could increase any amounts you regularly put away by a percentage that at least matches the inflation rate. When they’re added to the total sum, compound interest will further contribute its earning magic.

 

 Article written for Fidelity Investments

 

 

Mortgages in Reverse

In India, we pride ourselves for our family values and joint family support system. But the urban culture is creeping in all corners of India. Independence has become a catch word for not only the yonger generation bit also for the senior citizens. Today’s grandparents want to live life on their own terms and do not want to be financial dependent on their children. Many provide for the retirement years through savings. But often the income required for retirement is underestimated or due to some reason a chunk of the retirement funds are used for other purposes like medical emergencies, child’s education etc.

Coming to the rescue of senior citizens who need a steady income during their golden years is reverse mortgage. Highly popular in the west reverse mortgage unlocks you’re the money locked in you most important asset – your home.

What is reverse mortgage?

A reverse mortgage is a loan against your home that you do not have to pay back for as long as you live there. With a reverse mortgage, you can turn the value of your home into cash without having to move or to repay the loan each month. The cash you get from a reverse mortgage can be paid to you in several ways: all at once, in a single lump sum of cash; as a regular monthly cash advance; as a ‘credit line’ account that lets you decide when and how much of your available cash is paid to you; or as a combination of these payment methods.

No matter how this loan is paid out to you, you typically don’t have to pay anything back until you die, sell your home, or permanently move out of your home. To qualify for most loans, the lender checks your income to see how much you can afford to pay back each month. But with a reverse mortgage, you don’t have to make monthly repayments. So you don’t need a minimum amount of income to qualify for a reverse mortgage. You could have no income and still be able to get a reverse mortgage.

With most home loans, you could lose your home if you don’t make your monthly payments. But with a reverse mortgage, there are no monthly repayments to make, so you can’t lose your home by not making them.  Reverse mortgage systems would, perhaps be a boon to senior citizens who are property rich, but cash poor, and shall be another instrument for the banks to compete for

 

How does it work?

Suppose the value of your house is assessed at Rs. 60 lakhs and you are 65 years of age. Going according to the general stats, assuming that you will live upto the age of 82 years, you are eligible to get loan for a tenure of 15 years. It becomes important to mention that the older you are the more eligible you become for the loan since this would reduce your loan tenure. Coming back to the example, lets say you get 60% of the value of your house as loan, which comes to Rs. 36 lakhs. It means that the amount you will receive be Rs. 88,000 on an annual basis so every month you will receive an amount of Rs. 7,352 for 15 years.

 

Value of the property Rs.60,00,000
Tenure of reverse mortgage 15 years
Amount of mortgage 36% i.e. Rs.36,00,000
Monthly income Rs. 7,352

 

 

How do you get the loan?

 

You have to approach a housing finance company (HFC) or a bank and express your interest in pledging your home for the reverse mortgage scheme. The HFC will asses the value of your house and, depending on your age and the prevailing interest rate, the amount of loan payable to you will be decided upon.

The value of the house will be determined by independent valuation through the generally accepted property valuation methodology in the industry. Though there would be a provision for periodic valuation and consequent adjustment of payments, the loan amount will be fixed on the basis of current value and not on possible future appreciation.    The interest rate at which the loan will be given most likely to be marginally higher than the prevailing interest rates as the lending company will receive its money when the borrower dies. The loan to value ratio is fixed at 45-60 per cent of the value of the property based on the age.

What happens after the loan tenure?

Under the present recommendations of the NHB, the borrower needs to be 62 years of age and the tenure of the loan is fixed at 15 years.  However, if he outlive the tenure of the loan, he will not be asked to move out of the house. Although payments will stop after 15 years, the interest will keep accumulating till the accounts are finally settled.
The corpus accumulated at the end of 15 years will be used to fund the years that you outlive the loan tenure.  The accounts will be settled by the HFC only after the borrower’s death or if he vacates or sells the property. The settlement of the outstanding loan amount, along with the accumulated interest, will be met by the proceeds of the sale. In the event of his death, his spouse can continue to occupy the property until her demise, and she usually made a co-borrower. So it makes sense to include the spouse in the loan or else the bank will reclaim the loan after the borrower’s demise.

How is it different from a usual home loan?

A Reverse Mortgage as the name implies goes in reverse of the usual loan structure. Here it is the borrower who gets a monthly payment instead of making a payment. There is an evaluation of the cost of the property and then the around 60% of that is lent by the bank. It is a loan without recourse. The lender will never ask the borrower to pay the loan amount instead he will recover the loan after the death of the borrower.

The rate of interest is expected to be 1-2% higher than the home loan rate. There will also be some additional cost like the property evaluation costs. The reverse mortgage does not take into account any income stream or your earning capacity. It will only evaluate the value of your home and lend.

 

 

Some quick facts about reverse mortgages

  • To qualify for a reverse mortgage, you must own your home.
  • The amount you are eligible to borrow generally is based on your age, the equity in your home, and the interest rate the lender is charging.
  • Because you keep the title to your home, you are responsible for taxes, repairs, and maintenance.
  • Depending on the reverse-mortgage plan you choose, your reverse mortgage becomes due, with interest, when you move, sell your home, die, or reach the end of the selected loan term.
  • The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is usually paid off by refinancing it into a forward mortgage (assuming the heirs are eligible) or with the proceeds from the sale of the home.
  • A real benefit of reverse mortgages is that borrowers can live in their homes as long as they like, even after they have completely exhausted their equity. Borrowers must do their best to maintain the value of the home with diligent upkeep.

*Published in Capital market magazine

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